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.
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.
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.
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.
Edit: Or your point is that the share A class is the poison pill? I'm in over my head here...
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.
Because it's a private organization making a free choice, a choice which you can ignore.
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.
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.
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.
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 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 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.
No, they are also disallowed from being added to the index, but are being grandfathered in.
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 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.
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.
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.)
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?
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.
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.
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)
Sort of. SPY still invests in the S&P like it always has. Getting entry into the S&P 500 always had some rules , this is just one more.
FWIW, I don't think that concern applies here, because it's a judgment about share uniformity, not performance.
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.
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 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.
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:
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.
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.
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.
If anything, it's impressive that GOOGL trades at a premium at all.
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.
Nah you still have to run the company in good faith or you will get sued and lose.
If anything ICOs would show you are underestimating the demand for meaningless stock.
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 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.
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.
There was a period of time during which many thought it was the best way to get value out of your investments.
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.
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.
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).
> ... a stock that gives you no profits, no income from dividends ...
It used to be kind of a big deal.
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.
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.
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.
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
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.
They were already unqualified until now, because they lack positive earnings.
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.
Of course the ones that are already listed can continue to do so. But still a good step in the right direction IMO.
No, dividends are only one way that value can be returned to investors. There are at least two more: buybacks and acquisitions.
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.
Issue in this article and with SNAP is multiple classes of "common" stocks that come with and without voting.
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.
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.
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.
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.
Probably? That's very reassuring.
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. 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, 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.
$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.
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?
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.
At least, that's why I thought it was done.
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.
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.
If you know the future, one can certainly get quick, safe returns. Until you get kidnapped.
This move is bad for employees and founders, and good for Wall street. Don't buy into the narrative.
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.
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.
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.
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?
Anything more than that is "smart index" aka active.
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
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.
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.
ETFs have a creation-redemption mechanism . This keeps tracking error  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.
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):