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S&P 500 to exclude Snap after voting rights debate (reuters.com)
247 points by dvt on Aug 1, 2017 | hide | past | web | favorite | 167 comments



I think this is a perfect free market reaction to companies not having voting stock.

Last week the FTSE Russell index announced the same thing.

As a minor point, dual/triple class shares are still allowed so FB, GOOG and BRK are still ok.

If you really want to own a stock that gives you no profits, no income from dividends, no voice in how its run, and actually no value what so ever other than the greater fool theory then go ahead.

I mean, Google could come right now and offer to buy SNAP for 10x what its currently valued at and Evan Spiegel could say no, even though its almost a certainty that the company will never be worth that much.

On the other hand if you don't like the fact that a company goes public and declares that its ownership is in for life no matter what, then you'll probably view this as a positive measure.

All this means is that ETF funds will have some recourse to hold management accountable.

One thing is for sure now ETF investing got a bit less passive.

As a side note on SNAP in particular, Even though the first Lockup has just expired, most employee's, are in lock up due to earnings coming out on August 10th and a subsequent lock up at the end of the month.

By mid September we should have a clear picture on just how the markets value SNAP.

EDIT

To give an example of what companies like SNAP are foregoing by not allowing voting rights is access to, of the 7 largest owners of google stock, 2 are the founders, the other 5 are mutual funds/ETF fund firms.


> I mean, Google could come right now and offer to buy SNAP for 10x what its currently valued at and Evan Spiegel could say no, even though its almost a certainty that the company will never be worth that much.

Even worse, Google could offer to buy SNAP by only purchasing the shares that Evan Spiegel holds. If the Class A shares have no voting rights, and you want to buy the company, why even tender to buy the Class A shares? Just buy Evan's shares, at whatever price you and he agree to, and the Class A shares come along for the ride.

Are there SEC regulations preventing a purchaser from doing that? It seems like the SNAP stock classification system is really setup nicely for a hostile takeover that completely screws the Non-Voting shareholders.


> If the Class A shares have no voting rights, and you want to buy the company, why even tender to buy the Class A shares? Just buy Evan's shares, at whatever price you and he agree to, and the Class A shares come along for the ride.

The Class A shares' owners will still own them, they'll still have rights, the company directors will still have obligations to them. If the company were to sell its business then the cash from that sale would belong to the company. If they then wound up the company they would have to distribute the company's assets (i.e. the sale cash) evenly among all shareholders. If they tried to sell the company for a low price and were paid separately by the buyer there are laws about that.


Not SEC regulations, but Delaware corporate law rules. I don't remember all the details because law school was too long ago. Something to do with the Revlon doctrine, probably.


Based on my skimming, Revlon is about directors' obligation to go for a high buyout price in sinking-ship conditions, rather then dig in their heels and poison-pill. The GP's point was about being able to buy control from buying only a tiny sliver of the shares, AIUI.

Edit: Or your point is that the share A class is the poison pill? I'm in over my head here...


There are minority shareholder rights. It's unfortunately a case of "you have to sue people who do that" instead of "it doesn't work", though.


How is this a perfect free market reaction? It's explicitly a reaction not by market participants, but by the relatively minor players who make up part of the rules of the game.

The "free market reaction" is that if these capital structures suck, active investors don't buy them or short them, and the stock price goes down. That is, if shareholder control was actually valuable, it'd command enough of a premium to discourage SNAP's behavior.


Why don't you just buy SNAP directly? S&P 500 is just an index, like a phonebook. They can list or not list whatever they want, and ETF's can follow or not follow those indexes.


They don't arbitrary choose however. They have published and objective criterias, and they're not singling out SNAP but it is literally the first big stock without ANY voting rights so theyve decided to draw the line now.


>How is this a perfect free market reaction?

Because it's a private organization making a free choice, a choice which you can ignore.


When is "free market" synonymous with private choices? This sounds like a bad conflation.


It's not synonymous but a free market is built on the ability for private parties to make their own choices.


And a whole bunch of other criteria. I the term the OP was looking for was just "market".


Since always? Your definition of 'free market' is perfect competition[1]?

[1]https://en.wikipedia.org/wiki/Perfect_competition


SNAP doesn't need to be in the S&P 500. That's not the market, that's just a list of stocks.

One of the value propositions of these lists is some sort of vetting, so it's their prerogative to drop stocks that don't meet their requirements.


It's not just a list of stocks. It's also a basis for the purchasing of stocks by ETFs, Mutual Funds, etc. Being in the S&P provides a lot of "depth" to a company's stock.

I agree that a company like SNAP doesn't need to be in the S&P since it's pretty much a tech gamble. It's either gonna grow into a juggernaut or it's gonna fizzle. We'll find out soon enough.


I invest almost exclusively in index-tracking funds and ETFs. I don't want my money going into shares of stocks that confer no voting rights at all. That's not really traditional stock ownership at that point, as the corporation is no longer ultimately run by or held accountable to investors. It's something else.


Good index funds are much more diverse than the S&P 500. The S&P 500 is mostly composed of large-cap companies.

The beauty of index funds is that they're so diverse if you had a SNAP in it that plummeted it'd barely impact your portfolio. This is the whole point of index fund diversification.


> I invest almost exclusively in index-tracking funds and ETFs. I don't want my money going into shares of stocks that confer no voting rights at all.

Okay. I wouldn't either. What does your comment have to do with what I wrote?

> That's not really traditional stock ownership at that point, as the corporation is no longer ultimately run by or held accountable to investors. It's something else.

I agree. Once again, your comment has nothing to do with what I wrote. Did you reply to the wrong comment by any chance?

I'm just pointing out why S&P index is important and why it is more than a list?


>It's not just a list of stocks. It's also a basis for the purchasing of stocks by ETFs, Mutual Funds, etc. Being in the S&P provides a lot of "depth" to a company's stock.

It's still just a list and the reason it exists is to indicate some level of vetting. That's the reason that it's used by those funds.

Being excluded from the list just means you don't meet certain requirements but it doesn't block anyone from purchasing your stock.


I'm not sure if "depth" is the right word. Maybe inflation because investors know large S&P 500 funds need to buy SNAP.


Maybe these structures are themselves a free market reaction to the misbehaviour of hedge funds and hostile takeovers messing with how a company is run. They only want investors who trust how the company is run.

I admit I have very mixed feelings about these kind of structures. On the one hand it feels like cheating, on the other hand I totally get why this is necessary to protect the company. Still, it basically means that investors don't really own part of the company anymore; they just have a right to its dividends, but need blind trust in how the real owners of the company decide to run it. It enables more autocratically run companies without any accountability to shareholders, because those aren't real shares anymore.


> As a minor point, dual/triple class shares are still allowed so FB, GOOG and BRK are still ok.

No, they are also disallowed from being added to the index, but are being grandfathered in.


Note that the differences between Berkshire A and B aren't that great. B's have about 1/6 the relative voting rights per dollar of value. I used to look at arbitraging the A shares into B shares when the relative values were attractive, and voting rights never mattered because I wanted the guy running it to have that power.

But maybe that's wrong. I like what the S&P is doing here and maybe they should drop the hammer on GOOG and BRK too. And I say this as someone who has about 2/3s of my net worth in BRK.


In fairness to Berkshire, the A and B shares are both traded on exchanges. If the voting rights are important to you, you can just buy the A shares. In theory, if you had a metric ton of money, you could take control of the company just by buying shares there.

In Snap, you can't go on exchange and go buy the voting shares. They're held by insiders who won't sell at anywhere near the price of the non-voting shares.


I've been thinking but couldn't figure out how one would do arbitrage there..


And in fact S&P had to change its methodology for the S&P 500 a few years ago to allow for the two publicly traded Google share classes (A and C) to be included in the index.


At least Google makes money. Concessions can be made when your business is an actual business, not an experiment.


It seems like an arbitrary criterion and God forbid Google starts investing into future growth a la Amazon, but you're right, as long as the profits are rolling in, the interests are aligned. When the music stops, it's yet another GRPN or ZNGA.


Although the immediate reason BRK/B ended up in the S&P 500 was because they acquired BNI (Burlington Northern, a railroad company) for stock in 2010. But fair enough that it wasn't in there beforehand and is still around now. I don't remember why, probably some other S&P decision about the big-numbered, less liquid BRK/As.


Also, BRK/A shares are quite expensive but you still get Buffett's shareholder reports with a share of BRK/B. I'm sure you could find them either way, but hey. Interesting reading is a nice fringe benefit.


To be honest google is becoming too big to be purchased by anyone. I don't think people have M&A in mind when they buy google stock.


You don't know how leverage works.


Could you explain?


> If you really want to own a stock that gives you no profits, no income from dividends, no voice in how its run, and actually no value what so ever other than the greater fool theory then go ahead.

Totally agree. You can have this kind of dismissive attitude with naive early employees that don't know any better (equity low on the vesting rung, expensive equity buy-outs, unfair vesting schedules, etc.), but this shit won't fly on Wall Street.


> If you really want to own a stock that gives you no profits, no income from dividends, no voice in how its run, and actually no value what so ever other than the greater fool theory then go ahead.

The fundamental value of a stock is in the claim on the assets at dissolution (dividends are just partial dissolution, and voting rights are just a way for you to have a—very small, for most investors—protected role in having a voice in determining whether the company increases or decreased the value to which you would be entitled if it dissolved.)


Once upon a time, the fundamental value of a stock was the present value of the entire future dividend stream. Given the two forms of dissolution, acquisition (Yay!) or bankruptcy (Boo!), I'm not sure this is an improvement.


There is also liquidation.


... and what is the fundamentals value? - In the end the value of the parts and hopefully a premium for expectable profits.


There is a third form you are missing -- buybacks.


And having a voice on the act of dissolution itself. Without vote your claim is always dependent on decisions out of your control.


Do you mean dissolution due to bankruptcy (i.e. value = the sum value of all assets, like hardware, real estate, etc.) or sale (value = the sale price)?

I know very little about finance, but surely it must be important to distinguish the type of dissolution when using it to calculate the present value of a stock. There needs to be some consideration of probability of bankruptcy versus probability of sale (versus probability of no dissolution at all), right?


> Do you mean dissolution due to bankruptcy (i.e. value = the sum value of all assets, like hardware, real estate, etc.) or sale (value = the sale price)?

Any dissolution, in principle, though in a dissolution forced by bankruptcy, there are unlikely to be net assets to distribute to shareholders.

> I know very little about finance, but surely it must be important to distinguish the type of dissolution when using it to calculate the present value of a stock.

Technically, you have to consider all possible dissolutions along with their relative probabilities, since stock isn't a claim on assets restricted to any particular dissolution.


There are many liquidations that pay out significant amounts to shareholders.


Nope.. thats bullshit. If a company dissolves, creditors are first in line and stockholders are last in line. The nuts and bolts or even cash holdings, are often not even factored into stock price. If you did that with apple, its value should be much, much higher. What you buy, when you buy a stock, is earnings (sometimes paid out in dividends) and voting rights.


> Nope.. thats bullshit.

No, it's the fundamental meaning of stock.

> If a company dissolves, creditors are first in line and stockholders are last in line.

Yes, that priority is accurate, and part of what sets (and limits) the value of stock, as is the priority between different classes of stock, where they exist.

> What you buy, when you buy a stock, is earnings (sometimes paid out in dividends) and voting rights.

Earnings are just increase in dissolution value, and dividends are just a partial dissolution.


It's hard for people to get their head around this but you are exactly right. A company has value tied into their market value and accumulated assets even if they pledge to never pay dividends. Berkshire Hathaway is a notable example here. Stock trading is a way to make this value liquid before any actual dissolution event.


The indices should have given a grace period rather than a blanket grandfathering of existing multi-class-structured companies. It arguably discourages further participation in the public markets if a massive amount of control has to be ceded, and it implicitly gives the grandfathered companies a massive advantage (in particular Facebook, wherein one founder has majority voting control despite not having majority ownership)


Why does it give an advantage (and a massive one!) to Facebook? I see how it gives a massive advantage to MZ. But MZ!=Facebook.


When the owners don't control the vote, it's difficult to pass up on short-term opportunities without facing pressure from activist investors and the like. And being able to stay the course is a massive advantage to those companies that can do so without facing corporate attacks. That's a concrete advantage for the long-term prospects of Facebook, assuming of course that the owners' interests are aligned with the long-term value of the company.

And obviously having innate demand in the form of index funds is a great advantage that boosts the market cap (as you see time and time again when stock prices pop upon entrance and drop upon exit of indices)


When the owners don't control the vote, you have situations like Facebook or Google. It may not be necessarily bad, but the idea of those who have control being the owners is an indication of why it can be bad.


> One thing is for sure now ETF investing got a bit less passive.

Sort of. SPY still invests in the S&P like it always has. Getting entry into the S&P 500 always had some rules [1], this is just one more.

[1] http://www.investopedia.com/articles/investing/090414/sp-500...


Right but I think the parent's point was that, at the moment you're relying on someone to exercise judgment about which shares are too dangerous to be in the index, that's indirectly a kind of active investing.

FWIW, I don't think that concern applies here, because it's a judgment about share uniformity, not performance.


Sure, but that has always been the case. I would buy the argument if it was a change by a specific S&P 500 ETF, but since it's the index itself it doesn't seem like anything is changing.


Then I still think you're not appreciating the point: it would, in effect, be active investing if you bought an "index fund" that tracked the "JimBob index of stocks that JimBob thinks are good buys".

It's irrelevant that "hey, I'm just following the index", since the index is inheriting an active manager's judgment. The more such judgment is exerted, the more the index becomes someone's active management. At some point, it is not really an index fund (as properly understood), but an actively managed fund (albeit low-cost).

The OP's concern, then, was that making this kind of decision about "man, these multi-share stocks are too nutty" is getting close to looking like active management rather than some robotic, mindless tracking of some mostly-objective market measure.


It moves the S&P500 a little bit closer to the DJIA which is effectively your JimBob index. FTSE Global All Cap Index is still out there, though even that has to make some choices and draw some lines.


This rule seems a bit more of a judgement than the previous rules were. I think "less passive" is fair.


> If you really want to own a stock that gives you no profits, no income from dividends, no voice in how its run, and actually no value what so ever other than the greater fool theory then go ahead.

I guess I'm a fool, because I take zero interest in participating in any of the stocks I've bought, apart from just monitoring the latest price and watching them (hopefully) go up.

Voting rights or not makes no difference to me.

But I suspect most individual / non-institutional investors are like me. So when I see people get upset about voting rights, it's really just a small number of very self-interested and deep-pocketed parties (activist investors, etc) with their own opinions of how a company should be run, and I don't as-a-rule agree with their opinions.


I also never vote (which means my broker votes for me). However, I very much value the ability to vote. Owning stock is about owning the company, and if you have no vote, you have no ownership. If management doesn't trust me with a vote, what makes me think they have my interests in mind? At that point, owning the stock is simply gambling on the price going up. Maybe I get some dividends, too--bonus--but since my share class can't vote, what would make the owners give any dividends to that class, rather than keeping it all themselves? If management wants to keep control, that's great, I'm all for that, but then they should issue bonds, not stock.


Even if you don't vote, the voting rights in your stocks make them more valuable to someone else who would buy the stocks from you.


"To give an example of what companies like SNAP are foregoing by not allowing voting rights is access to, of the 7 largest owners of google stock, 2 are the founders, the other 5 are mutual funds/ETF fund firms."

I agree with most of your post, but what exactly are they forgoing? How much of Google do the two founders control? Furthermore, most funds are mostly hands off, and any proposals by any one not in your list are starting out dead.


They're forgoing investment from those sources, is the point. If those funds aren't buying the stock, its price will presumably be lower, which makes it harder for Snap to buy other companies, raise new capital, and so on.


We've entered into this topsy turvy world where passive investors are activists and active investors are passive. It's lead to ridiculousless like the current situation and also Aramco's contortions to bend the arm of the LSE for a new listing structure.

It speaks to the incredible orthodoxy that's grown up around indexing over the last few years, much of it poorly thought out. After all, if you believe in the Efficient Market Hypothesis, then indexes pulling out of SNAP doesn't hurt SNAP, it only hurts index funds as activists will move to backfill demand. If you don't believe in EMH, then what are you doing buying index funds?

Index has become such a hot word recently that it's started to lose it's meaning. Before, a fund operated something like this:

1. You pick a basket of stocks

2. You buy those stocks

Now, because "passive" is so much hotter than "active", it becomes:

1. You pick a basket of stocks

2. You contract a 3rd party index provider to construct an "index" based on that basket

3. You buy that index

Voila, you're now "passive" rather than "active" but all you've done is stock picking with extra steps.

The markets have already responded with price signals and their signal is that voting really isn't that valuable. For all the high minded rhetoric of corporate governance, price is where the rubber hits the road and the results are pretty unambiguous.

The whole point of indexing was that I didn't have to make decisions and now I have to make all sorts of decisions over which index provider I pick and what growth I'm missing out on because of arbitrary exclusions to the index.

edit: As always, Matt Levine of Money Stuff says this stuff better than I ever could. Read him religiously if you want to cut through all the bullshit of finance.


Thank you! I tried to make the same point with different words here: https://news.ycombinator.com/item?id=14906737


"If you really want to own a stock that gives you no profits, no income from dividends, no voice in how its run, and actually no value what so ever other than the greater fool theory then go ahead."

While I see you sentiment here, I don't think it's actually correct. Non-voting common stock will receive distributions if any cash is left over after a liquidation and debt, preferred and high-ranked common stock holders are paid (i.e. there is a real claim on assets). Also, with any common stock that doesn't pay dividends, the reason to hold is the promise of dividends (and/or buybacks) when the company does not have any more avenues for investing excess income. This is true for non-voting shares as well.


In the case of BRK.B, the shares still have voting rights, unlike SNAP and GOOG (C).

I've always been impressed that people would buy GOOG instead of GOOGL at such a small discount. 1.8% is not a lot to pay for voting rights.


What could you do with the voting rights? 51% of the votes are held by the two founders. Some more votes are held by people close to them (i.e. Eric Schmidt) This gives very little theoretical and even less practical worth to the votes, whereas the actual worth is benefiting from profits.


I guess the premium accounts for the eventuality of the founders selling their stock. Their shares will be sold eventually, whether in their lifetimes or after.


While introducing the C class of stocks they made clear that they don't plan to give up their majority any time soon (that's the whole reason the were introduced) thus that premium is far in the future.


You don't have any voting rights when you buy GOOGL either, it's a complete fiction. The founders control 51% of the votes.

If anything, it's impressive that GOOGL trades at a premium at all.


You absolutely get voting rights, you just don't get voting control. But there are three founders, so they have to vote together as a block to get that 51%. And over time, they may sell some of their voting stock.


> I think this is a perfect free market reaction to companies not having voting stock.

It's probably as good a reaction as we're going to get, but what in the world is free market about it?

A free market reaction would be something like: "Active investors decide that Snap's governance will lead to poor outcomes, and avoid it, driving the share price down. Future IPOs pick better governance structure in order to obtain higher share price."

Nothing of the kind happened. This is about a single company making a decision, not about markets at all.


So how many companies does it take to be a free market decision? 5? 20? A third? A majority? What if those active investors had taken advice from a single company, like a ratings agency?


> I mean, Google could come right now and offer to buy SNAP for 10x what its currently valued at and Evan Spiegel could say no, even though its almost a certainty that the company will never be worth that much

Nah you still have to run the company in good faith or you will get sued and lose.


>If you really want to own a stock that gives you no profits, no income from dividends, no voice in how its run, and actually no value what so ever other than the greater fool theory then go ahead.

If anything ICOs would show you are underestimating the demand for meaningless stock.


There is always demand for gambling.


> a stock that gives you no profits

What stocks 'gives you profits'?

> actually no value what so ever other than the greater fool theory

Stock gives you partial (and qualified) ownership of the company, i.e. a claim on the company's assets. If Snap owns valuable assets then owning their stock is (indirect) ownership of those assets. No greater fool is required to give them value.

Most companies are run as 'going concerns' so a liquidation disbursement[0] to shareholders is probably (?) very unlikely, but its possibility must be the 'base value' of any stock. (Right?)

[0]: https://www.wikiwand.com/en/Liquidating_distribution


Most companies are run as 'going concerns' so a liquidation disbursement[0] to shareholders is probably (?) very unlikely, but its possibility must be the 'base value' of any stock. (Right?)

Of ANY stock? Wrong.

How much would you give me today if I gave you back 3% of that amount every year forever and at any time you could call it off and get back the original amount you gave me (and you get to keep those payments)? Okay, that's just a savings account.

Okay, how about if I had a solid plan such that I could give you back 3% of that amount next year, 4% the year after that, 5% the year after that, then 6.5%, then 8.5%, onwards and upwards until in a few years it plateaus at you being given 25% (and then rising with inflation) of your original stake each year (which, by the way, you can now cash in for a lot more than you originally paid for it). Is that worth something to you, even if you're not buying any physical assets? The plan is pretty solid, but not foolproof; there's a risk here than it won't work out, but it might.

I have dividend bearing stocks that have done this.

Dividends. A share of the company profits. The value of good dividend bearing shares can be based heavily on how much money they expect to give the shareholders now and into the future, and have very little to do with what physical assets the company actually has.


I was making the point that even stocks that don't pay dividends are still valuable in so much as the company and its assets are valuable.

Your comments are all about the relative value of a stock versus other alternative investments. I don't disagree with anything you wrote.

The point I was trying to make – and I have a good bit of experience now that it's either a really subtle point or it's so wrong (or 'not even wrong') that no one knows how to address it 'directly' – is that, given a stock that:

1. "gives you no profits" 2. Provides "no income from dividends" [Note that this is a separate item in the comment to which I originally replied!] 3. Provides "no voice in how its [company is] run"

The stock is still 'valuable' – apart from any value due to "the greater fool theory".

What I was not claiming is that stock is a 'good value' or a sound investment at its current price(s). I was claiming that if, e.g. someone gave you shares, you shouldn't (necessarily) give them away to someone else. Maybe you have no use for a shovel, or a house somewhere where you neither live nor travel to, but they're not literally of no value even tho you wouldn't buy them yourself at whatever price you could find.


Oh, I see. We all just assumed you didn't know what dividends were.


Literally dividends.

There was a period of time during which many thought it was the best way to get value out of your investments.


I think it's a fantastic way to get value. Short of having significant influence over a company (Buffet) or very good intelligence about a company (e.g. to speculate that the value of a stock will change dramatically and use that information to make a trade) I consider it just about the best way to get value out of equities. The cash from dividends can be reinvested (the yield acts something like an interest rate on a savings account, although obviously the risk is higher and it isn't exactly the same thing) or pooled with cash from other dividends to diversify, etc.

I also like to issue covered calls/puts against assets/cash in my brokerage account for cash flow, although that's a tad more speculative than taking dividends.


Apart from selling my stock, it's the only way I could get any value out, but selling off the good dividend stocks just seems silly. Some of them have paid for themselves over the last decade; unspectacular, but very welcome.

Seguing off topic, a surprising number of companies are really bad at expanding; I'd much rather they gave the profits to me than waste them on failing ventures.


Given that the alternative changes investing from a positive sum game to a zero sum game, they were probably right.


I still think it is...


Buybacks are more tax efficient.


Might be more tax efficient, but I've seen a lot of companies buy back shares when the shares are high. Aside from high growth companies (which aren't usually buying back shares), that's value-destroying. Buy high, then sell low via options... With that kind of buybacks, I'll take the dividends, thanks.


> value-destroying

If you believe it's bad for the buyer (the company) then it must be good for the seller (you, if you participate in the buyback).


Hmm, I appreciate your comment because it resulted in me looking into it and learning more. However as a result I've found that such a blanket statement is slightly dangerous - the [1]investopedia article goes into some good scenarios towards the bottom under "Additional Considerations."

[1]http://www.investopedia.com/articles/active-trading/073015/d...


What I was replying to:

> ... a stock that gives you no profits, no income from dividends ...


Any stock that pays dividends using profits pays profits to stockholders.

It used to be kind of a big deal.


"What happened here was not that the pickiest and most careful investors scrutinized Snap closely and made the bold decision not to buy its stock. Instead, the very least picky possible investors -- the index funds, whose mandate is to buy all the stocks in the market -- are the ones who won't be buying Snap. It makes no sense: In a reasonable world, you'd expect the passive funds to be passive buyers of whatever the market provides, while active funds would make active decisions about what the market should provide. In our actual world, though, the passive funds have all the power, and the active funds are constrained to follow their lead" (Matt Levine, [1]).

[1] https://www.bloomberg.com/view/articles/2017-07-27/the-end-o...


This misses a key distinction: A passive fund has a mandate to buy stocks in proportion to the stock's market cap.

Do you rank a company's market cap by the market cap of each class of shares? If not, you can essentially trick passive investors into buying a large proportion of worse stock.


Indices have been handling e.g. Berkshire Hathaway's two classes of listed stock for decades.

Some buy proportionately (i.e. if Berkshire Hathaway is 10% of a market and 15% of its value is in Class B and 85% in Class A--making up numbers for illustrative purposes--then the index puts 1.5% into B and 8.5% into A) and others defer to a single class based on judgement and rules (e.g. 10% into A). But it's a trivial problem of index construction.


Ah, I stand corrected.

I tried to look more into the decision. These seem to be the two relevant quotes:

>Companies with multiple share class structures tend to have corporate governance structures that treat different shareholder classes unequally with respect to voting rights and other governance issues

>S&P Dow Jones Indices also said that the S&P Composite 1500 indexes, like the S&P 500, follow “more restrictive eligibility rules,” such as positive earnings based on accepted accounting rules whereas its other index groups were “intended to represent the investment universe.”

So I suppose they aren't really "the very least picky possible investors". Their mandate seems to include actively curating the S&P 500, despite its tendency to be used by "passive" investors.


On the other hand, it'd be helpful if a passive fund screened stocks to exclude ones that didn't meet criteria for being investible. E.g. if a stock is obviously a scam, it would be rational to not invest in it.

Passive funds tend to track indices, so the responsibility of deciding what stocks are investible seems to be done by the folks who maintain the index.

This is what appears to be happening here: index maintainers are unimpressed with stock, stock is excluded from index, passive funds that track index won't invest in stock


The S&P 500 isn't an index fund, it's an index.


Passive funds are still actively managed -- just not by the end consumer. I can see the appeal of a passive fund manager being able to make active decisions to benefit their investors.


Active funds aren't actively managed by the consumer either.


The majority of capital investment is held by active investors though. So how does passive funds have all the power?


Active investors benchmark against indices. Most use third-party indices instead of constructing their own, for good and bad reasons.


This title, "S&P 500 to exclude Snap after voting rights debate" is wrong. S&P 500 is moving to bar all stocks with multiple classes with different voting rights. Existing stocks in the S&P 500 are grandfathered.

Personally I'm a fan of this. Multiple voting classes seem to be abused. Take the recent Ford case where the Ford family owned a very small percentage of shares, but had an overwhelming share of the voting power. If I understood it correctly it took basically unanimous voting from all other shareholders to remove this imbalance.


SNAP is not an existing member of the S&P 500

They were already unqualified until now, because they lack positive earnings.

[https://en.wikipedia.org/wiki/List_of_S%26P_500_companies]


Good point, because the chances of arriving to profitability are not much higher than the chances of non-voting shares being granted voting rights.


I tried to rewrite the headline to address your criticism, here's my first attempt: "S&P 500 to exclude stocks without voting rights, starting with Snap." However it's longer and headlines need to be short. And it needs to have Snap in the headline or to attract interest.


Are multiple classes of shares really that bad? Here in Germany a possible concept is the Vorzugsaktie (https://en.wikipedia.org/wiki/Preferred_stock#Germany) where you have no voting rights in exchange for a higher dividend than the normal stocks. If you're just a small investor with no desire to exercise voting rights anyway it's actually the better deal.


That sounds fine. I think the problem is with the relatively recent trend of not paying out any dividends at all. If you have no voting rights to change that, there isn't really any value inherent in the shares other than the trust you and everyone else places in the company. It especially throws a wrench in the notion that the value of a security is the net present value of all future cash flows.

It's similar to when the US government stopped allowing trades of bills for silver. In both cases, you stop being able to get "real money" from the financial instrument and have to just trust that the rest of the world will treat the financial instrument as real money.


Similar but not the same. You are obligated by law to accept US dollar bills (any denomination) for the satisfaction of debt. Whereas you're not obligated to do so in the case of these non-voting shares. In a certain sense, by buying these shares, you are assuming there will exist other people who want them too (a market) whereas US securities guarantee a market (300 mil + US citizens).


It is true that the US guarantees liquidity for US dollar bills, but liquidity is hardly an issue for a public stock large enough to be listed on the S&P 500...


You are correct of course. My intention was to point out that this is a great step so that the S&P 500 remains that way. That you don't let in companies offering such shares in the same index (and thus market) as ones that don't.

Of course the ones that are already listed can continue to do so. But still a good step in the right direction IMO.


> If you have no voting rights to change that, there isn't really any value inherent in the shares other than the trust you and everyone else places in the company.

No, dividends are only one way that value can be returned to investors. There are at least two more: buybacks and acquisitions.


Without voting rights, there is no financial anchor for the price since you cannot liquidate the company either, so yeah, it's not really a stock. It is a scrip backed by the faith in the existing majority voting bloc.


They aren't inherently bad.

These shares are often structured such that the enhanced voting rights expire when the original holder sells the stock though. So the classes aren't equally available to the market.


US also has "preferred" stocks which generally pays dividends but don't come with voting rights. These are typically issued by financial companies in US.

Issue in this article and with SNAP is multiple classes of "common" stocks that come with and without voting.


Preference shares can be good investments, in reality they're more like bonds and aren't included in any of the main stock indices either.


Preferred shares also have senior claims if the company is dissolved. I believe the classes in question have none of those advantages.


I have a probably naive question. I just learned about the concept of non-voting stock today. Is there typically some contractual obligation for companies that, if they do a stock buyback, some fraction of the shares bought must be non-voting shares?

If not, what is the value of a non-voting share? Particularly for a company that doesn't pay dividends and doesn't have substantial material assets to sell in the event of liquidation (my impression is that this describes many or even most modern publicly traded companies)?


> If not, what is the value of a non-voting share? Particularly for a company that doesn't pay dividends and doesn't have substantial material assets to sell in the event of liquidation (my impression is that this describes many or even most modern publicly traded companies)?

Why would a voting share in a firm without dividends or with no assets be worth anything? Voting just gives you input into a future course which will hopefully give the firm assets (from which it may or may not issue dividends), but the voting shareholders will presumably pursue that anyway, and if you don't have better ideas than they do on how to do that, your vote isn't actually netting you any additional value.

All stock is based on the (possibly expected future) value of a share of the net assets of the company. There is nothing else that could provide it value. Voting rights are just a way to have input on how the company will try to realize value and how and when it will distribute it to those entitled to it.


My impression is that modern firms "pay dividends" by doing share buybacks, which are equivalent to dividends but taxed less (I'm nowhere near an expert here, if that isn't clear). If you don't have a voting share or some kind of contractual guarantee, though, what's to stop the voting shareholders from deciding to just buy only voting stock in the event of a buyback?


Note that the dividend effect is dependent on the share price, and may only be valid if you sell shares within a short time of the buy back.


Outside of taxation, a buy back is essentially equivalent to a dividend that you're forced to reinvest. At the end of the day, all of your shares are worth a smidge more of the company. Certainly, the price could go down after a buyback, same as if you reinvested the dividend.

The benefit for shareholders is that the shareholder can decide when to recognize that as a capital gain; the negative for shareholders is that they can't recognize only the portion of their capital gains related to the buy back.


The voting shares give control over the company. If another company wants to buy a company in order to control its direction, they non-voting dividend-paying shares are worthless to them. They need voting shares.

And indeed, non-voting shares in a company that doesn't pay dividends seem worthless to me. And who decides whether the company pays dividends? Not the non-voting shares.

Non-voting shares could be fine, but they could also turn out to be a scam, depending on the wishes of the people who control the company.


The value of a company like Alphabet if it's sold isn't the value of the material assets, it's the value of the actual business, i.e. for Google the ability to essentially print money via AdWords.


Right, but a voting stock is a contract that provides some fraction of those Adwords to you. If they accumulate a lot of those AdWords dollars, shareholders will eventually demand that money back to spend for themselves. In the past, this was done via paying dividends, but my impression is that nowadays it is done via stock buybacks. But if stock buybacks don't have to include non-voting shareholders, what's to stop voting shareholders from just excluding them from the buyback completely and keeping the payout for themselves?


The market value of the non-voting shares should theoretically be the value of the voting shares minus what the market believes the value of voting to be. If a stock buyback only buys voting shares and the price of shares in that class rises, such that the difference in prices of the share classes is greater than the value of voting rights, then an arbitrage opportunity exists. Thus the market will bring the price of the non-voting shares up, and the shareholders of that class will benefit too.


> If a stock buyback only buys voting shares and the price of shares in that class rises, such that the difference in prices of the share classes is greater than the value of voting rights, then an arbitrage opportunity exists.

I'd say the opposite is true. It's more likely non-voting share prices will crash because it's now clear to the market that voting rights are worth quite a lot given that they can be used to steal money from non-voting shares.


I think this assumes that the value of the voting rights is constant. In OP's example, the stock buyback only happens for voting shares, which should cause the market to update its estimate of the value of voting rights.


Good point! I don't really have enough (or any) economics knowledge to know how to model the value of voting shares in this case, but I think that there would also be downward pressure, for example as the voting power of company founders increases due to the reduction in number of voting shares.


The CEO still has some vague duty to the non-voting shareholders, even though they don't vote. If the CEO did something egregiously unfair they could probably sue successfully.


> they could probably sue successfully

Probably? That's very reassuring.


>"Companies with multiple share class structures tend to have corporate governance structures that treat different shareholder classes unequally with respect to voting rights and other governance issues," the index provider said in a statement.

Good. Reminds me of the thing with Zenefits where they basically screwed the (loose cannon, fired) CEO out of his shares by offering heavily discounted new shares to everyone but him.[1] I know, not quite the same thing here, but a good measure to hold the line against dilution trickery that might get that far.

Edit: According to this recode piece[2], the shares on the stock market (class A) have no voting rights, B have 12%, and the C class have 88% and are held by the founders. Yeah, I'm surprised the exchanges tolerated such weak offerings to begin with, let alone the indexes.

[1] https://news.ycombinator.com/item?id=12013321

[2] https://www.recode.net/2017/2/21/14670314/snap-ipo-stock-vot...


Now to see if the next big startup to IPO (AirBnB, Uber, etc) learns their lesson about issuing these bullshit shares to the public.

$SPY alone is a significant chunk of total equities ADV - and there are other SP500 ETFs that hold significant assets. By not being eligible to be part of these indices pre-IPO shareholders are ignoring a huge and growing segment of the market.


If you actually believe in passive index investing, this seems like a bad thing. You want lots of little pieces of various companies, especially ones that protect from distractions/meddling by activist investors.


If you believe in passive investing, it might make more sense to buy something like the Vanguard Total Stock Market Index rather than the S&P 500, which has inclusion rules and isn't a true broad-market index. (Although the S&P 500 performs almost exactly the same as a total market index).


Yeah those pesky investors. Giving us money and expecting something in return!


Why go public in the first place if you don't want active investors? I find it highly unlikely investors wanting to get involved in a company's success would be a bad thing more often than not.


I believe the are rules that often force companies to go public (e.g. the 500 investor rule) even if the CEO wants to retain private ownership.


Right, hopefully there will be passive funds that include companies like Snap that are large parts of the "investable universe" but aren't on an the indices.


I just don't get the whole non-voting shares thing for established, profitable companies like Google.

AFAIK, the idea behind non-voting shares is to be able to continue to raise money by selling stock. Selling non-voting shares allows the founders to maintain control. For an established, profitable company like Google that does not need to raise additional funds, why even bother with non-voting shares? Is the purpose just for compensation in the form of stock grants / options?

Why not just increase salary or bonuses, and get rid of stock grants? At least at my level, I never thought anything I did could have a dramatic impact on the stock value, so holding stock did not provide motivation (and most of us were on auto-sell anyway). Is it just to provide executive level motivation? Why not just have meaningful performance targets and performance bonuses to motivate execs?


Well when you give out salary or bonuses (or even a dividend) taxes are paid twice (once by company, once by employee/investor).

By playing stock tricks (buying back shares, non voting shares) the company never pays taxes, just the employee/investor.

That's probably not the whole story, but part of it I think.


I should have thought of this. It all comes down to avoiding taxes.


Stock grants let them push part of your compensation for work done today out to next year, or beyond. The money (stock) that's coming in the future keeps you at the company.

At least, that's why I thought it was done.


At least at Google, most people viewed it as a part of your compensation. Similar to a raise. It was done every year, and you'd eventually have several overlapping GSUs at once. It was almost more a reward for tenure than anything else.

The thing that kept people around was the annual bonus. It was always interesting to see who quit the day after the bonus was paid.


So there's going to be a time where Snap gets snatched up for real - I don't care about the current promises from the founders, reality has a way of making itself happen.

The real problem is to get in a bit before the snatch up because there's usually a stock boost then. It'd be a quick, low-yield safe return.

The risk there is sometimes the captains do go down with the ship and you're going to just have to write things off when things get bought for peanuts (aka my SUN holdings) so I don't know if it's a farm-betting strategy.

And finally, this strategy has some weird consequences, like when I bought Apple stock in the late 90s after Jobs publicly said they had a couple month runway. I thought Compaq or Gateway would come by and get them (and no, I sold it off at a reasonable double digit percentage profit and am damn happy about not being greedy). Crystal balls are very cloudy.

This is not financial advice.


"The real problem is to get in a bit before the snatch up because there's usually a stock boost then. It'd be a quick, low-yield safe return."

If you know the future, one can certainly get quick, safe returns. Until you get kidnapped.


I can draw the future stock market price of many companies with pretty high confidence as long as you grant me the permission to not label the axis. Turns out not to be very useful.


You're just looking to time the market. It's not really a reliable strategy (unless you trade in insider info). Most stocks often mentioned in news/articles will inevitably get a stock boost when good news hits. Why not time them as well if you can time SNAP?


This is so strange. Multiple classes of stock are commonplace. Nonvoting stock is for people who want to invest in the company, but not be real owners of it. That sounds like why most people buy stock. Was there a lead up to this that I missed?


Carl Ichan is just angry that vote-free shares aren't useful for corporate raiding and pillaging. No casual investor cares about voting power.

This move is bad for employees and founders, and good for Wall street. Don't buy into the narrative.


Surprising, but excellent news for America's 401ks. Bad news for Uber shareholders.


Give up control of the company to short-term minded public investors vs. losing access to passive funds? Seems like an easy choice.

I believe Snap has what it takes to grow another 10x under its current leadership, while S&P could prop the stock up 20% without actually creating real value.

Glad Snap is going down this route.


Good rulemaking, but any thought as to why it isn't retroactive?


Because then it would be bad rule making.


And also, good luck convincing people that you're dumping alphabet and Berkshire Hathaway.


I guess SNAP doesn't want easy money.


It's just an index. I'm sure there will be many index funds with SNAP in them if you want to buy them.


Not really. It's one of the, if not the top index. A lot of passive investors (myself included) put a large chunk of their investment funds in ETFs and/or index funds that just track the S&P500. Not being included means a massive reduction in the number of people indirectly holding their shares.

Index inclusion/exclusion is something that must have been studied by some academic - I wonder what their conclusion is. My hypothesis is that the stock price would be lower given the significant reduction in quantity demanded.


And not just S&P, also FTSE Russell: https://www.bloomberg.com/news/articles/2017-07-27/index-pla...

This is a big deal (in a good way, IMO). Companies have a very real disincentive to go public with a shareholder-rights-unfriendly listing now, since a large portion of the passive investment universe will be prohibited from ever buying.

I see this as a case where everybody wins: the default option ends up being friendly to shareholder rights, but if you really want to and are in an advantageous position you still have the option to list go public with non-voting/less-voting shares if you want to gamble.


Well...kinda. I don't know if they were invented for this specific purpose, but preferential shares do prevent activist shareholders from imposing their will on public companies, forcing them to take actions that are very short term. Preferential shares actually prevent that from happening, which is great.

This is a new dimension in that struggle. I don't know how this will pan out...

One thing I don't understand is why don't index funds take preferential shares into account when deciding which ones to buy/sell? Couldn't that be factored into the decision engine's rules/algorithms?


Passive funds should have consistent and binary rules. Either you're in, or you're out.

Anything more than that is "smart index" aka active.


If you're interested, the National Bureau of Economic Research has some pretty interesting work on the subject:

Stock Price Reactions to Index Inclusion: http://www.nber.org/digest/nov13/w19290.html

The Mysterious Growing Value of S&P 500 Membership: http://www.nber.org/papers/w8654

Big Picture: Inclusion in an index does have some +ve effect on price


Most index funds do not actually hold the index. They look at the index as a guide of the types of stocks to buy, but the fund manager still makes buy/sell decisions on any stock they want including those not in the index.

Index funds are actively managed. They difference from traditional funds in that they hold their stocks much longer. A traditional active fund is always asking the question "what stocks will go up the most in the short term" - when they get this right they do very well, but when they get it wrong they pay a lot more transaction fees which cuts their gains significantly. Because an index fund is asking "which stocks are worth holding for a long time" they don't have the pressures to find the best short term performing stocks and so their transaction fees are much less.


This is completely wrong - not how ETFs work at all. If you have a large block of SPY you can redeem it for the index constituents. If you have a large block of the index constituents, you can redeem it for SPY.

When the SPY price rises above the price of the constituents, arbitrageurs (firms like Jane Street) will go and buy the constituents and create some SPY shares (and sell them for a profit). Similar for if the SPY price falls below the corresponding weighted sum of the constituents.


You're both right. There are two broad classes of exchange-traded products (ETPs): exchange-traded funds (ETFs) and exchange-traded notes (ETNs).

ETFs have a creation-redemption mechanism [1]. This keeps tracking error [2] low. It also forces ETFs to actually hold their component stocks.

Some clever financial engineers noticed they could approximate most of an index's performance with a few names and some clever trading. They issue ETNs. These are notes issued and backed by usually an investment bank that promise to pay interest in a way linked to an index. They have no requirement to hold the index's constituents.

[1] http://www.etf.com/etf-education-center/7540-what-is-the-etf...

[2] https://en.m.wikipedia.org/wiki/Tracking_error


Just an index that you really really want to be in... It's the mother of all indexes.

Facebook gained 4.3% when it was announced they were getting included in the S&P 500 (a $5b market cap gain at the time):

http://www.reuters.com/article/us-sp500-facebook-idUSBRE9BA1...


And Mark still has full control I believe because of their shares structure?


Yes, this only affects new entries to the index.




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