INSIGHTS: Walking the Walk: Connecting visionary companies and long-term investors

The recent debates surrounding dual class, shareholder activism, and defining good governance have missed a crucial question: why is it so hard for good companies trying to achieve their mission (which is what every company claims to be, in one form or another) to align with good investors trying to support them for long-term growth (which is what most investors claim to be)?  

It’s because our current form of capitalism doesn’t work like it’s supposed to. At the most basic level, financial markets were created to help money flow from those who want to invest it in a good idea — to grow it — to those who have a good idea and will execute on that growth. But that’s not what happens in today’s public markets.

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Short-term pressures and avoidance of going public

Rather than connecting with investors who believe in their vision and support them for long-term success, too many companies find the public markets rife with short-term pressures driving an overemphasis on quarterly results. While going public used to signal a company’s success, today, many founders aim to avoid it as long as possible. So much so that the median age for a company to go public has increased from six years in 1980 to 11 years in 2021¹. During the same time period, the median market value at IPO (adjusted for inflation) increased from $105 million to $1.33 billion. 

But the problems with the current misalignment in the public markets go further. Companies that are overly focused on quarterly results are less likely to invest appropriately in R&D (and therefore less innovative), less likely to invest in the long-term well-being of their workers and communities, and less likely to care about their impact on the environment. 

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Identifying truly long-term companies and investors

By definition, a company that is pressured to overperform in the short-term is going to make decisions that hurt its long-term performance. Those companies that are able to maintain a longer-term focus, despite the pressures in the other direction, do outperform over time. But because of the nearly universal claims of long-term focus on both sides, it is often hard for truly long-term companies and truly long-term investors to accurately identify each other.  

One thing is clear: the markets need a reliable way for these parties to find each other in order for the best companies, executing on the right priorities, to get the credit they deserve. Not only from their investors, but from their customers, their employees, and others. 

According to Edelman’s Trust Barometer, 63% of employees and consumers buy, or advocate for, brands that share their values and beliefs. Employees are willing to take lower pay to work at a company they believe in. Many customers are willing to pay higher costs to buy a product from a company that operates responsibly and produces the product sustainably. But with nearly every company claiming to act in these ways, how can anyone — including investors — really tell the difference? 

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Differentiation and accountability

We created the Long-Term Stock Exchange to address this core challenge. To create differentiation and a way for investors, employees, customers, policymakers, and others who care about a company’s responsible behavior to differentiate those who “walk the walk” from those who “talk the talk.” To give appropriate credit where it is due to companies that list with LTSE. To create accountability, but accountability for the right metrics. Not metrics focusing on quarterly EPS, but on a company’s progress toward achieving its long-term goals. Accountability in the short-term for the right long-term performance metrics. That’s what the LTSE long-term standards are designed to do.

And the accountability goes both ways. Virtually every investor claims to be “long-term,” particularly at the time of IPO. But the evidence tells a different story. Even within an organization that is truly long-term, individual portfolio managers may behave differently. So we created the LTSE Long-Term Score^SM that provides listed companies with information about investor behavior in their sector on the manager level, so they can better target those who are most likely to support their vision and enable the success of the system described above. 

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Reinforcing alignment through governance

In a market that returns to this fundamental alignment, debates about good governance and ways for each side to protect itself still exist — but they are far less divisive. Incentives and behavior align to create the long-term value both sides are seeking. And there are a number of governance tools that can further reinforce that alignment. One of the roles that the Long-Term Stock Exchange plays with listed companies is helping to identify approaches that have worked and helping our companies to continue to excel in new areas. 

By focusing on success metrics over the long-term, providing increased transparency and commitment from companies to investors, and increased transparency and evidence about investors to companies, the Long-Term Stock Exchange is seeking to return to the fundamentals for which markets were created in the first place. When companies are positioned to fulfill their long-term vision and mission, supported by investors who believe in them and hold them accountable for the right performance metrics, then companies, investors, employees, communities, and customers all win. That’s the public market we all deserve.  

References:
¹ https://site.warrington.ufl.edu/ritter/files/IPOs-Age.pdf

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