A “Long-Term” Stock Exchange Could Promote Innovation—If It Ever Happens
Public companies live and die by their quarterly earnings. Author Eric Ries, calling this bad for innovation, proposes an alternative.
Here's an audacious plan to change the way that companies operate: create a new stock exchange that values sustained innovation over short-term profit chasing.
If it sounds radical, it is. But then it is the brainchild of the author Eric Ries, who rose to fame writing The Lean Startup, a book that formally cemented the notions of minimum viable products, rapid iterations, and failing fast into the psyche of Silicon Valley hopefuls. Less well known is a concept Ries raised toward the end of his book, in which he described the idea of a “long term” stock exchange.
In this new exchange, Ries suggested that quarterly reporting would be given far less prominence. He argued that the frantic demand to report quarterly earnings—and, therefore, profitability—stymies the spirit of innovation that’s so important to tech companies. In fact, Ries reckons that it’s a barrier that stops many companies from going public at all.
His solution is to create a completely new kind of stock exchange that incentivizes long-term thinking. As Quartz points out, over time Ries refined the concept so that the key tenets of the system now include: employee pay scales related to long-term success in the market rather than short-term stock performance; tenured voting power, so the longer a share is held, the greater its owner’s say; and disclosure requirements that demand companies report in detail how they’re investing.
The idea would be to allow companies to make sustainable economic and design decisions about products and services, rather than scrambling to make a quick buck in the next three months. That’s a luxury that only privately held or supremely successful public firms currently enjoy.
But of course, building a new stock exchange isn’t easy. Nor for that matter is it necessarily universally welcome. Speaking to Bloomberg, Ries explained that the concept floated in his 2011 book ruined his credibility in some circles.
Since then, though, he has been building a team to try to make the idea stick. So far he’s assembled a team of 20 engineers and 30 investors, and rallied support from the likes of the venture capitalist Marc Andreessen and ex-chief technology officer of the U.S., Aneesh Chopra. The collective has already entered into “early discussions” with the U.S. Securities and Exchange Commission about the so-called LTSE.
Those who find the idea appealing, though, are in for a wait. Informal talks with the SEC are followed by a formal application procedure, after which a lengthy decision-making process takes place. The alternative stock exchange IEX, for instance, was founded in 2012 and yet only this month is it expected to receive word from the SEC as to whether it will get the green light. Even then, Nasdaq has already pointed out that the IEX will face lawsuits if the application is approved.
Those are not the only problems. While the mechanisms suggested as part of the LTSE would certainly prevent the mad-dash of quarterly reporting, they could generate other problems. Tying executive income to long-term success may make it hard to attract talent, for instance, while tenured voting might place power in the hands of a stubborn few.
On top of all that, if the LTSE does come to be, it will have to find suitably successful companies willing to list themselves. Ries has plenty of scope for failure, then—though this time around it might not be quite so fast as his book suggests it should be.