Feeling Blue About The ‘S&P 501 Index’

April 04, 2014

The venerable S&P 500, tracked by ETFs like SPY, VOO and IVV, changes to reflect a sad reality.

Quick: How many stocks are in the S&P 500 Index?

It sounds like a trick question, and starting this week, it is.

The index committee that runs the S&P 500 made clear that the “500” applies to the number of companies, but that the number of stocks has ratcheted up to 501 to cover Google’s new dual-share class system.

In this I give a nod to S&P and a grunt to Google.

S&P gets props for addressing the reality of large, publicly traded share classes for the same firm that shouldn’t be treated as identical.

Google’s new C-class shares—issued in a stock split—have no voting rights, while existing A-class shares have one vote. Both are publicly traded.

The fact that C shares traded on day 1 at only a slight discount to A shares might merely reflect that neither class draws much water: Google’s founders own 16 percent of the company’s shares but control 61 percent of voting, according to the New York Times.

In short, the founders controlled the firm beforehand, and this move merely helps them do so going forward.

This strikes me as a modest step backward—not for S&P, but for Google shareholders.

I understand that the notion of “one share, one vote” has never been at the heart of capitalism. The idea of the “silent partner” is embodied in structures like limited partnerships, where the general partners run the show and the limited partners hop on for the ride.

Still, the idea of the founders of a now-massive and public firm squelching the proportional representation of the firm’s owners strikes me as one that’s a century past its time.

I get that activist shareholders can buy up a minority stake and then demand actions that might be short-sighted and self-serving.

Still, disproportionate power in the hands of a few founders seems like a poor alternative.

Google’s founders rightly earned billions for their vision and ability to execute. It’s not clear to me, however, that their continued grip is in shareholders’ best interests. Shareholders had to resort to a class-action lawsuit that produced the compromise that played out today.

The solution for investors who want better representation is, of course, simple: Don’t own the stock. That’s hard to do today in a plain-vanilla ETF, but argues for the “governance” screens in so-called ESG funds that select securities based on “environmental, social and governmental” factors.

ETF investors should also know that big fund issuers like BlackRock and Vanguard act on your behalf regarding proxy votes and the like. But they can only do that if the stock they beneficially hold for you has a vote.

In all, it seems that today’s high-tech founders, for all their modernity, have the same problem faced by founders of old: letting go.


Contact the author at [email protected].

 

 

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