Two weeks ago, FTSE Russell banned companies that issue non-voting shares from joining its index, claiming that the two class structure hurts shareholder rights. This week the S&P 500 followed suit. The S&P 500 notably grandfathered in three companies that use non-voting shares, Alphabet (aka Google), Berkshire Hathaway, and Facebook, because without those stocks the S&P 500 would be irrelevant. The move to “de-index” companies with non-voting shares was seen in the tech community as a direct assault on recent IPOs like SNAP and Blue Apron who issued non-voting shares to the public and kept control in the hands of management.
Being part of an index is critical for companies today. Many institutional and retail investors use passive strategies that automatically buy indices, which means that index companies get more demand for their shares and trade at higher multiples. This gives index companies a big advantage over their non-index peers.
Under the new rules from FTSE and S&P, joining the index now comes with downside. Single class companies have fewer protections against activists and momentum investors, who optimize for day-to-day movement in a company’s share price. Activists often force companies to use stock buybacks and other such nonsense to drive up the share price in the near term, making companies less competitive, or even bankrupt, in the long term.
Compare this to the interests of long term investors. If you are the CEO of a public company, you and your key employees have short windows of time around earnings announcements where you can sell stock. Otherwise you are prevented from selling because you have insider information. VC shareholders have lock up provisions that make them hold stock for at least 6 months after an IPO, often much longer. As a result insiders are all unified around structures that create the best long term performance, which is why so many tech companies have opted for dual class structures that keep management in control.
I believe there is a simple solution to this problem. Use a single class of stock, but the number of votes you get is equal to the length of time in years that you have held the shares. The counter starts at zero on the day you acquire the stock. If you hold it for one year you get one vote, two years you get two votes per share, etc. All shares trade at the same price since there is only one class of stock, and holding periods can be easily tracked thanks to innovations like blockchain where each share can be registered.
If implemented, this change would empower long term investors over fly-by-night shareholders, and enable companies to fend off spurious attacks. It seems like a simple solution to the voting rights problem.