Snap Inc.'s recent decision to issue non-voting shares undermines the basic right of shareholders to have a say in the companies in which they invest. These rights are even more important for index investors, because, unlike active investors, they have minimal discretion to sell a stock if it is part of the index. Snap exemplifies a worrying trend that is eroding the principle of one-share, one-vote and calling into question the very idea of equity ownership. The number of companies with unequal shareholder voting rights has increased, and now accounts for 12% of the S&P 500.
Some blame the rise of unequal voting rights on aggressive activists looking to swoop in on young companies with stalled earnings to wrest control. That, they say, has not only had a chilling effect on the number of companies willing to go public, but also has led entrepreneurs like Snap's Evan Spiegel or Blue Apron Holdings Inc.'s Ilia Papas, Matt Salzberg and Matt Wadiak to keep voting rights tightly restricted to a small group of founders and early investors, once they do decide to go public, to ward off any potential takeover attempt.
But that is missing the bigger picture of what is at stake.
Equal voting rights for all equity shareholders are fundamental to an equitable public market system. By voting their shares in the election of directors and other corporate matters, shareholders align management interests with their own. Indeed, management is often willing to engage with shareholders because of the threat of an opposing vote. In the event that management and investor interests become misaligned, removing or diluting voting rights weakens a basic correcting mechanism. With Snap's new model, investors purchasing shares in the initial public offering have been denied any say in company matters.
Stock exchanges and index providers could in principle take a stand against unequal voting rights. While the New York Stock Exchange and Nasdaq allow companies with unequal voting rights to list, major exchanges in the U.K., Hong Kong, Singapore and Australia have banned the practice. Index providers face a trickier path in excluding publicly listed companies from the investible universe their indexes are meant to track.
We think regulators and long-term institutional investors have the best chance of standing up to this threat. Regulators in particular could play an important role in stemming the tide of companies issuing multiple share structures by introducing rules around listing standards. They could, for example, introduce rules requiring that a majority of minority shareholders approve key transactions, as is the case in India, the U.K. and China. They could also opine on whether shares without votes are actually shares in the conventional sense of common equity.
Long-term institutional investors also need to raise their voices. Voting rights are key to supporting board members and actions that will promote sustainable value over the long run.
This is a fight not only for the interests of long-term shareholders, but also for the long-term sustainability of companies and the health of the broader economy. We must all work together to protect the basic principles of shareholder rights and the ability to promote long-term value creation. Without these principles, the future of public companies and their investors is at risk.
Lynn Blake is executive vice president of State Street Global Advisors and chief investment officer of global equity beta solutions, Boston.
