In late July, S&P Dow Jones and FTSE Russell announced that they were changing or proposing to change the standards that govern whether a company is included in their indices.  Although their approaches differ, the changes would effectively bar most companies with differential voting rights from their indices, as follows:

  • In its July 31 announcement, S&P Dow Jones said that companies with multiple share classes will no longer be included in the indices comprising the S&P Composite 1500 – which includes the S&P 500, S&P MidCap 400 and S&P SmallCap 600. There are some exceptions; companies currently in these indices will be grandfathered, as will any newly public company spun off from a company currently included in any of the indices.
  • Five days earlier, FTSE Russell proposed to require more than 5% of a company’s voting rights – across all equity securities, whether or not listed or traded – to be held by “free float” holders to be eligible for inclusion in the FTSE Russell indices.

These changes followed an investor outcry arising from the Snap IPO, in which public investors were accorded no voting rights. And, not surprisingly, the investor community did a figurative happy dance when these changes were announced.

I’m not a huge fan of differential voting rights or of issuing stock to the public that carries no voting rights at all.  For one thing, I wonder what will happen if one of these companies gets sued on a transaction and cannot use the defense that its shareholders – or even a class of shareholders – voted to approve the transaction after full and fair disclosure.

But I’m also not a fan of merit regulation.  Our securities laws and all the regulations that flow from those laws are based upon disclosure, not whether the underlying security is a good or bad investment.  So if the public wants to snap up shares of Snap (all puns intended), with full and fair disclosure that doing so will entitle them to no voting rights, why should these quasi-regulators stop them from doing so?

The changes have also been criticized – rightly, in my view – on the grounds that (1) indexes should provide a comprehensive picture of all companies in which investors may invest and (2) the restrictions will only add to companies’ reluctance to go public in the first place.  I’m hardly the first person to be troubled by the paucity of IPOs in recent years, which has its own potential consequences, including weakening our capital markets and restricting liquidity.

I’m also troubled by the all-or-nothing (or almost nothing) approach of the new standards.  If you provide for limited or no voting rights, you’re out – no ifs, ands or buts.  How about some more flexible positions, such as mandating that these restrictions “sunset” in X years?  How about working with issuers, or with the issuer community, to figure out if there are “optimal” levels of voting rights that might satisfy (or equally dissatisfy) both sides?

And what’s next?  Will companies with staggered boards be ousted from the indices?  How about companies that have neither a non-executive board chair nor a lead or presiding independent director?

So while I think the investor community has every right to be snappish about Snap (there I go again), I question the advisability of this “one-size-fits-all” approach to this important governance issue.