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.
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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)