CII backs long-term focus of new exchange’s rules

The Council of Institutional Investors (CII) has welcomed plans by a start-up exchange to require member companies to develop policies based around a set of principles based on focusing corporate governance beyond immediate concerns.

The Long-Term Stock Exchange (LTSE) in June proposed a set of what it describes as ‘enhanced listing standards that are designed to allow a new generation of companies to advance their visions for creating value far into the future.’

The proposed standards, which are subject to SEC approval, center around the idea that companies operate according to principles designed for them to serve customers, expand their businesses and make a positive impact on society. The exchange defines these principles as:

• ‘Long-term focused companies should consider a broader group of stakeholders and the critical role they play in one another's success
• ‘Long-term focused companies should measure success in years and decades and prioritize long-term decision-making
• ‘Long-term focused companies should align executive compensation and board compensation with long-term performance
• ‘Boards of directors of long-term focused companies should be engaged in and have explicit oversight of long-term strategy
• ‘Long-term focused companies should engage with their long-term shareholders.’

The LTSE proposal includes a series of policies, consistent with these principles, that listed companies would have to adopt and publish. These are:

• A long-term stakeholder policy explaining how the issuer operates its business to consider all stakeholders critical to its long-term success
• A long-term strategy policy explaining how the company prioritizes long-term strategic decision making and long-term success
• A policy explaining the company’s alignment of executive financial and non-financial compensation and of board compensation with the issuer’s long-term success and long-term success metrics
• A policy explaining the engagement of the company’s board in its long-term focus, including a discussion of whether the board and/or which board committee(s), if any, have explicit oversight of and responsibility for long-term strategy and success metrics
• A policy explaining how the company engages with long-term investors.

The proposal is the first in a series of proposed enhancements to the exchange’s listing requirements, LTSE says in a statement.

The SEC in May approved LTSE’s application for registration as a national securities exchange. According to LTSE’s website, the exchange anticipates being ready to accept listings and start trading later this year.

In a recent comment letter, CII states that it supports LTSE focusing on a long-term vision for its listed companies and the proposed rules ‘[that] would require LTSE-listed issuers to adopt and publish policies that are consistent with… long-term principles.’

‘We believe the long-term policies described in the filing are thoughtful, well-structured and generally aligned with CII’s membership approved corporate governance policies,’ the group states. For example, it notes that the proposal’s required long-term policies on strategy, the board and investor are generally consistent with a CII policy stating that the group ‘encourages companies to resist both internal and external short-term pressure and thinking, to prioritize creating sustainable value over the long run through long-term investment and to engage with shareholders with long-term ownership and investment horizons.’

According to CII, the proposal’s long-term policy on compensation is also generally consistent with a CII policy stating: ‘Long-term incentive compensation, generally in the form of equity-based awards, can be structured to achieve a variety of long-term objectives, including retaining executives, aligning executives’ financial interests with the interests of shareowners and rewarding the achievement of long-term specified strategic goals of the company and/or the superior performance of company stock.’

In addition, CII states, the proposed long-term policy on stakeholders is generally consistent with the group’s own policy that holds: ‘The council believes companies should adhere to responsible business practices and practice good corporate citizenship. Promotion, adoption and effective implementation of guidelines for the responsible conduct of business and business relationships are consistent with the fiduciary responsibility of protecting long-term investment interests.’

Concerns about short-termism are elsewhere on the regulatory agenda. The SEC late last year called for feedback on the ‘nature, content and timing’ of earnings releases and quarterly reports, with a view to reducing compliance burdens. The agency was also seeking feedback on how the existing periodic reporting system of earnings releases and earnings guidance may foster an ‘overly short-term focus’ by market participants.

In response, CII gave its support to the existing quarterly reporting model – but voiced concern that quarterly guidance can lead to short-termism and ‘making the numbers.’ CII generally supports companies deciding against providing quarterly earnings guidance, as ‘such guidance can cause undue focus on short-term profits at the expense of long-term strategy and investment,’ it stated.