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Indexers take action on voting rights

By: Mary Fjelstad, senior research analyst

Concerns over how corporate governance is affected by the growth of passive investments are not new. Some argue that passive investors do not care how companies are managed because they do not base their stock purchase/sale decisions on the idiosyncratic characteristics of individual companies.[1]

However, passive index fund providers and large institutional investors have responded to such  concerns by reporting regularly  on proxy voting, by publishing new governance guidelines and policies, and by increasing the size of their governance divisions overall.[2] Index fund providers and large institutional investors formed a new coalition on governance in January 2017.[3]

The SNAP Inc (SNAP) IPO in March of this year was therefore a challenge to investors and the indexing industry alike. It generated buzz on Wall Street as the largest IPO from the technology industry in quite a while. However, the stock was issued without any shareholder voting rights, a first of its kind.[4] There has been an increasing trend for tech companies to tap the public equity market but at the same time limit the voting rights of shareholders primarily by issuing multiple share classes with differential voting rights.[5] Investors and regulators alike have expressed concerns about the impact the reduction—and in the case of SNAP,  the complete elimination—of shareholder voting power.[6]

In response, FTSE Russell chose to lead the way in defense of corporate oversight by stock owners by conducting a market wide consultation and based on client feedback announcing on July 26, 2017 a new minimum voting rights threshold for index eligibility, becoming the first index provider to address this vital aspect of corporate governance. The result is that SNAP is excluded from FTSE Russell indexes. The new inclusion rule will go into effect at the September quarterly and semi-annual FTSE Russell global index reviews. The table below outlines the new rule.

 

The new rule will apply to all standard FTSE Russell indexes, including the Russell US Indexes, FTSE GEIS and non-cap weighted indexes, including the FTSE and Russell RAFI Index Series and factor based indexes. The threshold will be reviewed on an annual basis for appropriateness.

FTSE Russell’s response to the SNAP IPO was quickly followed by other index providers applying new rules to address the same issues. This demonstrates a commitment among index providers to maintain a strong stance on corporate governance and provides an example of how index providers can have a positive impact on corporate governance.

Please see FTSE Russell’s Environmental, Social and Governance (ESG) page for more information on how we track ESG-minded companies. 

 

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[1] For discussion of these issues see Appel, I.R., T.A. Gormley, and D.B. Keim, “Passive investors, not passive owners,” 2016, Journal of Financial Economics, July. In late 2016, the Wall Street Journal published a three-part, in-depth series covering many  recent developments; these reports are summarized in Friedman, A., J. Bonafacino, C. Wightman and L. Gojkovich, “The passive revolution:  Key observations regarding the WSJ’s “Passivist Series,” 2016, Camberview Partners.

[2] In late 2016, the Wall Street Journal published a three-part, in-depth series covering many  recent developments; these reports are summarized in Friedman, A., J. Bonafacino, C. Wightman and L. Gojkovich, “The passive revolution:  Key observations regarding the WSJ’s “Passivist Series,” 2016, Camberview Partners.

[3] Kilroy, M., “Institutional investor coalition announces corporate governance framework,” 2017, Pensions&Investments, January 31.

[4] Wagner, K., “One way Snapchat’s IPO will be unique: The shares won’t come with voting rights,” 2017, Recode, Feb. 21.

[5] For a brief overview of the trend of limiting  voting rights by tech companies, see Solomon, S. D., “When Snap goes public, some shareholders’ voting rights may disappear,” 2017, New York Times: Deal Book, Jan. 24.

[6] Lambert, L and R. Kerber, "After Snap IP, U.S. Regulator questions unequal voting rights,” 2017, Reuters, March 9; Bertsch, K., “Remarks to the SEC Investor Advisory Committee: Unequal voting rights in common stock,” 2017, Council of Institutional Investors,” March 9.

 

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