CII Opposes Admitting Dual-Class Stock to S&P Indexes

In George Orwell’s novel “Animal Farm,” there’s a telling quote: “All animals are created equal, but some animals are more equal than others.” The same may be true for public companies that have share classes with unequal voting rights: One type has voting control; the other does not.

Since 2017, S&P Dow Jones Indices has barred adding new members with dual-class shares from its indexes, most prominent among them the S&P 500. But in April, the organization reversed itself, and the trade group that represents institutional investors is calling foul.

The Council of Institutional Investors is “surprised and disappointed” that the Standard & Poor’s-run unit has done a 180 on dual-class stock, says Amy Borrus, its executive director. She criticizes the “opaque” rationale for the index outfit’s about-face on the issue. Borrus says she has gotten S&P to agree to a meeting to discuss the matter and to press it for the chance to consult on similar major questions in the future.

Allocators, notably the California State Teachers’ Retirement System, have been vocal in their opposition to dual-class arrangements because they have no say in governance.

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S&P replied that it did indeed consult with “market participants” and, since the 2017 ruling, numerous companies, mainly in tech, have gone public with dual-class structures. Hence, it argued, blocking index membership for multi-class companies “no longer served the index family’s objective.”

S&P also believes there’s an “inconsistency” in its 2017 ruling, which grandfathered in dual-class structures from tech high-fliers such as Google (now Alphabet), Facebook (now Meta Platforms) and Groupon. Also exempted were long-standing family-owned companies like Berkshire Hathaway and the New York Times. The new setup fixes that anomaly, S&P’s argument goes.

The policy change should enable investment powerhouse Blackstone to join the S&P 500, analysts say. Blackstone’s uncommon share structure has seemed a lot like dual-class to many and has kept it out of the S&P 500. While the company does not strictly have dual-class shares, CEO Steve Schwarzman controls a limited partnership owning preferred stock that effectively controls 39.7% of the firm’s voting power. The new S&P rules clear up any doubts that Blackstone is eligible for inclusion in the storied index.

When First Republic recently departed the S&P 500 after regulators seized the bank, many thought the new S&P rule would result in Blackstone’s ascension to the index. But the honor went to Axon Enterprise, a manufacturer. In a recent earnings call, Schwarzman noted that Blackstone is the largest company by market cap not included in the benchmark. Its market value is $100 billion; Axon is at $16 billion.

Various analysts calculated that Blackstone’s share price, down since its November 2021 peak by one-third, would climb because of sudden demand if it became an S&P 500 member—it must then be included in index-tracking mutual and exchange-traded funds. The general prediction is that Blackstone will join the index soon.

S&P Dow Jones Indices is 73% owned by S&P Global and 27% by CME Global.

In “Animal Farm,” animals drive out humans and take over the farm, but things remain as bad as ever for the animal denizens. Let’s hope dual-class companies don’t end up the same way.