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Governance

Multiclass-share decision galvanizes investors to action

Amy Borrus said CII was ‘disappointed’ MSCI didn’t exclude certain listings.

Calls to level the playing field when it comes to multi- and dual-class shares are growing in light of MSCI Inc.'s decision not to eliminate companies with unequal voting structures from global equity indexes.

The move last month surprised industry bodies, including those representing the institutional investor community — particularly since index provider rivals FTSE Russell and S&P Dow Jones Indices made moves last year to limit certain listings.

S&P no longer admits firms with dual-class share structures to some of its most well-known indexes, including the S&P 500 index. Companies already in the index are grandfathered.

And FTSE Russell decided that current and future developed market companies whose free-float market capitalization makes up less than 5% of total voting power would be excluded from its indexes.

"When a company goes to the public market for capital, it needs to give public shareholders fundamental rights — voting that is proportional to the investors' economic stake in the company, not what will give the founder perpetual control," said Amy Borrus, deputy director at the Council of Institutional Investors in Washington.

Besides the recent MSCI decision — which also included an announcement that the provider would launch an index series that reflects the preferences of investors wanting to eliminate unequal voting structures — a number of events over the past year or so have helped sharpen focus on the issue:

Last month, 21 executives from the finance world signed the Commonsense Principles 2.0 — an updated guide on corporate governance best practices. Signatories included Laurence D. Fink, CEO of the $6.4 trillion money manager BlackRock (BLK) Inc. (BLK); Mark Machin, president and CEO of the C$366.6 billion ($279.7 billion) Canada Pension Plan Investment Board, Toronto; and Theresa J. Whitmarsh, executive director of the $130.2 billion Washington State Investment Board, Olympia. The principles state that "dual-class voting is not best practice."

In September 2017, the 426 billion Swedish kronor ($46.5 billion) AP7, Stockholm, succeeded in fighting plans by Facebook Inc. to reclassify minority shareholders' shares into non-voting C shares. The pension fund led a lawsuit against Facebook founder Mark Zuckerberg on behalf of minority investors representing $10 billion of investments in the social media behemoth.

In March 2017, Snap Inc. launched its initial public offering with no-vote shares.

Calls for action

The latest move by MSCI has reinforced calls from industry bodies for more to be done by all stakeholders involved in equity markets, from regulators to stock exchanges.

"We were disappointed, particularly because of weak regulation by U.S. stock exchanges to date, and the recent implementation (of what) we believe to be reasonable policies by S&P and FTSE Russell," said the CII's Ms. Borrus. "We believe the voting right is a core attribute of equity securities. It is hard to understand MSCI's decision to do nothing other than offer another index series — that is not a big deal as MSCI has many bespoke indices already."

The International Corporate Governance Network, whose members include money managers and pension funds, was also surprised by the decision.

"I didn't see that coming," said George S. Dallas, policy director in London.

Mike McCauley, senior officer, investment programs and governance at the $194.1 billion Florida State Board of Administration, Tallahassee, and chairman of the ICGN, cited a revised proposal by MSCI set out early this year for a weighted voting rights approach. This would have seen MSCI continue to include stocks with unequal voting rights in equity indexes, but with adjusted weightings to reflect both their free float and company-level listed voting power.

Mr. McCauley said this approach "was likely the most innovative way among the index providers to approach the problem. The MSCI decision is certainly a fallback from their initial proposal."

Mr. Dallas added, "We didn't necessarily expect this complete reversal — in some ways, it takes MSCI from being the most innovative to trailing the pack."

And Sacha Sadan, Legal & General Investment Management's director of corporate governance in London, said, "Our concern is that investment banks promote more zero-voting shares for new IPOs that all investors may then have to purchase."

Polarizing views

Despite surprise from sources on MSCI's decision, and the belief there had been widespread support for an adjustment to the treatment of dual-class-share companies, the index provider itself said views were polarized.

"Our market consultation highlighted the divide in opinions among international institutional investors regarding the treatment of unequal voting structures in equity benchmarks," said Sebastien Lieblich, managing director and global head of equity solutions at MSCI, based in Paris. "Many of the international investors that we spoke to, including asset owners and managers, highlighted the critical need to find the right balance between investor views on voting rights and comprehensive representation of the investible equity universe."

Mr. Lieblich said that while the idea of "one share, one vote" did gather "overwhelming" support from consultation respondents, "the treatment of unequal voting structures in equity benchmarks has proven to be a polarizing question among international institutional investors."

A statement provided by a spokeswoman for Norges Bank Investment Management — the investment management division of the Norwegian central bank and the manager of the 8.3 trillion Norwegian kroner ($991 billion) Government Pension Fund Global, Oslo — said: "The outcome is in line with our suggestion. We share MSCI's concern about the impact of unequal voting structures on investors who want to exercise formal influence on the companies in which they invest, and we appreciate efforts to address these concerns. At the same time, we believe that indices should appropriately reflect the international investible opportunity set of equities."

The statement also referred to the NBIM's consultation response, dated May 31, in which it wrote: "While we understand MSCI's objectives and we appreciate its effort to develop a coherent methodology, we are concerned about the potential impact on investors' portfolios, taking into consideration longer-term risk, return and turnover, and on the wider market."

Mr. Lieblich said: "For instance, while many participants felt strongly that benchmarks should be adjusted to reflect unequal voting structures, other participants highlighted that the question of unequal voting rights should be addressed holistically by the stakeholders that are responsible for operating, regulating and investing in equity markets," such as securities regulators, stock exchanges, asset owners and money managers.

"The (Florida) SBA has to recognize that (MSCI's) clients were giving them mixed messages," Mr. McCauley said.

Officials at the Securities and Exchange Commission declined to comment; the U.K. Financial Conduct Authority did not respond to a request for comment; and a number of stock exchanges did not respond or were unavailable to comment.

Renew regulatory focus

Following the decision by MSCI, there has been a renewed call for other stakeholders to themselves make changes.

ICGN's Mr. Dallas agreed that perhaps MSCI has become somewhat of a scapegoat in the situation. "To be fair to MSCI, it really shouldn't be the index providers who are tasked with the job of making governance-related judgments like this; it is putting them in a difficult position. I think the real failing is regulatory in nature."

Mr. Dallas said a particular concern relates to stock exchanges around the globe, "which are competing with one another for listings by watering down standards relating to dual-class shares. ... I disagree with the MSCI decision but recognize that they and the other providers are in an awkward position," he said.

Ms. Borrus agreed that the issue of unequal voting rights "should be the responsibility of the regulator. In our market, the (SEC) is the regulator but does not believe, apparently, that it has the jurisdictional authority to set rules on dual- or multiclass shares. So it falls to the stock exchanges, but they're in competition — they are publicly traded companies competing for listings — they're not inclined to make any changes. ... The index providers were really the best available alternative for tackling this problem."

Ultimately, Ms. Borrus said, "all of the gatekeepers have a responsibility — investment bankers, lawyers, (venture capital) firms, do have some responsibility in guiding these young companies and making sure that when they go public they do (so) with governing standards that public shareholders have come to expect."

Future work for LGIM, which offers index strategies that track a wide set of indexes from different providers, will see the firm "individually and collectively push regulators to stop zero-voting shares," Mr. Sadan said.