14 ms·

S&P 500 to exclude Snap after voting rights debate

247 points by dvt 9y ago

guelo 9y ago
It's just an index. I'm sure there will be many index funds with SNAP in them if you want to buy them.
- tryitnow 9y ago
  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.
  - gabbo 9y ago
    And not just S&P, also FTSE Russell: https://www.bloomberg.com/news/articles/2017-07-27/index-plan-to-dump-some-dual-class-stocks-would-bar-snap-hyatt 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.
    - pm90 9y ago
      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?
      - HappyTypist 9y ago
        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.
    - deleted 9y ago
      [deleted]
  - bluGill 9y ago
    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.
    - hendzen 9y ago
      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.
      - JumpCrisscross 9y ago
        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-creationredemption-mechanism.html?nopaging=1 http://www.etf.com/etf-education-center/7540-what-is-the-etf... [2] https://en.m.wikipedia.org/wiki/Tracking_error https://en.m.wikipedia.org/wiki/Tracking_error
  - kxxsc 9y ago
    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 http://www.nber.org/digest/nov13/w19290.html The Mysterious Growing Value of S&P 500 Membership: http://www.nber.org/papers/w8654 http://www.nber.org/papers/w8654 Big Picture: Inclusion in an index does have some +ve effect on price
- jonknee 9y ago
  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-idUSBRE9BA1AQ20131211 http://www.reuters.com/article/us-sp500-facebook-idUSBRE9BA1...
  - loceng 9y ago
    And Mark still has full control I believe because of their shares structure?
    - jonknee 9y ago
      Yes, this only affects new entries to the index.
chollida1 9y ago
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.
- dvt 9y ago
  > 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.
- dmurray 9y ago
  > 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.
  - kgwgk 9y ago
Dobbs 9y ago
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.
- dsjoerg 9y ago
  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.
- gregshap 9y ago
  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 https://en.wikipedia.org/wiki/List_of_S%26P_500_companies]
  - kgwgk 9y ago
    Good point, because the chances of arriving to profitability are not much higher than the chances of non-voting shares being granted voting rights.
skrause 9y ago
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 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.
- maxerickson 9y ago
  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.
- rb808 9y ago
  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.
- jon_richards 9y ago
  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.
  - pm90 9y ago
    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).
JumpCrisscross 9y ago
"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-of-libor-and-non-voting-stock https://www.bloomberg.com/view/articles/2017-07-27/the-end-o...
- jon_richards 9y ago
  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.
  - JumpCrisscross 9y ago
    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.
    - jon_richards 9y ago
      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.
hendzen 9y ago
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.
debt 9y ago
I guess SNAP doesn't want easy money.
malchow 9y ago
Good rulemaking, but any thought as to why it isn't retroactive?
- kgwgk 9y ago
  Because then it would be bad rule making.
  - deleted 9y ago
    [deleted]
  - HappyTypist 9y ago
    And also, good luck convincing people that you're dumping alphabet and Berkshire Hathaway.
kristopolous 9y ago
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.
- njarboe 9y ago
  "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.
  - kristopolous 9y ago
    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.
- FLUX-YOU 9y ago
  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?
woopwoop 9y ago
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)?
- dragonwriter 9y ago
  > 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.
  - woopwoop 9y ago
    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?
    - mcguire 9y ago
      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.
cbhl 9y ago
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.
- zenlikethat 9y ago
  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.
  - cbhl 9y ago
    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.
- MichaelDickens 9y ago
  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).
  - deleted 9y ago
    [deleted]
- dingo_bat 9y ago
  Yeah those pesky investors. Giving us money and expecting something in return!
- OscarCunningham 9y ago
  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.
c3534l 9y ago
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?
rajacombinator 9y ago
Surprising, but excellent news for America's 401ks. Bad news for Uber shareholders.
SilasX 9y ago
>"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 https://news.ycombinator.com/item?id=12013321 [2] https://www.recode.net/2017/2/21/14670314/snap-ipo-stock-voting-structure https://www.recode.net/2017/2/21/14670314/snap-ipo-stock-vot...
bpodgursky 9y ago
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.
Allower 9y ago
err who in their right mind thinks Snap has a future in the black? Oh yeah, no one.
drewg123 9y ago
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?
- vosper 9y ago
  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.
  - drewg123 9y ago
    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.
- mox1 9y ago
  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.
  - drewg123 9y ago
sebleon 9y ago
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.

247 points by dvt 9y ago

guelo 9y ago

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

tryitnow 9y ago
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.
- gabbo 9y ago
  And not just S&P, also FTSE Russell: https://www.bloomberg.com/news/articles/2017-07-27/index-plan-to-dump-some-dual-class-stocks-would-bar-snap-hyatt 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.
  - pm90 9y ago
    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?
    - HappyTypist 9y ago
      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.
  - deleted 9y ago
    [deleted]
- bluGill 9y ago
  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.
  - hendzen 9y ago
    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.
    - JumpCrisscross 9y ago
      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-creationredemption-mechanism.html?nopaging=1 http://www.etf.com/etf-education-center/7540-what-is-the-etf... [2] https://en.m.wikipedia.org/wiki/Tracking_error https://en.m.wikipedia.org/wiki/Tracking_error
- kxxsc 9y ago
  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 http://www.nber.org/digest/nov13/w19290.html The Mysterious Growing Value of S&P 500 Membership: http://www.nber.org/papers/w8654 http://www.nber.org/papers/w8654 Big Picture: Inclusion in an index does have some +ve effect on price
jonknee 9y ago
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-idUSBRE9BA1AQ20131211 http://www.reuters.com/article/us-sp500-facebook-idUSBRE9BA1...
- loceng 9y ago
  And Mark still has full control I believe because of their shares structure?
  - jonknee 9y ago
    Yes, this only affects new entries to the index.

chollida1 9y ago

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.

dvt 9y ago
> 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.
dmurray 9y ago
> 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.
- kgwgk 9y ago

Dobbs 9y ago

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.

dsjoerg 9y ago
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.
gregshap 9y ago
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 https://en.wikipedia.org/wiki/List_of_S%26P_500_companies]
- kgwgk 9y ago
  Good point, because the chances of arriving to profitability are not much higher than the chances of non-voting shares being granted voting rights.

skrause 9y ago

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 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.

maxerickson 9y ago
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.
rb808 9y ago
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.
jon_richards 9y ago
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.
- pm90 9y ago
  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).

JumpCrisscross 9y ago

"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-of-libor-and-non-voting-stock https://www.bloomberg.com/view/articles/2017-07-27/the-end-o...

jon_richards 9y ago
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.
- JumpCrisscross 9y ago
  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.
  - jon_richards 9y ago
    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.

hendzen 9y ago

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.

debt 9y ago

I guess SNAP doesn't want easy money.

malchow 9y ago

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

kgwgk 9y ago
Because then it would be bad rule making.
- deleted 9y ago
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- HappyTypist 9y ago
  And also, good luck convincing people that you're dumping alphabet and Berkshire Hathaway.

kristopolous 9y ago

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.

njarboe 9y ago
"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.
- kristopolous 9y ago
  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.
FLUX-YOU 9y ago
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?

woopwoop 9y ago

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)?

dragonwriter 9y ago
> 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.
- woopwoop 9y ago
  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?
  - mcguire 9y ago
    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.

cbhl 9y ago

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.

zenlikethat 9y ago
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.
- cbhl 9y ago
  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.
MichaelDickens 9y ago
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).
- deleted 9y ago
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dingo_bat 9y ago
Yeah those pesky investors. Giving us money and expecting something in return!
OscarCunningham 9y ago
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.

c3534l 9y ago

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?

rajacombinator 9y ago

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

SilasX 9y ago

>"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 https://news.ycombinator.com/item?id=12013321 [2] https://www.recode.net/2017/2/21/14670314/snap-ipo-stock-voting-structure https://www.recode.net/2017/2/21/14670314/snap-ipo-stock-vot...

bpodgursky 9y ago

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.

Allower 9y ago

err who in their right mind thinks Snap has a future in the black? Oh yeah, no one.

drewg123 9y ago

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?

vosper 9y ago
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.
- drewg123 9y ago
  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.
mox1 9y ago
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.
- drewg123 9y ago

sebleon 9y ago

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.