In a world where there are more stock indexes than stocks, refusing to cooperate has its consequences.
At least that’s one way of explaining the tremors that were sent through the market this week when S&P Global Inc. barred companies with multiple share classes from joining its main U.S. indexes, including the S&P 500. The move blacklists an equity structure made popular by Facebook Inc. and Alphabet Inc. and comes just days after FTSE Russell, a unit of London Stock Exchange Group Plc, took its own stance on voting rights.
That the nuts and bolts of benchmark construction could play a role in how companies govern themselves should be no surprise to anyone paying attention to the stock market over the last decade. Share indexes are the building blocks of exchange-traded funds, and a company excluded from them loses access to the world’s fastest growing investor.
That indexers emerge as a hero of shareholder rights? That’s more of a shock.
“It’s amazing an index would have that kind of power,” said Eric Balchunas, an ETF analyst with Bloomberg Intelligence. “But with so much money going passive, the pressure’s on.”
You’re Barred
Of course, shareholders already have a mechanism for voicing their opinion on corporate governance -- don’t buy the stock. Since ETFs disclose their holdings, it isn’t hard for investors to determine whether companies that trouble them are in the portfolios.
But S&P Global’s decision takes the issue to another level. Under the rule, corporations that issue shares conveying different rights for investors won’t be eligible to join the S&P 500 Index. Nearly $9 trillion is benchmarked to the S&P 500 alone, according to its overseers, and hundreds of billions more follow its mid-cap and small-cap measures.
FTSE Russell last week banned companies that don’t give shareholders at least 5 percent of voting rights from joining its gauges. Existing constituents meanwhile have until 2022 to get their houses in order.
“It’s our job to set minimum standards, in the past these minimum standards have been set by the regulators but regulators are competing for listings,” Mark Makepeace, chief executive officer at FTSE Russell, said on Bloomberg Television last week. “About 30 percent of the market wants to passively manage, so for those users they don’t want this risk in their benchmark.” Makepeace could not immediately be reached for further comment.