Index Providers May Shun Snap-Style Stock

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By Andrea Vittorio

MSCI Inc. has joined other leading index providers in weighing whether to bar from their benchmarks shares of companies like Snap Inc. that deny investors voting rights.

FTSE Russell could make the first move after its consultation ends June 16 and S&P Dow Jones Indices could follow once its comment window closes June 30. MSCI’s request for feedback from the investment community on a June 12 proposal for exclusion runs through the end of August.

Depending on the index providers’ approach, more companies besides Snap could be affected if they don’t meet a certain voting power threshold.

Other founder-led firms such as Facebook Inc. and Google parent Alphabet Inc. have multiple share classes with unequal voting rights. But the company behind the Snapchat messaging app recently became the first to offer only non-voting shares to public investors. That means those investors have no say in company matters, no rights to elect board members and no say on pay policies, according to a recent report from MSCI’s environmental, social, and governance research unit.

“The argument is: if you don’t like it, then don’t invest,” said Matt Orsagh, a director of capital markets policy at the CFA Institute, an association of investment professionals that endorses a one-share, one-vote standard. “But a lot of large investors don’t have that choice because they’re heavily indexed.”

Share Structures

An association of pension funds, foundations, and endowments is among those appealing to index providers to exclude Snap and any other companies that might follow its initial public offering’s lead.

“We are concerned that if Snap is included in core indices, non-voting equity may gain unstoppable momentum,” the Council of Institutional Investors wrote in response to the S&P Dow Jones consultation. “We also are concerned that excluding only Snap-like structures could spark further market deterioration through ‘Snap-lite’ offerings that similarly undermine the link between ownership and voting rights.”

Snap didn’t respond to a request for comment. Supporters of such structures say they ultimately benefit shareholders by insulating management from short-term market pressures.

“We believe there is no strong evidence that differential voting rights provide companies with a better environment for long-term planning and execution,” the International Corporate Governance Network, whose membership includes investors representing more than $26 trillion in assets, wrote to S&P Dow Jones Indices. “Indeed, the weight of evidence suggests otherwise.”

Controlled companies in the S&P 1500 with multiple classes of stock generally underperformed on a number of financial metrics over the long term, according to a 2016 study commissioned by the Investor Responsibility Research Center Institute. Companies with dual-class structures also tend to have lower quality governance, ICGN said.

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

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

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