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June 27, 2016 Inside the Notebook

Could a Long-Term Stock Exchange stimulate innovation?

Quarterly earnings reports dog public companies, especially innovators, who feel pressured by answering to shareholders interested only in short-term financial gains or high-frequency stock short-sellers. Some investors and technologists say the current financial reporting processes for public companies stymie innovation and refocus creative thought onto the balance sheet, but also put a drag on initial public offerings: there were no tech IPOs in the first quarter of this year.

Not surprisingly, a Silicon Valley investor wants to change the system, and already is advocating with the U.S. Securities and Exchange Commission to create a new U.S. stock exchange called the Long-Term Stock Exchange that would give companies more breathing room to focus on longer-term ideas and products.

The idea comes from Eric Ries, author of the “The Lean Startup,” in the less-known epilogue of his 2011 book. Wrote Ries: “In addition to quarterly reports on profits and margins, companies on 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 exist a few years earlier.”

He also said executive compensation would be tied to the company's long-term performance. Trading on the new LTSE would carry much higher transaction costs and fees to minimize day trading and massive price swings, he wrote. The upside for LTSE companies is that they could structure their corporate governance to pursue long-term investments.

“In addition to support for long-term thinking, the transparency of the LTSE will provide valuable data about how to nurture innovation in the real world. Something like the LTSE would accelerate the creation of the next generation of great companies, built from the ground up for continuous innovation.”

If the concept gets off the ground — and it has detractors, notably investors fearing they'll get the short end of the stick — it could take at least a decade to get going, Ries admitted. And the new exchange would need buy-in from both investors and companies.

Ries already has a for-profit company behind the LTSE that has raised money from some powerhouse investors including venture capitalist Marc Andreessen (Netscape cofounder), technology publisher Tim O'Reilly and the first U.S. Chief Technology Officer Aneesh Chopra. Amy Butte, former CFO of the New York Stock Exchange, is an advisor to the project, according to the website Quartz.

Quartz notes that technology startups already have tried to skirt market pressures on public companies. Google tried a Dutch auction to allocate some shares in its 2004 IPO. Facebook also tried to reduce control by investment banks when it went public in 2012.

The LTSE would still require that listed companies satisfy all the normal SEC rules, but Ries said he'd try to use those powers of the exchange to create incentives for long-term thinking. That would include tenured shareholder voting, allowing shareholder votes to be weighted by the length of time they held the shares. There also would be mandated ties between executive pay and long-term business performance by companies listed on the exchange. Ries also is proposing more disclosures so companies know who their long-term stockholders are and likewise for investors to know what investments the company is making.

Like many ideas in Silicon Valley, it's a major shift from current thinking. But will it boost the number of IPOs and create a stronger environment for innovation? The proof is yet to come.

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