Investors' significant influence on the S&P's recently-effected ban on including multi-class share structure companies in its S&P 500, MidCap 400 and SmallCap 600 indices (reported on here) notwithstanding, this article from the LA Times: "Will tech companies bow to S&P's new Snap-inspired rules? Probably not" captures the non-uniform, and potentially diminishing-over-time investor support for the S&P's move, which may very likely and measurably reduce investors' index-based fund returns as companies determine that the benefits of retaining founder control via outsized voting rights outweigh the 5% average stock price boost associated with inclusion on the indices.
According to the article - citing an April 2017 report from State Street Global - had the new S&P policy already been in place to the exclusion of "outsized growth" companies such as Facebook and Alphabet (which, along with Google, Workday, LinkedIn and others, went public with dual/multi-class share structures), the S&P 500 index returns would have fallen from 86.5% to 84.6% over the last decade. With actively managed funds (as compared to index funds) still dominating the market and multi-class tech companies like Google and Facebook beating the S&P 500 by a significant margin, there may not be sufficient incentive over the long-term for companies (or investors) to relinquish, or go public without, their multi-class share structures.
The article quotes Vanguard's Joe Brennan, head of the company’s equity investment group: "We're absolutely in favor of one share, one vote. We're also proponents of index methodology that captures the broadest set of companies.” And therein lies the problem - as a benchmark stock index like the S&P 500 (which index funds track) that excludes substantial market players like Facebook and Alphabet no longer accurately reflects the market or presumably will yield the associated returns that have made index funds an attractive investing option.
In this recent post, R Street Institute Associate Fellow and Visiting Assistant Professor at the University of Maryland School of Law Bernie Sharfman identifies a number of potential consequences associated with the so-called shareholder empowerment movement that triggered S&P's decision - including the impact on the representative nature of index funds and associated implications:
Of course, index funds that are required to exclude the stock of certain public companies because they exhibit a certain attribute that is distasteful to the movement will become less representative of the investment universe they are trying to represent, reducing their value to mutual fund and ETF investors. But perhaps more fundamental to the objective of creating the most representative portfolio possible, these funds will not have the opportunity to include the stock of successful private companies that have shied away from going public.
As previously reported, the FTSE Russell also released plans to effect a minimum 5% of voting rights free-float (aggregated across all of the company's equity securities) eligibility requirement as of its September 2017 and subsequent quarterly and semi-annual index reviews, and MSCI launched a consultation on the inclusion in its indices of non-voting shares, which remains open through August 31st (reported on here).