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Major Indexes Push Back Against Non-Voting Shares

August 18, 2017

Late last month, two major stock index firms announced decisions to partially or fully exclude from their indexes companies with multi-class share structures. As discussed in a previous Ticker report, critics argue that capital structures with unequal voting rights serve to entrench boards and management by eliminating investors’ means of holding them accountable, while defenders argue that companies will perform better if management is insulated from shareholder pressure for short-term profits and that investors who purchase non-voting shares do so of their own freewill. The existence of such freewill is debatable, however, since many investors will indirectly invest in companies that issue non-voting shares if index providers permit such companies to be included in their indexes.

In response to this dilemma, FTSE Russell announced on July 26 that “market constituents of all FTSE Russell indexes will in future be required to have greater than five percent of the company’s voting rights in the hands of unrestricted (free-float) shareholders as defined by FTSE Russell.” Subject to public comments, FTSE Russell expects to formally adopt this policy on August 25, effective as of September 1, 2017, though current constituents will be given a five-year grace period to comply.

While FTSE Russell’s policy will exclude only those companies that offer little or no voting rights to public shareholders, S&P Dow Jones Indices has gone further, announcing on July 31 that, effective immediately, the S&P Composite 1500 and its component indices (including the S&P 500) will no longer add companies with multi-class share structures, though current constituents are exempt from the new requirements.

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