the company that produces the Standard & Poor’s
500-stock index announced this month that it would
exclude the corporate parent of Snapchat from its
benchmark market measure, the move was cheered by
advocates of better corporate governance.
was seen as an overdue response to a disturbing trend,
particularly in tech: Founders, when they take a company
public, do whatever they can to maintain control, even
when they own relatively small stakes.
the case of Snap Inc., it had issued only nonvoting
shares in its March initial public offering— as far as
it gets from many investors’ ideal of all shares
having equal voting power.
it’s far from clear that the stand taken by S&P
will have much effect, even though inclusion in the
index boosts a stock price by 5 percent on average.
is a lot of evidence that company management won’t
care," said Chris Jones, the former chief
investment officer for asset management giant BlackRock’s
domestic equity business.
now a member of the investment committee at Irvine,
Calif., investing start-up Acorns, said the new rules
might persuade some small companies to change how they
plan to go public. That’s not so for big, well-known
firms that investors are clamoring to invest in.
Uber comes public, they’ll come with some kind of
differentiated structure," he said.
S&P rules say that companies with more than one
class of stock will not be eligible to join its
benchmark S&P 500, MidCap 400 and SmallCap 600
indexes, which track large, midsize and small companies,
respectively. Companies already included in the indexes,
however, will be able to remain.
announcement followed a similar rule change by FTSE/Russell,
which plans to exclude companies from its indexes,
including the Russell 3000, if they severely limit the
voting rights held by ordinary shareholders.
the past decade and a half, numerous companies ––
including Google, Facebook, Workday and LinkedIn ––
have gone public with two classes of stock. One, owned
by founders and early investors, carries outsize voting
rights — often 10 votes per share. The other, sold to
everyone else, has just one vote per share.
Snap went public in March, it took things one step
further, selling shares to the public that came with no
voting rights at all. That prompted S&P, FTSE/Russell
and another index manager, MSCI, to ask investors
whether Snap’s nonvoting shares or shares of other
companies with little or no voting power should be
included in their indexes.
investors, according to the results of polling released
by FTSE/Russell, said the indexes should include only
companies that give ordinary shareholders meaningful
companies are included in major indexes, investment
funds that seek to match the returns of a particular
index are forced to buy shares — something some
investors don’t like.
Mastagni, an investment officer at the California State
Teachers’ Retirement System, told The Los Angeles
Times this spring that investing in Snap would encourage
"bad behavior" but that the huge pension fund
would nevertheless have to buy Snap shares if they were
included in the Russell 3000.
by index-tracking funds is one of the big benefits of
index inclusion, especially as index funds have become
more popular than ever. Vanguard, a pioneer in index
fund investing, has seen hundreds of billions of dollars
flow into its index-tracking funds over the past few
there’s much more cash in actively managed funds,
meaning there’s plenty of capital that can be invested
in companies shut out of major indexes — and that the
benefits of being included in the indexes may not be
enough to persuade company founders to give up more
companies don’t heed the new rules and continue to go
public in ways that will keep them out of the big
indexes, it could eventually make the indexes less
attractive to investors.
decades, the S&P 500 has been used as a gauge of
what the U.S. stock market is doing. And index funds
that track the S&P 500 are billed as a way to
essentially invest in the whole market, or at least in
the largest public companies.
imagine if S&P had issued its new rule years ago and
that companies such as Facebook and Google parent
Alphabet never became part of the S&P 500.
to an April report from investment firm State Street
Global Advisors, if those and other companies with
dual-class share structures were excluded from the
S&P 500, the index’s returns would have fallen
from 86.5 percent to 84.6 percent over the past decade.
That’s because firms such as Facebook and Alphabet
have had outsize growth, boosting the index’s overall
might help explain the position of Vanguard on the whole
absolutely in favor of one share, one vote. We’re also
proponents of index methodology that captures the
broadest set of companies," said Joe Brennan, head
of the company’s equity investment group.
the former BlackRock investment manager, said this is an
issue he’s thought about since S&P made its
we going to have lower expected returns in our (funds)
than we would ideally like to have because we’re
excluding certain portions of the stock market?" he
now, he doesn’t believe this is a big problem.
without the new rule, Snap would not be eligible to be
included in the S&P 500. It’s plenty big enough,
valued at about $15 billion, more than twice the
valuation of the smallest company in the index, but it
hasn’t been public for a full year and it isn’t
close to being profitable — both requirements for
Jones said if Snap and other companies that will be
excluded continue to grow and prosper, it could spur
investors to reconsider their position.
investors feel S&P’s indexes are out of step with
the market as a whole, another firm could create its own
set of stock lists. Or S&P and other index managers
could simply do an about-face.
and Russell might change their rules if the market told
them investors don’t care about this stuff,"
Jones said. "They are for-profit organizations. I
think the market will respond to this somehow."
Borrus, deputy director of the Council of Institutional
Investors, praised the new S&P rule and said she
believes it will at least prevent more companies from
following Snap and going public with nonvoting shares.
she said it’s true that some companies will continue
to go public with multiple share classes and limited
shareholder voting rights. For that to stop, she said,
it will take more than new rules from index managers.
new rules don’t solve the problem," she said.
"This should be laid at the door of the stock
exchanges. They should have standards that give
shareholders some modicum of accountability."