One of the most asked questions as passive investing grows is whether index makers have become too powerful. Based on MSCI Inc.’s failed 18-month quest for benchmark reform, it seems not.
MSCI said on Tuesday that it was scrapping plans to reflect voting power in its benchmarks, following opposition from some investors. The U-turn ends more than a year of agonizing over whether the indexer for almost $14 trillion should police companies that have different classes of shares with unequal voting rights, a structure made popular by the likes of Google parent Alphabet Inc.
But wider questions about the companies behind index funds have only just started to be raised.
With the growth of passive investments like exchange-traded funds, these benchmark giants have gained substantial size and prominence. MSCI and its peers can send cash flooding into a company or country by adding it to a high-profile measure -- or out again, if they remove it. MSCI benchmarks were used by ETFs holding $763 billion as of July 31, the company said in August. Companies, investors and policy makers are still grappling with what this means.
Snap Decision
“We’re disappointed, particularly in light of the weak regulation by stock exchanges at this point,” Ken Bertsch, executive director of the Council of Institutional Investors, said of MSCI’s decision to stand pat. Still, “there’s some valid criticism that they’re not really very good in a quasi-regulatory role.”
The CII, which is based in Washington and lobbies for better corporate governance on behalf of more than 120 pension funds and endowments, is now asking exchanges to step up, Bertsch said.
The latest controversy exploded in March 2017, when Snap Inc. listed shares with no voting rights. A plethora of startups had used multiple share classes to go public without ceding their founders’ control, but Snap proved to be the last straw.
S&P Global Inc. last year barred companies with multiple share classes from joining its indexes, including the S&P 500. FTSE Russell, a unit of London Stock Exchange Group Plc, said public shareholders must control at least 5 percent of a firm’s voting rights to be eligible for its gauges.
Both, however, shied away from hurting companies already in their indexes -- or the funds that follow them. S&P only tweaked a handful of benchmarks and made an exception for companies already in them. FTSE, meanwhile, gave existing constituents until 2022 to get their houses in order.