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S&P Dow Jones changes methodology, cites governance issue

S&P Dow Jones Indices announced Monday several methodology changes to certain U.S. equity indexes, including excluding new companies with multiple share class structures.

Effective immediately, companies with multiple share class structures no longer will be eligible for inclusion in the S&P Composite 1500 and its component indexes — the S&P 500, S&P MidCap 400 and S&P SmallCap600, a company news release stated. Existing S&P 1500 constituents are not affected. Companies with multiple share class structures will continue to be eligible for inclusion in the S&P Total Market index and other indexes.

"Companies with multiple share class structures tend to have corporate governance structures that treat different shareholder classes unequally with respect to voting rights and other governance issues," the news release said, explaining the change.

Another methodology change announced Monday was the elimination of the domicile requirement that a U.S. company have a corporate governance structure consistent with U.S. practice.

"This criterion is superfluous since S&P DJI's criteria for eligible securities, including listing requirements and organizational structures, is used as a proxy for governance structure consistent with U.S. practice," the index provider said in the release.

Ken Bertsch, executive director of the Council of Institutional Investors, praised S&P DJI's decision to exclude new multiple-class companies as a "huge win for investors and a blow to companies that deny shareholders any say in how the company is run."

"Multiclass structures, especially those with non-voting shares, rob shareholders of the power to press for change when something goes wrong, which happens sooner or later at most, if not all, companies," Mr. Bertsch said in a separate news release Tuesday. "Shareholders at such companies have no say in electing the directors who are supposed to oversee management."

S&P DJI's decision comes nearly a week after FTSE Russell announced companies now coming to market will need more than 5% of their voting rights in the hands of "unrestricted (free-float) shareholders" to be included in its benchmark indexes.

Among the companies that will be barred under the changes by S&P DJI and FTSE Russell is Snap Inc., which issued non-voting shares in its March initial public offering, CII noted in its release.

A spokesman for S&P Dow Jones Indices declined to comment beyond the release.