The world’s biggest index companies have taken sides in one of the most controversial issues in today’s markets, setting up a clash with stock exchanges pushing to loosen rules on multiple share classes.
The decisions by FTSE Russell and S&P Dow Jones Indices to ban companies that use the structures has already had an effect, with photo-sharing app Snap. now unable to qualify for S&P’s US indexes.
But a bigger battle is likely to play out in the months ahead, as bourses from New York to Hong Kong step up efforts to woo such companies while index compilers and fund companies that track their offerings keep the stocks out of benchmarks and investor portfolios.
Firms such as Facebook and Alibaba like dual or even triple-class structures because they ensure founders and leaders keep control over their companies even with minority ownership. But investors have become increasingly vocal in questioning whether it’s in their best interests. Those concerns have led to the index companies taking a stand, one that could deter firms from issuing multiple classes in future, according to a corporate governance specialist.
“Companies do listen to their bankers, their sponsors,” said Jamie Allen, secretary general of the Asian Corporate Governance Association in Hong Kong. “So if they come down and say, ‘This is going to devalue your company, your exposure, and the marketing benefit you get from being in an index,’ then yes, that would have some effect.”
On Monday S&P blocked multi-class shares from joining US indexes including the S&P 500, though a grandfather clause spared giants such as Google parent Alphabet and Berkshire Hathaway . Last week London Stock Exchange Group unit FTSE Russell announced a list of more than 30 companies it would bar from its indexes unless they raised the percentage of voting rights accorded to public investors.
MSCI’s Henry Fernandez, told Bloomberg Television in July that exchanges relaxing their rules to allow multi-class shares “is not the right direction” and that MSCI is consulting with clients about the best way to handle such stocks.
At least one of the firms on FTSE Russell’s list -- market maker Virtu Financial -- is in talks with the index compiler to make the case it shouldn’t be blocked, according to people familiar with the matter. Virtu is working with FTSE Russell on the definitions for its thresholds, said the people, who asked not to be named.
While Virtu wouldn’t be booted from FTSE Russell’s gauges for five years even if its talks fail, Snap’s situation is more immediate: its class of zero voting right shares means it’s barred from FTSE Russell’s benchmarks and S&P’s US indexes. The firm’s shares have lost a quarter of their value since Snap’s IPO in March.
Officials at Virtu and Snap declined to comment while FTSE Russell didn’t immediately reply.
S&P’s decision affects only its US indexes and its global gauges will continue to include companies with multiple share classes and zero shareholder voting rights, said spokeswoman Soogyung Jordan.
The indexers’ decisions won’t help Snap as it tries to recover its share price, Monness Crespi Hardt & Co analyst James Cakmak said. “The broader takeaway is that up-and-coming companies need to do a serious gut-check on pursuing multi-class share structures,” he said.
Chinese companies with multi-class shares raised US$34bn in the U.S. over the past decade, Hong Kong Exchanges & Clearing said in June, as it unveiled plans to allow the structures.
“Our present listing regime isn’t agile enough to cope with the demands of this new age,” Charles Li, chief executive officer of HKEX, wrote in a related blog post Tuesday. “This global relay race is in the first leg, and we are lagging behind.”
In Singapore, the government supported a proposal to allow dual-class shares as part of a package to drive economic growth. The UK regulator suggested loosening its restrictions in a February discussion paper on the effectiveness of its markets.
“We are still evaluating the feedback received and target to update the market before the year-end,” said Tan Boon Gin, head of Singapore Exchange’s regulatory unit, said in response to a request for comment.
“The resistance of some exchanges to non-voting shares is admirable, but competition might force them to allow it. The index guys have an economic motivation to please the funds that use the indexes,” said Paul De Vierno, a strategist at UOB Kay Hian Holdings in Singapore. “Both sides are going in different directions.”
Index exclusion may be the price that founders pay to stay in charge. HKEX said that any dual-class stocks that listed in the city would be ineligible for inclusion in the benchmark Hang Seng indexes.
“It’s hard to say who’s winning or losing at this moment,” said Chow Kar Tzen, a Kuala Lumpur-based senior portfolio manager at Affin Hwang Asset Management Bhd. “It’s a balance between profits and governance.”