Equity index providers' efforts to crack down on the inclusion of shares with limited voting rights into benchmarks are being welcomed by emerging market investors -- even if the changes end up expelling some of the developing world's biggest firms.
Slashing the index weighting of firms whose unequal voting rights can favor their founders or governments tightly holding onto the reins, would be a powerful measure, potentially depriving them of a pool of money from passive investors aligned with those benchmarks.
Shares with unequal voting powers were out of fashion and even banned in some jurisdictions for decades after World War Two but the growth of tech giants such as Facebook or Google parent Alphabet have seen such structures become popular again.
A number of indexes across major developed markets, such as S&P 500, have already started excluding firms that issue multiple classes of shares - such as ones that do not allow votes on major corporate decisions or the make up of the board.
Now index provider MSCI is proposing a firm's weighting in some developed and emerging indexes should reflect shareholders' voting power as well as free float.
Under the proposal, stocks that offer holders no voting rights would be deleted, those that restrict voting rights would be trimmed.
The issue is more prevalent in emerging markets which fund managers say is due to the sheer weight of tech firms such as Samsung in the indexes, along with state-controlled firms such as Brazilian oil-giant Petrobras.
Fund managers said the move was essential to address the imbalance which developed as the growth of passive investing encouraged companies to sell non-voting shares that index-tracking investors were forced to buy.
Passive investors are at the forefront of those urging a change.
"One of the most foundational principles in corporate governance is the alignment of voting rights with economic interests," said fund manager Vanguard, whose Vanguard FTSE Emerging Markets fund ETF has more than $73 billion under management - the largest emerging equity ETF in the world.