Industry view: Index providers tackle multi-class share structures
Two of the world’s largest index providers have recently announced decisions to partially or fully exclude companies with multiple-class share structures from their indices.
These new policies, made after substantive consultation with index users and other stakeholders, have wide-ranging implications for issuers and investors and highlight the growing roles of investors and index providers in shaping corporate governance standards. Another index provider, MSCI, is conducting a stakeholder consultation on the issue of non-voting shares that is slated to conclude on August 31.
Given the intense and sustained flow of funds into passive strategies over the past several years, listing standards for index providers have become an increasingly important battleground for investors concerned with corporate governance. FTSE Russell’s decision leaves substantial latitude for issuers to implement share classes with highly differentiated voting rights. By comparison, S&P Dow Jones Indices’ decision to exclude companies with multiple-class share structures from certain of its key indices is a much broader exclusion.
Taken together, these new policies show clearly the growing willingness and ability of investors to assert their power in the market in ways that have economic impacts for public companies.
S&P DOW JONES INDICES
On July 31, S&P Dow Jones Indices announced that it would take immediate action to fully exclude companies with multiple-class share structures from entering its S&P Composite 1500 and component indices. The new policy, which took effect on August 1, does not apply to existing index constituents and covers the S&P 500, S&P MidCap 400 and S&P SmallCap 600, but not the S&P Global BMI Indices or the S&P Total Market Index.
In its announcement, S&P Dow Jones Indices writes: ‘Unlike the S&P Global BMI Indices and S&P Total Market Index, the S&P Composite 1500 follows more restrictive eligibility rules including a minimum float of 50 percent and positive earnings as measured by [Gaap]. In light of the Index Committee’s review of the S&P US Indices Methodology...a methodology change to make companies with multiple share class structures ineligible for inclusion in the S&P Composite 1500 is effective immediately.’
A few days earlier, FTSE Russell announced that beginning this fall it plans to exclude companies with low, or no, voting rights from its indices. The new policy is the result of a months-long consultation by the index provider with index users and other stakeholders about whether FTSE Russell’s indices should include a minimum hurdle rate for the percentage of a company’s voting rights in the hands of non-restricted shareholders.
Major findings of FTSE Russell’s consultation process include:
- In total, 68 percent of respondents agreed that companies listed on the index should have some percentage of securities with voting rights
- Of respondents who thought a minimum voting rights hurdle was sensible, 23 percent thought the rate should be set at 5 percent, and 55 percent said it should be set at 25 percent. FTSE noted that the majority of those in favor of this higher hurdle were users of FTSE UK Series indices, where a minimum free float threshold of 25 percent already applies
- Respondents expressed strong support for FTSE Russell global indices (88 percent) and Russell US indices (77 percent) to follow the proposal.
As a result of these findings, FTSE Russell proposed that:
- Market constituents of all FTSE Russell indices must have greater than 5 percent of the company’s voting rights in the hands of unrestricted shareholders, though the threshold will be reviewed on an annual basis
- For potential new constituents, including initial public offerings, the rule will apply beginning from FTSE Russell’s September semi-annual and quarterly reviews
- For existing constituents, the rule will take effect starting in September 2022, allowing those companies to change their capital structure to comply with the new rule.
FTSE Russell said final ground rules and methodology for inclusion in affected indices would be announced on August 25 and become effective at the September quarterly and semi-annual index reviews. However, the index provider also said it would review the threshold and the sanction of non-compliant companies on an annual basis. According to an Excel file released by FTSE Russell, roughly 35 public companies would need to increase the voting rights of public investors by 2022 to avoid exclusion from its indices.
Abe M Friedman is CEO of CamberView Partners. Allie Rutherford, Bob McCormick and Rob Zivnuska, partners with the firm, contributed to this article.