Big pension funds demand answers from S&P Global on its decision to allow companies with unequal shareholder voting rights in its popular indices, a move that allows private equity giants Blackstone and Ares to join the S&P 500.
The Institutional Investors Council, which represents pension funds and has spoken out against unequal voting rights, said it was “surprised and disappointed” by S&P’s investment. decision on April 17 to reopen the S&P 500 and other indices to companies with multiple share class structures, according to an April 25 letter to S&P seen by the Financial Times.
“We were also disappointed with the opaque process S&P Dow Jones used to make up its mind,” CII said, requesting a meeting with company officials.
S&P’s change reverses a five-year policy of banning new dual class stock corporations from clues. S&P initially banned dual-class companies in 2017 after Snap, the owner of the Snapchat app, went public without voting rights, sparking an outcry from pension funds. The S&P ban did not force existing constituents such as Alphabet, Berkshire Hathaway and Meta.
For decades, institutional investors and corporations have fought over dual-class stocks. This configuration was typically used by family businesses such as Ford and The New York Times to preserve family control over businesses in sell shares with much less voting power.
In recent years, IPOs have more and more dual class actions, especially since Google’s controversial two-class float in 2004. Pension funds and other big investors have attacked two-class stocks for undermining their grip on corporate boards. There are 27 dual-class stock companies in the S&P 500, according to ISS Corporate Solutions. More than 100 companies are now eligible for the S&P 500, mid-cap 400 and small-cap 600, according to Keefe, Bruyette & Woods, an investment bank.
Investors said they were taken aback by the S&P’s decision.
“We were deeply dismayed to learn of S&P’s retrograde decision” on multiple classes actionssaid Caroline Escot, chief investment officer at Railpen, which manages £35bn for UK railway workers.
“It is currently unclear to what extent the broader investment industry has been appropriately consulted during the decision-making process over the past few months,” she said. “We are writing to S&P to request further information.”
S&P said the company occasionally revises its index methodologies and the change on multi-class stocks was the result of a public consultation last year with market participants.
Changes in markets and investor sentiment since 2017 mean that restricting multi-class companies “no longer serves the purpose of the index family”.
“Companies with multiple share classes are part of the total investment universe and should be eligible for potential addition,” he said.
S&P’s rule change means Ares and Blackstone could soon join the benchmark S&P 500 index, KBW said in an April 19 report. Blackstone was likely already eligible, KBW said, but S&P’s rule change “removes any uncertainty” about the private equity group’s eligibility.
“We have the largest market capitalization of any company in the United States that is not in the S&P 500,” Blackstone Chairman Jon Gray said in an interview with the FT last week.
Jill Fisch, a corporate governance scholar at the University of Pennsylvania Law School who has published research on dual-class stock companies, said S&P’s ban on dual-class stock in 2017 hasn’t deterred companies from making the structure public in recent years.
And there is an argument that retail investors missed performance opportunities when dual-class stock companies were banned by S&P. Companies such as Peloton and Uber were held back by the market even though they had dual-class stocks that protected founders, she said.
Ultimately, the ebb and flow of the stock market will likely determine how many companies attempt to go public with unequal voting rights, she said.
“In a tougher market for IPOs or a tougher stock market overall, I think we can expect to see fewer dual-class IPOs.”