Want FTSE Russell index inclusion? Meet the minimum on voting rights

There is ‘broad support’ for index inclusion to require at least some voting rights, says index provider FTSE Russell, following consultation on the issue.

FTSE Russell, part of the London Stock Exchange Group, surveyed asset managers and other stakeholders following the controversial listing of Snapchat parent Snap Inc, which lacked voting rights. 

Following the consultation, FTSE Russell has announced that ‘developed market constituents of all FTSE Russell indexes will in future be required to have greater than 5 percent of the company’s voting rights (aggregated across all of its equity securities, including, where identifiable, those that are not listed or trading) in the hands of unrestricted (free-float) shareholders as defined by FTSE Russell.’

For potential new constituents, including IPOs, the rule will apply with effect from the September semi-annual and quarterly reviews. Existing index constituents have until September 2022 to change their capital structure, if they wish to continue their inclusion.

In fact, of the 68 percent that agreed that ‘some minimum hurdle for the percentage of voting rights in public hands should be imposed,’ less than a quarter (23 percent) said a 5 percent hurdle was sensible. A far higher 55 percent thought it should be set at 25 percent.

‘The results of the consultation showed broad support for the introduction of a voting rights threshold,’ notes FTSE Russell in its paper: ‘Voting rights consultation – next steps. ‘However, a significant minority of respondents argued that no such eligibility criterion was necessary. These respondents argued that the role of an index provider was to reflect the investable universe, and not to require minimum governance standards from constituent companies, at least not in standard, as distinct from ESG, indexes. 

‘One respondent presented an academic paper that argued that the issue price of an IPO would reflect the economic value of any loss of voting rights. The inclusion of such an eligibility hurdle might in addition discourage future tech IPOs should companies prefer to stay private rather than lose a degree of control; this would reduce the opportunity set for investors in public markets. Against this it was argued that without the imposition of a hurdle, future tech IPOs in the US would have little incentive to offer voting rights to public shareholders.’ 

With strong support for both FTSE Russell global indexes (88 percent) and Russell US indexes (77 percent) to follow the proposal, the index provider also asked respondents how such hurdles should affect companies. 

Of those that support a minimum voting rights threshold:

• 29 percent thought that companies that fail to meet the threshold should have all their securities rendered ineligible for index inclusion
• 31 percent thought only their non-voting securities should be made ineligible
• 21 percent thought that the weight of all the companies’ securities should be reduced
• 13 percent thought that non-voting securities should be ineligible and the weight of voting securities reduced.

Back in March, IR Magazine spoke to the Council of Institutional Investors (CII), which had approached stock indices providers S&P Dow Jones Indices and MSCI to bar Snap, and any other company that sells non-voting shares, from their stock benchmarks.

‘It is tapping public markets but giving shareholders no say,’ commented Amy Borrus, deputy director of the CII at the time. ‘What we would like to see at least is for the indexes to exclude new no-vote companies.’