Snap Inc.'s high-profile listing in March of shares without voting rights has brought to a boil a simmering corporate governance standoff — between big investors increasingly focused on “engaging” with the companies in their portfolios and high-tech firms intent on limiting such engagement.
It remains to be seen whether the Los Angeles-based company behind the Snapchat image messaging app will ultimately prove a harbinger of more such listings or a cautionary tale.
For now, a building backlash — led by benchmark index providers — against Snap's extreme departure from the corporate governance “one share, one vote” gold standard looks set to discourage would-be imitators.
FTSE Russell, on July 26, led the way, announcing that companies — such as Snap — that don't have more than 5% of their voting rights in the hands of “unrestricted (free-float) shareholders” will be excluded from its indexes.
Five days later, S&P Dow Jones Indices went a step further, announcing it no longer will add companies coming to market with dual-class share structures to its widely followed S&P 500 index or the company's other U.S. benchmark indexes.
Market veterans predict those moves could blunt recent momentum that had seen one high-profile tech firm after another coming to market with share structures favoring company founders.
“Index inclusion is an important feature of going public,” with companies structuring themselves to ensure they'll be eligible, said Thomas Vita, a London-based partner with law firm Norton Rose Fulbright LLP. For such companies, the prospect of being cut off from the large and growing pool of money tracking benchmark indexes would be a “serious consideration,” he said.
Still, other market dynamics remain in play that could pave the way for more dual-class listings around the globe.
Among them, money managers point to moves now by stock exchanges in Singapore, Hong Kong and London to consider allowing dual-class shares in order to compete for high-profile tech listings globally — particularly from China — at a time when the number of firms coming to market has continued to fall.
On July 28, the Singapore exchange took a half-step in that direction, clarifying that existing rules allow dual-class share companies with primary listings on developed market exchanges to pursue secondary listings in Singapore. In a statement, Tan Boon Gin, CEO of Singapore Exchange Regulation, warned observers not to conclude that Singapore will “adopt a primary dual-class share listing framework.” The exchange is still evaluating feedback on that topic and will look “to update the market before the year-end,” he said.
Money managers say the tug of war over voting rights cuts to the core of governance.
“The idea of investor stewardship is premised on all shareholders being equal, and our voice, our vote, being proportional to our economic interest and cash flow rights in the company,” noted Jenn-Hui Tan, Singapore-based director of corporate finance with Fidelity International in the Asia-Pacific region, in a recent interview.
Breaking “that link, that 'one share, one vote' principal,” opens the door for potential misalignment of interests, said Mr. Tan.
Some observers predict there's a limit to how wide the corporate governance gulf between investors and companies can become.
Investors are focusing more and more on being “active owners of companies” even as an important, growing segment of the market is “systematically” denying them voting rights, noted David A. Smith, Singapore-based head of corporate governance with Aberdeen Asset Management Asia Ltd. “Something's got to give.”
For investors who have watched uncomfortably as the number of companies offering their founders 10 votes per share to one vote for public investors has grown, the Snap IPO effectively served as a poke in the eye with a sharp stick.
A wave of unequal voting structures in the tech sector — including Google parent Alphabet Inc., TripAdvisor Inc., Facebook Inc., Expedia Inc. and Groupon Inc. — stoked concerns that multiple share classes “was becoming conventional wisdom,” and then “Snap went a step further — a huge, high-profile IPO with no voting rights for public investors,” said John Roe, managing director, head of analytics with Rockville, Md.-based Institutional Shareholder Services Inc.