Playing with fire

The world’s biggest index provider may adjust its stock weightings.
Picture: Shutterstock

This week MSCI Inc, the world’s largest provider of indexes and analytics, will decide whether it will treat stocks with unequal voting rights differently. It has proposed that it should adjust the weights of stocks like Naspers, Google and Visa in its MSCI Equity Indexes to reflect shareholders’ diminished voting power.

This is a decision of enormous significance with MSCI’s proposed approach likely to remove (or restrict) about 4% of the market capitalisation from the current MSCI World Index and 11.2% from the MSCI ACWI Index, which covers both developed and emerging markets. The latter contains 243 stocks with unequal voting rights out of a total of 2 493 companies (as of September 2017), according to Dmitris Melas, MSCI’s MD and head of core equity research.

The largest of these companies are Alphabet, Facebook, Berkshire Hathaway, Samsung and Visa.

MSCI’s decision, when it comes, follows almost a year’s worth of consultation with the investment community.

That the debate is complex is reflected by the fact that it has been ongoing for decades, but was brought to the fore with Google’s listing 15 years ago. And the list of companies employing these structures is not getting shorter. Recently companies like Dropbox, Spotify and Snap (founder of Snapchat) have listed shares with unequal voting rights.

On the one hand executives like Naspers chairman Koos Bekker argue that retaining superior voting power protects them from hostile takeovers, particularly when operating in foreign markets. At the same time, this security frees executives from the pressure to deliver short-term results.

Equity investors argue that in today’s age of corporate malfeasance, voting power enables them to express their views on things like executive remuneration, perceived conflicts of interest and other corporate governance decisions.

Caught between the two are stock exchanges, regulators and global regulatory coordinators who have not adequately responded to the growing separation of ownership and control.

In the late 1980s the US’s Securities and Exchange Commission tried to insist that national stock exchanges adopt a “one share, one vote” listing standard but they were barred from doing so by a court that argued that it would encroach on listed companies’ governance. The response was to request that US exchanges voluntarily adopt forward-looking, “one share, one vote” listing standards, but they have not taken any action. Globally the Stock Exchange of Hong Kong is a notable exception with its long-standing “one share, one vote” rule.

There are more than 20 large stock exchanges in the world and hundreds of smaller ones and competition for new listings is intense. Thus many have adopted (or are planning to adopt) listing requirements that will further accommodate misalignment.

There is no doubt that the ideal regime is one where there is alignment between economic rights and voting power. Voting is an important tool for investors to exercise their ownership rights.

Dual class or unequal share structures tend to be used by companies that have recently listed, are in innovation-driven sectors like technology or health care, and have active owners. Certainly the listing of Snap last year saw investors ‘snapping up’ ordinary shares (sorry!) with no voting rights and barely any sunset provisions (where a company commits to removing the structure over time).

However in this article Lucian Bebchuk and Kobi Kastiel argue that over time the potential advantages of dual-class structures tend to recede, and the costs tend to rise. Also management (or whoever holds the voting power) has a perverse incentive to retain dual-class structures even when those structures become inefficient over time.

That said messing with indices is also problematic as the job of a broad equity index is to accurately reflect the international investable opportunity set of equities.

It has been argued by the likes of BlackRock and the Council for Institutional Investors that while the logic behind MSCI’s proposal (to adjust the weights of unequal voting stocks in the index) makes sense, and could in fact encourage companies to move towards the “one share, one vote” principle, its implementation could have far-reaching and potentially unintended consequences.

Apart from one-off effects (costs associated with adjusting indices), the move would skew the composition of the MSCI indexes and would limit portfolio diversification for investors who want to follow the broader index – with all of its foibles. Imagine if Facebook and Alphabet were weighted down in the MSCI World Index? The unintended consequence is that portfolios would be concentrated in more mature companies, in more traditional industries, with dispersed and passive ownership.

It is difficult to predict the potential impact of this proposal on the equity market and Thursday’s decision will be watched with interest.


You must be signed in to comment.




The Budget Speech explained
Moneyweb’s 2020 national budget offering, including infographics and audio ratings, as well as past budget coverage....

The Investor Issue 48
Separating out the noise from useful information in the markets is not easy. The trick to staying the course is to keep an eye on ...

The Investor Issue 47
Some people intuitively understand that investing for future gain is a long-term process that cannot be rushed. The management of ...

The Investor Issue 46
While US innovation soars and its tech listings continue at a ferocious pace, SA has no real plan for how to embrace the 4th Indus...

The Investor Issue 45
As the investment world falls more and more in love with the simplicity that ETF investing offers, index providers are realising t...

The Investor Issue 44
Company financial statements are the last line of defence for investors wanting to protect their investments. But these cannot alw...

The Investor Issue 43
What makes one CEO great and another mediocre? The Moneyweb Investor ponders this and other leadership questions in the latest iss...

The Investor Issue 42
Stagnant economic growth and questionable economic policy is hampering the development of mid-sized - and investible - businesses ...

The Investor Issue 41
If you are one of those people who invests more energy into your credit card or medical aid rewards programme than you do your ret...

The Investor Issue 40
Volatility in global markets is higher than it has been in years, giving investors the jitters. Some 'experts' are suggesting a re...

The Investor Issue 39
From lessons from Buffet to building your own crypto-portfolio (a risky endeavour by anyone's standards), this issue of The Moneyw...

The Investor Issue 38
They say the art of investing is to ignore the short-term noise and focus on attaining long-term goals. That's true, but that does...

The Investor Issue 37
Getting the economy on the correct footing requires that everyone pulls their weight. Our writers this month have gone above and b...

The Investor Issue 36
The past year is littered with train wrecks like Steinhoff, SAA and Eskom. But there is real sense of ‘back to business’ in So...

The Investor Issue 35
Stock markets are soaring, but productivity is not. Innovation continues, but leads to fewer new jobs. And the great and the good ...

The Investor Issue 34
South Africans are fed up with corruption, or anything that has even a whiff thereof, as JSE rockstar Naspers is currently experie...

The Investor Issue 33
As the year races towards its close, investors will be forgiven for feeling a little breathless. The British WWII propaganda phras...

The Investor Issue 32
Anyone would think that getting an economy moving is rocket science. It's actually not. It requires single-minded commitment. Whil...

The Investor Issue 31
We examine the opportunities of forex trading, the best unit trusts, e-commerce at Richemont and more. ...

The Investor Issue 30
Despite what the astrologers say, there are no shortcuts when it comes to successful stock picking. Fundamental analysis counts. T...


Follow us:

Search Articles: Advanced Search
Click a Company: