FTSE Russell to Revisit Voting Power One Year After Snap IPO

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By Andrea Vittorio

Index compiler FTSE Russell is taking another look at how much of a voice ordinary shareholders should get one year after Snapchat Inc. sold voteless shares in its $3.4 billion initial public offering.

The London-based firm was the first of its indexing peers to bar stocks that don’t give shareholders at least 5 percent of voting power from benchmarks like the Russell 3000 index. It could revise that threshold soon.

“We will be reviewing it this summer,” FTSE Russell’s CEO Mark Makepeace said March 13 at a Council of Institutional Investors (CII) conference in Washington. He said the firm plans to put out a paper on threshold options and show the index impact of each one.

No other companies in the U.S. have sold nonvoting stock since Snap’s March 2017 offering, but Silicon Valley’s trend toward giving public investors less voting power than founders continues at companies such as Dropbox Inc. Dropbox said in a March 12 filing that it’s aiming to raise as much as $648 million in its U.S. IPO.

Last year, FTSE Russell consulted investors that use its indexes and other stakeholders before deciding on the 5 percent minimum, which it pledged at the time to review annually. More than half of respondents who thought a voting floor was needed for inclusion in the index favored setting the bar higher at 25 percent.

New York-based rival S&P Dow Jones Indices barred companies with differentiated voting from benchmarks such as the S&P 500, but a grandfather clause spared tech giants such as Google’s parent Alphabet Inc.

Fellow index firm MSCI Inc., which recently restarted its consultation on the issue, has proposed adjusting the weight of such stocks in its indexes to reflect voting power.

‘Doesn’t Sit Well’ With SEC

The head of the Securities and Exchange Commission doesn’t think indexes should choose which stocks to include based on voting power. “Governance by indexation doesn’t sit really well with me,” Chairman Jay Clayton said March 12 at CII’s conference.

Clayton also isn’t keen on his own agency acting on dual-class shares. “I’m not putting this at the front of the agenda for something we should weigh in on,” he said.

Pension funds and other heavily indexed asset owners that are CII members have cheered the index’s voting-based bans, saying that unequal power structures like Snap’s limit accountability to shareholders. After S&P announced its ban in July, CII’s executive director, Ken Bertsch, said, “This is a huge win for investors and a blow to companies that deny shareholders any say in how the company is run.”

Top asset managers including BlackRock Inc. have also came out against Snap-like stock, but they split with asset owners on whether such stocks should be excluded from an index. Doing so would limit investing opportunities for index-based clients, BlackRock said in October. It also said that policy makers, not index providers, should set equity investing and corporate governance standards.

Index providers stepped in partly because regulators don’t want to get involved, MSCI Chairman and CEO Henry Fernandez said at the CII conference. “We’re not looking to play this role,” he said after Clayton’s comments March 12.

“The regulators don’t want to play it” either, Fernandez said, and neither do stock exchanges for fear of missing out on the next Alibaba Group Holding Ltd.

Hong Kong’s exchange, which lost out to New York for Alibaba’s record $25 billion listing in 2014, has announced plans to allow such unequal structures. So has Singapore’s exchange.

“Then it goes to you,” Fernandez said, referring to investors, “and you push it to us.”

To contact the reporter on this story: Andrea Vittorio in Washington at avittorio@bloomberglaw.com

To contact the editor responsible for this story: Fawn Johnson at fjohnson@bloomberglaw.com

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