Markets

The Long-Term Stock Exchange Is Worth a Shot

Silicon Valley venture capitalists are shaking things up with "tenure voting."

The long view hasn't been this popular in ages.

Photographer: General Photographic Agency/Getty Images

Here is a theory of stock prices. The value of a share of a company is equal to the market's expectation of the present value of its future free cash flows. If the company does something that will permanently increase its earnings power in the future, that will increase the price of its stock. If the company pursues a short-term gain at the expense of its long-term prospects, that will decrease the price of its stock, because the bulk of a share's value comes not from this quarter's earnings but from earnings over the entire future.

As a theory of stock prices, this has the advantage of being (1) very, very standard economics and (2) kind of intuitive. (A popular alternative theory -- that stock prices reflect only very near-term events and ignore the future -- requires investors to be, collectively, very stupid.) It has the disadvantage of being somewhat debatableempirically, but it is not obvious that the alternative theories are any stronger there. 

One basic and important implication of this theory is that, if you hold a share of stock for a minute, you will want the company to increase its long-term earnings power during that minute. If, during your minute of ownership, the company announces "we have sold all our factories and ruined our productive capacity, but we booked a big profit for this minute," you will be sad. Your minute's profit doesn't matter that much; what matters is that your minute saw the demise of the long-term value of the company, and so at the end of your minute the stock will be worth less than it was at the beginning.

Another plausible thing to believe -- it doesn't follow from this theory of stock prices, it's just a thing you might think -- is that someone who holds a stock for a minute, or a quarter anyway, might pay more attention to this sort of stuff than someone who holds it for 10 years. It is hard to pay attention to anything for 10 years, plus a buy-and-hold investor might well be an index fund, or a casual retail investor, who doesn't care at all about the underlying fundamentals of the company. The short-term shareholders have a clear incentive to demand long-term improvements: They're going to sell their shares, so they want the price of the shares to go up, and the way to get a share price up is to discount in future growth. 

If you combine those -- debatable! -- ideas then you might conclude that medium-term active shareholders are more likely to hold managers to account and demand long-term productivity improvements than are long-term shareholders who never sell. On the other hand, the managers might prefer the long-term shareholders, since managers -- according to another fairly standard piece of financial-economics theory -- love not being held accountable by shareholders.

Anyway here's a story about the Long-Term Stock Exchange, which is a new planned stock exchange backed by Silicon Valley venture capitalist types that will have "tenure voting," in which shareholders who hold their shares for a long time will get more votes. The theory is that the shareholders who hold their shares for a long time will be more focused on the long term than shareholders who hold their shares for a short time. When you say it like that it sounds intuitive, but I think it is not as obvious as it sounds.

That said, I am all for governance experimentation in public companies, and if companies want to go public and give more votes to long-term holders, well, that is no worse than companies that go public and give more votes to their founders. Others vehemently disagree:

Skeptics wonder whether the LTSE is just another way for tech founders and elite Silicon Valley investors to maintain control at the expense of other shareholders. One leading New York hedge-fund manager who asked not to be named called tenure voting “disgusting” and said it would enable managers to duck accountability.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Matt Levine at mlevine51@bloomberg.net

    To contact the editor responsible for this story:
    James Greiff at jgreiff@bloomberg.net

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