By Caitlin Huston, MarketWatch
FTSE Russell and S&P Dow Jones Indexes are trying to make
sure investors have their say in how companies are run.
Spurred by the initial public offering of Snap Inc. (SNAP),
index provider FTSE Russell set rules last week that require
companies to give unconnected investors a minimum 5% voting rights
to be in their indexes. On Monday, S&P Dow Jones joined them,
barring the entrance of companies that have multiple share classes
from some of their indexes, effective immediately.
While the small minimum set by FTSE Russell is an easy pill for
most companies to swallow, it speaks to a larger backlash against
companies that have recently been going public while giving
investors little to no power.
FTSE Russell, which includes the Russell US indexes and FTSE
Global Equity Index Series, set the rules citing a group of index
users and other stakeholders, who "believe the SNAP Inc. IPO set a
dangerous precedent for companies to come to the market with few,
if any, voting rights."
"The principle set out here effectively draws a principled line
in the sand," the index provider wrote in a report.
Snap made headlines earlier this year, when the company went
public, selling upward of 200 million shares at $17 each, but did
not give those investors any votes along with the shares. Instead,
the company's two co-founders, Evan Spiegel and Robert Murphy, have
88.6% of the voting power.
This voting control was a step beyond what companies had done in
the past. The trend of limited voting rights for outside
shareholders for tech companies received a big boost when Alphabet
Inc.,(GOOGL) (GOOGL) Google Inc. at the time, executed a 2-for-1
stock split in 2014 that created a nonvoting class of stock that
helped retain its co-founders' majority voting power.
Facebook Inc. (FB) also established limited voting power when it
went public, with CEO Mark Zuckerberg owning preferred shares that
carried 10 votes each, while IPO shares had one vote.
In that vein, S&P Dow Jones will no longer add companies
that have multi-class share structures, which means new IPOs with
that setup won't be included in the S&P 500, S&P MidCap 400
and S&P SmallCap 600 However, existing companies with multiple
classes of shares are grandfathered in and won't be affected by the
change.
Russell chose the 5% threshold for its baseline, instead of the
other option of 25%, to make sure that it did not affect companies
like Google and Facebook, instead aiming for others that have gone
even farther in their quest to keep voting rights away from the
public.
"By including a low threshold for the minimum percentage of a
company's voting rights that can be held by unrestricted
shareholders, future IPOs of companies that confer few if any
voting rights will be discouraged without there being any untoward
impact on longstanding existing index constituents such as Facebook
and Alphabet which have securities with differential voting
rights," the company said in a document detailing the change.
The Russell has pointed to 183 companies that would be affected
by the 5% threshold, including Snap and several other recent IPOs,
such as Match Group Inc. (MTCH), Atlassian Corp. (TEAM) and Nutanix
Inc.(NTNX).
Not giving shareholders votes in a company is a worrisome trend,
said Charles Elson, director of the John L. Weinberg Center for
Corporate Governance, as the founders are not held accountable by
the public.
"If someone doesn't feel accountable to someone else, they'll
use the corporation for their own benefit or they're less likely to
be as diligent as you like," Elson said.
He believes companies will comply with the rule because they
need indexes to bring in more money.
"If they're not in an index, and the trend today is doing index
investing, that means capital is going to be more difficult to
acquire," Elson said.
Passive investing was expected to accelerate in 2017, after
passive funds attracted inflows of $428.7 billion, compared with
active fund outflows of $285.2 billion.
The limit proposed is not a big deal to these companies, because
it will still only give outside shareholders a small portion,
around 5%, of the company, he said. He'd like to see greater
shareholder voting allocation, even at the 25% limit that is
required by Russell FTSE indexes in the United Kingdom.
However, Max Wolff, market strategist at investment manager 55
Institutional, says the rule is more likely to affect the
decision-making of companies preparing to go public, as they weigh
their voting structure.
As recent patterns have shown, newly public companies would do
well to cater more to institutional investors, Wolff said. These
investors are more likely to hold on to a stock and buy again
later, which comes in handy around lockup expirations, when
investors are allowed to sell stock. But the company will likely
only be able to attract those institutional investors if it gives
them voting rights.
"I think it's the beginning of a cultural shift of some
authority back to institutional investors in tech land," Wolff
said.
FTSE Russell's rule will come into effect for new IPOs beginning
in September. For stocks already in the indexes, the rule will
apply starting in September 2022, giving them five years to get
ready.
If they don't comply, the stocks will be kicked out of Russell
indexes.
FTSE Russell said it would review the rule every year and could
increase the voting share minimum in the future, if deemed
necessary.
-Caitlin Huston; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
August 01, 2017 09:08 ET (13:08 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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