Home / Analysis / Index maker snaps back on non-voting shares

In a move set to hit tech darling Snapchat, index provider FTSE Russell has introduced new voting rights barriers for including certain stocks in its benchmarks.

Under the new framework released last week, FTSE Russell says developed market equities in all its indexes “will in future be required to have greater than 5% of the company’s voting rights… in the hands of unrestricted (free-float) shareholders”.

The 5 per cent threshold will be applied across a company’s entire equity base including “where identifiable” any unlisted or non-trading stock.

Sparked by the controversial zero-vote share float this March of Snap, the company behind the photo-share app Snapchat, FTSE Russell consulted with stakeholders on an appropriate response.

According to the FTSE Russell consultation report, almost 70 per cent of survey respondents supported the concept of minimum public voting rights for listed firms: of whom about 55 per cent wanted a 25 per cent minimum voting rights while 23 per cent favoured a 5 per cent threshold for inclusion in the index.

Despite the majority vote for a higher threshold, FTSE Russell says the 5 per cent level was appropriate, considering a “significant minority” of respondents wanted no voting rights rule imposed.

“FTSE Russell believes that the proposals set out in this document represent a pragmatic compromise between those that believe the SNAP Inc. IPO set a dangerous precedent for companies to come to the market with few, if any, voting rights attached to their securities, and those respondents who believe the role of the index provider is to represent the investable opportunity set as comprehensively as possible,” the paper says.

However, the FTSE Russell non-voting share proposal, due to take effect by the September quarter, will not apply to emerging market indices.

“Under the FTSE Russell country classification scheme, emerging markets are not expected to meet the same criteria as developed markets; it might be considered unreasonable to hold constituent companies to the same standards as their developed market peers,” the paper says.

Rival index firm, MSCI, is also currently consulting with clients on a proposal to exclude companies from its indexes “in the cases when company level “voting power” of listed shares is less than 25%”.

“Existing non-voting index constituents would be maintained in the index if the company listed ‘voting power’ is above 2/3rd of 25%, i.e., 16.67%,” the MSCI paper says. “Such ‘buffer’ would reduce potential reverse turnover resulting from borderline cases.”

The MSCI consultation, which remains open until August 31, also canvases opinion on including wider factors “such as corporate governance problems or specific unacceptable business involvement, such as controversial weapons” into general index construction.

S&P Dow Jones Indices – another of the big three index providers – has also called for feedback on excluding companies with non-voting shares from its benchmarks.

In a response to the S&P survey in April, Ken Bertsch, head of the US Council of Institutional Investors, said: “We believe that Snap-type no-vote shares are even worse that low-vote shares in a traditional dual class stock structure, and [just excluding no-vote shares] would be a significant step in protecting the market and long-term institutional holders (core clients of an index provider) from the worst form of multi-class shares.”

FTSE Russell claims about US$12.5 trillion of institutional and retail money benchmarked against its indices.

Index providers have amassed huge influence over investment markets in recent years with the overwhelming flow of money into passive products.

Snap was down 1.36 per cent on Friday to US$13.81, or about half its price on listing in March.

– David Chaplin, Investment News NZ