Index Providers Speak: Policy Process and Voting Rights
Index providers spoke at
#CIIFall2017 about how they develop their policies. Specifically, they discussed recent developments around voting rights.
Index Providers Represented
- Annalisa Barrett, Clinical Professor of Finance at the University of San Diego (Moderator)
- David Blitzer, Managing Director & Chairman of the Index Committee, S&P Dow Jones
- Pavlo Taranenko, Executive Director, Index Research, MSCI (standing in photo)
Index Providers: What I Heard
As with all my other posts on
#CIIFall2017, I mostly refrain from quotes, since my typing speed is abysmal. I try to be accurate but don’t always hit the mark. You may also find some difficulty determining if what write is my opinion or that of a speaker. Be forewarned.
Annalisa Barrett started off with a little background of the importance of indices. For example, index funds will hold more than half the assets in the investment-management business by sometime between 2021 and 2024, according to Moody’s Investors Service Inc. By definition, actively managed investments, in aggregate, cannot deliver above average performance
Some index-tracking exchange-traded funds charge as little as $3 annually for every $10,000 invested. The average charged by U.S. stock mutual fund managers is $131. (Index funds to surpass active fund assets in U.S. by 2024)
David Blitzer then opened his remarks by discussing the work of S&P Global. They are not just index providers. They also do credit rating and provide financial information.
With regard to indices, they have a plethora or products from equities, to commodities and housing. Committees have ultimate responsibility on index policies and governance. Voting policy determines which and how firms go in an out of the indices. They start with the International Organization of Securities Commissions (IOSCO) guide.
S&P Global index methodologies are published. Material changes require review and consultation. S&P Global publishes questions before making changes on their website to published policies. Consultations, if public, take a minimum of 30 days. The Index Committee reviews all comments. All revisions to policy are done on noncommercial side of the company.
The most discussed decision in their history came with the Snap controversy . 75-80 responses on consultation. Two public comment periods. No changes in the broadest indexes. However, for the largest indexes, 1500 (large, mid, small) accounting for 50%+ stock in market, the big change left companies like Snap off. Now companies can have only one class of stock unless they were in the index before.
Index providers do not see themselves as a regulators. Committee members are all on the noncommercial side, experienced, with appropriate degrees, etc. Sometimes they have partners but they insist those representatives on the Committee are noncommercial as well. Yes, they heard from the major ETF providers, CII, etc. but did not hear from corporate managers — although they did hear from some attorneys who represent them.
Companies can increasingly get a huge amount of capital without going public. There is less anti-trust action. Majority vote standard? That could be petitioned. (unlikely) Stock market should be a market for corporate control.
Pavlo Taranenko noted that MSCI was founded in 1969 and is based in Geneva. Then it connected to Morgan Stanley but is no longer affiliated. They acquired Risk Metrics. He briefly touched on portfolio analytics and other products. MSCI can create leveraged indexes.
Market-cap weighted, ESG indexes, Islamic, etc. Generally, policies are consistent globally. Equity index committee discusses changes in methodologies. Committee members are senior researchers (noncommercial). Sounded much the same process as S&P Global, although I do not recall anything about a public comment period. Majority vote standard? Some ESG indexes address.
Both looked at the issue because there was a consensus in investment community. Index providers can act faster than regulatory agencies.
Personally, I am interested in MSCI’s approach to optimizing factor and ESG exposure, which places a higher weighting on stocks with alpha potential, based on less risk/controversy, higher ESG.
Index Providers: What Others Write
- Tech companies probably won’t follow S&P’s new Snap-inspired rules
- Thoughts On S&P’s Decision To Exclude Non-Voting Stock From Indexes
- S&P and FTSE Russell on Exclusion of Companies with Multi-Class Shares
- Snap Decision