Credit: Shutterstock photoThe Facebook board recently scuttled plans to create a new class of Facebook shares that would have had no voting rights. The plan would have given CEO, Mark Zuckerberg nearly complete control of the company. Alas, he will have to make-do with controlling nearly 60% of the company’s voting power, despite owning just 16% of the company’s shares, according to The Economist.
The plan to issue non-voting shares would have allowed Mr. Zuckerberg to control the company while owning only about 3% of its shares. This separation of economic ownership from control obviously shifts much the share price risk onto outsiders while allowing a CEO to retain control. Rather abysmal in terms of sound corporate governance.
The landscape may be shifting however. Dual-class share structures may have lost some of their luster, and no-vote shares in particular might be no-go. This past spring, SnapChat (SNAP) went public with a structure that gave shareowners rights the proverbial middle finger. No voting rights whatsoever. These “zero voting rights” angered institutional investors so much that they went to index providers and asked them to revisit their rules on including dual class companies in their indices. Most institutional investors are largely indexed, so they have to own the whole market – even companies with zero voting rights like Snap.
Three main index providers; FTSE Russell, S&P Dow Jones and MSCI all opened consultations for investors into what to do about including companies with differential voting rights in their indices. MSCI still has not released a new policy based on its consultation, but both FTSE Russell and S&P Dow Jones have.
FTSE Russell said that they would require all companies in their indices to have some nominal voting rights and that zero voting rights would not pass muster. S&P Dow Jones went further, however, saying that going forward, companies with any differential voting rights in their IPOs could not be listed on prominent S&P Dow Jones Indices.
This essentially cut-off Snap and other aspiring IPOs from potentially vast amounts of capital if they choose dual-class structures. Companies who already had dual-class structures would be grandfathered.
This decision by S&P Dow Jones sent a clear message to corporate management and boards who wish to separate ownership from control – that they do so at a cost in the capital markets. Going forward, companies going public in the US may have to choose between being included in an index with all the benefits of investment flows into their stock or retaining control of their companies and settling for lower valuations. Bravo index providers!
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
