We all like to think we live our lives by making rational decisions – and surely, a business’s best interests are served by prioritising long-term growth? Well even before the recent market turmoil caused by Covid-19, the 2019Growing New Zealand’s Capital Markets report and the NASDAQ business survey both found that businesses globally were facing greater pressure from investors to deliver short-term results at the expense of longer-term growth.
Although, understandably, in the current Covid-19 environment, businesses are focusing on short-term survival, do publicly listed businesses sometimes focus too much on short-term performance - and what can we learn from this?
Like most public markets, businesses listed on the NZX are required to comply with a ‘continuous disclosure’ regime to ensure investors are kept informed. Directors and managers must ensure any information that might influence the price of the business’s shares, must be made immediately publicly available to the whole market. The impact such disclosures can have on short-term share price can make directors rightly nervous. The directors of the Warehouse are probably regretting the wording of their recent disclosure, for example, where they claimed their stores would remain open during the lockdown. After a jump in their share price, followed by the discovery that they were not considered an essential service, The Warehouse may now face penalties, if they’re found to have broken the NZX rules.
This constant disclosure of business activities and subsequent media scrutiny can incentivise a focus on short-term results that have an immediate positive impact on share price. The combination of this, alongside disclosure requirements and liability settings, corporate governance obligations and expectations, and greater intervention from shareholders means that publicly listed businesses can be put off from investing in longer-term projects in favour of short-term wins.
Well-functioning capital markets are important for a healthy economy – even more so in the current economic conditions. There are many components to well-functioning capital markets, which include capital raising mechanisms for smaller businesses, such as private markets, crowdfunding, angel investment, venture capital and private equity. A healthy market should provide solutions that cater to all types of viable businesses and give them the best opportunities to grow.
Catalist’s new stock exchange designed for small and medium-sized businesses (SMEs), will conduct trading using periodic auctions, rather than continuously - but with the requirement that businesses disclose all material information ahead of each auction. Periodic trading means investors can take more consideration towards the long-term opportunities for a business, as they don’t have to make snap decisions or deal with prices changing wildly from day to day. The businesses themselves can get on with the running of their business between auctions and only have to give periodic updates to investors. The information updates they do provide contain the full context of the business, rather than having to constantly drip feed new information, as under the continuous disclosure rules of a traditional stock exchange.
At a time where SMEs are struggling with the impact of Covid-19, the Catalist Public Market will help to fill a gap in our capital markets. As well as giving SMEs new ways to raise capital, periodic trading will focus investor decisions on the business’s medium to long-term fundamentals, helping to reduce the impact of short-termism. Coming out the other side of this pandemic, both investors and businesses are presented with an opportunity to enable growth and job creation.
Interested in more information about our new marketplace? Contact us now.
By Michelle Polglase