How London Stock Exchange deals with companies who offer non-voting rights shares
Let's talk about something that big and small companies strive to be on top but are often criticized for - corporate governance
As some of you may have heard, Snapchat Inc. (An American technology and social media company) announced it would make an IPO (Initial Public Offering) on the NYSE (New York Stock Exchange).
Everyone got excited!
The excitement went dramatically down when the investors realized that the only shares available to buy would be …wait for it… NON-VOTING SHARES!!
Yes, that’s right. You give the owners money to grow the company and fair enough, you’ll be rewarded through share price appreciation or dividends, which is an economically sound judgement. However, you will have absolutely NO SAY in the strategic direction of the company since you won’t be an owner with voting power
Here’s the deal now. Responsible investors take exception to buying non-voting shares, as in corporate governance terms, this massively undermines shareholder rights and fails the one share one vote principle! If the owners decide to take a different approach in the future against investment managers’ opinions, the latter won’t be able to do much, because they don’t have any voting power to replace the management/owners.
However, passive funds normally follow indexes and some Russell indexes would have included Snapchat, based on its current inclusion rules. Responsible passive investment managers would have had no choice than to buy the stock even if they didn’t want to – ‘passive’ means you follow the index religiously with no questions asked!
Pressure was boiling in the responsible investment community and FTSE Russell (part of London Stock Exchange Group) had to take the unusual step to put a consultation out there asking the community what it thinks about imposing a minimum voting threshold for non-restricted shares, i.e. shares held in the public for normal trading.
The index company (FTSE) has now announced it will introduce a strict 5% minimum non-restrictive voting power for all of its indexes. So what does that mean? If the public does not hold 5% voting power, the company will not find itself in FTSE Russell indexes. Passive investors, both responsible and classic ones, will not be buying into them, meaning less demand for the stock, and therefore less share price growth.
But FTSE Russell understands they can’t just kick companies out of their indexes if they fail that rule.
First, only companies from Developed markets will be subjected to this rule. So companies registered in emerging countries will get away with it, at least one would expect for a short while until FTSE Russell realizes this rule should be expand to all companies.
If companies failing it are currently in a FTSE Russell index or multiple ones, they will have 5 years to adjust their capital structure and meet the requirements for inclusion. Those about to enter the index in September 2017 (indexes are published quarterly) will be subjected to the new rule!
While this may not have a big bearing on companies listed on the London Stock Exchange, as most of them prefer to follow the advanced corporate governance culture in UK, companies listing in United States have more flexibility and could exploit the less rigid corporate governanceexpectations.
Corporate governance rules are very useful for each company in order to ensure that they are on track with what investors and shareholders want them to do. The Snapchat case is a clear example of how owners can decide to avoid all accountability to investors providing them funds to grow.
I hope you enjoy it !