Companies with dual-class structures impose a disproportionate amount of economic risk on public shareholders in relation to their voting power. But thanks to the actions of global index provider S&P Dow Jones Indices, at least one key player in the chain of corporate accountability is standing tall.
In the latest iteration of dual-class capitalizations, Snap Inc. took shareholder disenfranchisement to new lows. Snap famously offered shareholders zero votes per share as part of its recent initial public offering, the nadir of a recent trend of companies testing the limits on shareholder rights.
Snap's action caused an outcry among institutional investors, particularly as it relates to the prospect of these no-vote firms eventually making it into key market indexes. Many such institutions are largely index investors and own huge positions in funds based on the indexes of firms like S&P Dow Jones, FTSE Russell and MSCI Inc. But proponents of investor rights, who have fought long and hard for the rights of shareholders in public companies, rallied support against the governance scofflaws. In response, three index providers opened consultations asking for investor comment. The MSCI comment period is open until the end of August, but S&P and FTSE have taken action.
S&P took what we consider to be the hallmark approach. It will not allow companies with dual-class share structures to be part of some of its high-profile indexes such as the S&P 500 and its small-cap and midcap brethren. Companies already in the index with dual-class share structures will be grandfathered.
Meanwhile, FTSE chose to adopt a lower threshold, stating that companies will only be required to give shareowners a cumulative voting power of 5% of a company's shares in order to qualify for FTSE Russell indexes. While better than nothing, from an investor protection/shareholder rights perspective, it's not sufficient. The FTSE Russell announcement does state the proposal is subject to modification based on public reaction to the proposal. We strongly encourage all three of the major index providers to send a strong and consistent message to companies trying to access public capital.