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The growth of index-based passive investment strategies adds a new dimension to this issue and can result in a “captive market” for passive investors to invest in companies they might not otherwise invest in on the basis of differential ownership rights. The major index providers – S&P/Dow Jones, FTSE/Russell and MSCI – have all recognised investor concerns relating to dual class shares in their benchmark indices, and it is encouraging that they have each conducted consultations to re-examine their policies regarding index inclusion of such shares.
Kerrie Waring, Executive Director of ICGN, stated “ICGN welcomes the positive developments taken by global index providers to penalize companies with lower governance standards – provoked by the audacious US-based SNAP IPO with exclusively non-voting shares. We also call on stock exchanges and securities regulators to recognize the inhibiting effects such share structures have on effective investor stewardship and to avoid a regulatory race to the bottom in terms of governance standards of publicly listed companies.”
Specific recommendations by ICGN include:
- Engaging with companies with existing dual class structures to introduce sunset provisions that will result in their elimination over time as the company evolves in its own life cycle.
- Encouraging index providers and companies with differential ownership structures to provide for at least 25% minority voting rights on an aspirational journey over time to 50%+ 1.
- To encourage index providers at least not to exacerbate the current problem by not adding new dual class shares into benchmark indices.