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Tech: The Pros and Cons of a Long-Term Stock Exchange

Joseph McKeating


A couple of years of ago, Silicon Valley entrepreneur Eric Reis presented a bold proposition to technology companies considering IPOs: ditch Wall Street altogether. Since the release of his 2011 book The Lean Startup, he has been publicly advocating the creation of what he calls a “Long-Term Stock Exchange” (LTSE), an alternative to The New York Stock Exchange and Nasdaq designed by select investors and executives in the industry. Since Twitter’s recent announcement to go public, the idea has resurfaced in some circles.

“In addition to quarterly profits and margins, companies of the LTSE would report using innovation accounting on their internal entrepreneurship efforts… They would report on the revenue they were generating from products that did not exists a few years earlier. Executive compensation in LTSE companies would be tied to the company’s long-term performance. Trading on the LTSE would have much higher transaction costs and fees to minimize day trading and massive price swings. In exchange, LTSE companies would be allowed to structure their corporate governance to facilitate greater freedom for management to pursue long-term investments,” Reis said in The Lean Startup.

Quartz Editor-in-Chief Kevin Delaney eloquently reiterated the views of LTSE supporters in a recent article, stating that they feel “markets are so dominated by high-frequency trading, short-selling, and quarterly investor pressures that they actively hinder the growth of the businesses whose shares are being traded.”

The LTSE was one of a two ideas listed at the end of The Lean Startup. The other was “start-up testing labs,” which would test Reis’ business advice in controlled settings. “They’re two of the wacky ideas in the book, places where I really feel like I’m out on a limb,” Reis said shortly after the release of his book, according to a 2011 Wall Street Journal article. The idea of a LTSE is largely based on the belief that current stock exchange models do not reward innovation due to their focus on short-term results.

Not everyone believes in the idea of a LTSE, including renowned consultant and ex-World Bank executive Steve Denning, who voiced some of his concerns in a 2012 Forbes article. First, he questioned the validity of concluding that current stock exchanges do not reward innovation, the premise of Reis’ argument, by comparing Amazon and Microsoft. According to Denning, Amazon has historically been rewarded for its long-term philosophy while Microsoft has been punished in recent years for not being innovative enough. The second problem, he said, is the mentality of executives who are compensated purely based on short-terms results. He does not believe a LTSE will change that mentality. Instead, he argues that if things are to change it will be because of shareholder activism, something we have been seeing more and more of.  In regards to executives, Denning said, “They are in essence being paid to act stupidly. Should we be surprised that they continue to act stupidly?” Reis might respond that this short-term mentality is exactly what he would like to change by tying executive compensation to a company’s long-term results.

Innovation is a process, and although the effects of short-term pressures are debatable, it is worth questioning how beneficial or detrimental current stock exchange models are to the progression of the most innovative industry, technology. It is also important to understand that what works in theory does not always work in practice. What do you think of a LTSE? Would the technology industry benefit from it? Is it wishful thinking or could it be properly implemented?

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