A new stock exchange wants to encourage long-term investors with long-term investment horizons by giving them increased voting power as they continue to hold the stock. We saw how this can go off the rails back in the 1980’s when a company rescinded the additional voting power just before Gamco’s shares were about to qualify.
We have no problem with this option, in a way a variation on convertible bonds, and every confidence that large institutional investors will be able to assess the risk and return accurately.
[Is Wall Street rational], voting for positive cash flow over corporate empire-building? Or that it tends to revert towards a short-sighted mean, picking companies that can deliver profits now rather than build strong market positions for the future?Some Silicon Valley insiders strongly believe the latter. Their answer — called the Long Term Stock Exchange — was formally approved by the SEC last month, and has just published its first set of proposed listing rules.
As the name suggests, the exchange hopes to establish a new contract between investors and companies that encourages the pursuit of long-term value creation — measured in “years, decades, and generations” — over short-term profits.
The brainchild of Eric Ries, author of The Lean Startup, it has the backing of venture capitalists like Founders Fund and Andreessen Horowitz. They argue that Wall Street short-termism has discouraged many tech companies from going public.The rules published this week are a first stab at establishing the general principles that companies would sign up to when listing on the exchange. That makes them necessarily bland. What company wouldn’t claim to consider all stakeholders in its decision-making, or invest in its staff for the long term?..The most controversial proposal is to reward long-term shareholders with more voting power: the longer shares are held, the greater the voting rights that attach to them….Letting more votes accrue over time presents a paradox for investors with a true long-term perspective. They would be rewarded for their patience with higher voting rights. But when the time finally came to sell, the rights attached to the shares would reset, meaning that the long-term investor wouldn’t be able to capture some of the value their patience has helped create.
It would also, by definition, concentrate power in the hands of founders and early investors who are in the driving seat at the time of a company’s IPO.