CII on Unequal Voting Shares and Index Funds

The Council of Institutional Investors has written an exceptionally thoughtful reply to MSCI on the issue of dual class stock and index funds, in response to MSCI’s Consultation on the Treatment of Unequal Voting Structures in the MSCI Equity Indexes.

The Council of Institutional Investors (CII) is committed to the alignment of economic rights and voting power (Alignment). 2 We support the substance of the proposal with certain qualifications, described further below. Most notably, our suggested revisions seek to mitigate disruption related to the proposal’s implementation and afford companies an enhanced incentive to commit to phasing out unequal voting structures after a reasonable period….Our response is divided into three sections: a comment on why we believe index
providers have a legitimate and important role to play in this matter; a suggestion to provide relief to companies that adopt reasonable time-based sunset provisions; and answers to specific questions posed in the Expanded Consultation.

CII believes that voting rights must be considered an essential factor by funds who are creating indexes that cover asset classes extensively, not exhaustively. They ask funds to adjust for the failures of oversight by regulators and the exchanges, while “long-term, fundamental shifts in public capital markets have occurred since the original decision to exclude voting rights from equity index
methodology.”

Stock exchanges, regulators and global regulatory coordinators have not adequately responded to the growing separation of ownership and control. While various reasons explain this inaction, and fault cannot not be pinned on any one entity, what is ultimately most important is that for years, public equity has continued to slide down the path toward greater misalignment, and index providers are in position to do something substantive about it.

CII supports exemptions for companies with sunset provisions, so that unequal voting rights will expire after a limited time, seven years or less.

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