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Is It Time to Delist the NYSE?

The financial markets need a reminder that they are there to serve firms, not the other way around.

(originally published by Booz & Company)

October saw some pretty dispiriting business news: JPMorgan Chase is paying a multibillion-dollar settlement for its dealings with Freddie Mac and Fannie Mae, on the heels of paying more than a billion dollars in fines relating to the “London Whale” scandal. And the New York Times recently ran a story about resistance to greater transparency and accountability in the audit process. These are just two examples of many that highlight the trouble with standards for public companies in the United States. We have devolved to a catch-me-if-you-can financial system, which isn’t good for companies, shareholders, or the economy as a whole.

The financial markets need a reminder that they are there to serve firms, not the other way around. As Peter Drucker said a long time ago, the purpose of a company is to “create and keep a customer,” not to hit the quarterly forecast. Profits are essential for staying in business and attracting investors, but they are not the reason that the business exists. Yet many executives obsessively ask themselves, “What will the market think?” And this question can be found at the root of many misdeeds committed in the pursuit of profit maximization. Executives should instead wonder what the customer will think, and if they get it right, the market will follow.

The financial markets need a reminder that they are there to serve firms, not the other way around.

Recently, I sat down with Michael Beer and Russ Eisenstat, two of the coauthors of Higher Ambition: How Great Leaders Create Social and Economic Value, and asked them about the challenges of moving beyond profit-at-any-cost practices. They’re both former faculty members at Harvard Business School, so they’re certainly not opposed to making money. Beer quickly listed three things that would have to change: business schools, boards of directors, and financial markets.

(Oh, is that all?)

As I reflected on this, I realized that one thing has to change before the others can: financial markets. A change in financial market rules and mores would shift the behavior of board members and the aspirations of business school students. Such a change, however, is no small thing. Most reform efforts fizzle before they ever see the light of day. Those that make it through, such as Dodd-Frank, are tepid after having been run past the gauntlet of lobbyists, status quo-friendly legislators, and overwhelmed regulators. 

Thus, the current markets are unlikely to change and, unfortunately, most investors have little choice but to play along. Bank savings accounts and certificates of deposit offer paltry rates thanks to Fed stimulus efforts that have kept long-term interest rates near zero. There is always the under-the-mattress investment strategy…

I would like to suggest an alternative: a market with greater transparency and higher standards of conduct, one that embraces some of the common sense governance plans that have been proposed. I call it the High Road Exchange—a market that would challenge the NYSE and force both companies and investors to choose the high road or the low.

The first question you may ask is where the money would come from. There is a large pool of conservative, patient money that should be attracted to the lower risk and reduced volatility that would accompany the high road standards: retirement accounts. Investors willingly put money in because they’re building toward a long-term goal, and they’re prudent taking money out because they want the funds to last through their lifetimes. What retirement investors fear are wild swings that upset their careful planning, particularly when they are older and dependent upon investment income for daily living expenses. They’d rather not have the companies in which they own shares taking outsized risk; they don’t want to read about billion-dollar fines and see CEOs grilled by congressional committees.

There is also a growing cadre of socially responsible investors (SRI) who control an estimated almost $4 trillion in investments. Some of that is retirement savings, but the growth of this investment strategy indicates the viability of integrating ethical values into a market.

What companies would want to list in such a market? They’re not as rare as you may think. Beer and Eisenstat presented 36 “higher ambition” companies in their book. Other books—Conscious Capitalism and Super Corp, among others—offer many more. SRI fund managers and investment advisors have been seeking out such companies for years. These are not just Fred and Jane’s Organic Farm; these are brand name companies including IKEA, IBM, Costco, BD, Unilever, and P&G. They would benefit from a source of capital that understands values-based decision making and that won’t obsess over quarterly earnings estimates. Executives at these companies could focus on building the business rather than meeting analysts’ expectations.

Why a separate market? The only way to effect real change—change that reflects what I believe most people would like to see—is to offer a clear choice. It is a market-based solution to a market-based challenge. You either list your company on the High Road Exchange or one of the traditional markets. Investors could make clear decisions knowing the rules of each exchange. The standards of High Road Exchange would have a ripple effect across the banks and accounting firms that want to serve the listed companies. High Road Exchange could serve as a proving ground for new models and approaches that, if they work, would make it hard for the other exchanges to ignore.

Now all we need is to bring High Road investors and High Road companies together. I offer the idea of the High Road Exchange here in hopes that it inspires people with greater means to realize it than this columnist has, and that it can serve as a springboard for even better ideas that bring us closer to what our markets need most: accountability, transparency, and a sense of responsibility to the society that allows them to operate.

Full disclosure: I consult on content strategy with the Center of Higher Ambition, a nonprofit cofounded by Michael Beer and Russ Eisenstat.

Eric McNulty

Eric J. McNulty is the associate director of the National Preparedness Leadership Initiative. He is the coauthor of You're It: Crisis, Change, and How to Lead When It Matters Most (PublicAffairs, 2019). He writes frequently about leadership, change, and organizational culture.

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