The world’s biggest index companies have taken sides in one of the most controversial issues in today’s markets, setting up a clash with stock exchanges pushing to loosen rules on multiple share classes.
The decisions by FTSE Russell and S&P Dow Jones Indices to ban companies that use the structures has already had an effect, with photo-sharing app Snap Inc. now unable to qualify for S&P’s U.S. indexes. But a bigger battle is likely to play out in the months ahead, as bourses from New York to Hong Kong step up efforts to woo such companies while index compilers and fund companies that track their offerings keep the stocks out of benchmarks and investor portfolios.
Firms such as Facebook Inc. and Alibaba Group Holding Ltd. like dual- or even triple-class structures because they ensure founders and leaders keep control over their companies even with minority ownership. But investors have become increasingly vocal in questioning whether it’s in their best interests. Those concerns have led to the index companies taking a stand, one that could deter firms from issuing multiple classes in future, according to a corporate governance specialist.
“Companies do listen to their bankers, their sponsors,” said Jamie Allen, secretary general of the Asian Corporate Governance Association in Hong Kong. “So if they come down and say, ‘This is going to devalue your company, your exposure, and the marketing benefit you get from being in an index,’ then yes, that would have some effect.”
On Monday S&P blocked multi-class shares from joining U.S. indexes including the S&P 500, though a grandfather clause spared giants such as Google parent Alphabet Inc. and Berkshire Hathaway Inc. Last week London Stock Exchange Group Plc unit FTSE Russell announced a list of more than 30 companies it would bar from its indexes unless they raised the percentage of voting rights accorded to public investors.
MSCI Inc.’s Henry Fernandez, told Bloomberg Television in July that exchanges relaxing their rules to allow multi-class shares “is not the right direction” and that MSCI is consulting with clients about the best way to handle such stocks. That review lasts until Aug. 31, MSCI said in a statement Thursday. “Until now, governance-based criteria has not been part of our global index methodology,” MSCI said. “Through feedback we sought from the investment community at the time of the Snap offering, we made the subsequent decision to more formally engage around this topic.”
At least one of the firms on FTSE Russell’s list, market maker Virtu Financial Inc., is in talks with the index compiler to make the case it shouldn’t be blocked, according to people familiar with the matter. Virtu is working with FTSE Russell on the definitions for its thresholds, said the people, who asked not to be named because the discussions aren’t public.
While Virtu wouldn’t be booted from FTSE Russell’s gauges for five years even if its talks fail, Snap’s situation is more immediate: its class of zero voting right shares means it’s barred from FTSE Russell’s benchmarks and S&P’s U.S. indexes. The firm’s shares have lost a quarter of their value since Snap’s IPO in March.
Officials at Virtu and Snap declined to comment while FTSE Russell didn’t immediately reply.
S&P’s decision affects only its U.S. indexes and its global gauges will continue to include companies with multiple share classes and zero shareholder voting rights, said spokeswoman Soogyung Jordan.