Snap’s recent IPO created a stir not only because of the impressive valuation and the post-launch price pop. It also generated controversy due to the voting rights of the listed shares. As in, they don’t exist.
As a result, FTSE Russell (market leader in the creation of global market indices) has decided to exclude Snap from its global indices when they are revised in June, pending revision. This is a blow to the company, since inclusion in an index implies a significant boost in liquidity, especially given the recent surge in demand for index-based funds.
Bloomberg’s Matt Levine points out that the increasing role of index funds in the market confers an increasing amount of power to the index creators. That FTSE Russell can make such a key decision about the market prospects of a company is disconcerting, especially since the criteria are not clear.
Here we start to scratch the surface of a fundamental shift in market models.
Although FTSE Russell has said that it will collect opinions from investors before making a firm decision, the fact that this is even up for review implies a judgement call.
The concerns are apparently centered on the governance model. Fund managers and even the SEC have also expressed concerns, citing uneven representation and its potential impact on disclosure requirements.
But the deeper issue at play is this: centralized vs decentralized control.
Giving all shareholders a say in how the company is run – who’s on the board, capital increases, corporate policy, etc. – is a more “democratic” approach to governance. Spreading responsibility for major decisions across the ownership structure is a gesture of faith that the owners will have the company’s best interests at heart, and that a collective decision carries more weight than one taken in isolation.
However, giving up control is understandably difficult for most founders (even with a fortune on the table in exchange). Hence the creation of a separate class of shares for outside investors (ie. not the founders and not the initial backers) with no voting rights. In fact, the founders have created a separate share class for themselves, with 10x the voting rights of the “normal” shares owned by the original backers (1 share, 1 vote). So, Snap’s founders effectively can do whatever they want with the company.
While that may sound fair on the surface, when you admit external investors, you relinquish control. At least, that’s how economics has worked up until now.
It’s not obvious why public companies bundle ownership and voting rights, other than the belief that it makes the shares more attractive. Snap has gone the other way, alleging that the market wants the founders to retain control.
In theory, their argument should be easy to prove: if investors don’t want that, they won’t buy the stock. Since the share price has remained well above its launch at $17, we can deduce that investors are not too unhappy.
What’s more, the market’s widely accepted definition of “ownership” implies responsibility, but there apparently is no legal basis for that interpretation.
The market has also always assumed that owning a “share” means owning part of the company. That definition seems to be changing, with the advent of new types of representation such as token-based dividend rights and blockchain-based funding models.
Snap’s decision highlights not only a shift in sentiment, but also a widening gap between the two schools of thought: those that think ownership should be decentralized, and those that don’t.
The debate looks set to intensify over the coming months, and not just because of the tie-in with political trends of anti-globalization and concentration of power. Underlying disquiet over the decentralizing influence of blockchain technology is likely to encourage attempts to regulate or channel applications. A heated discussion of the meaning of ownership is likely to surface, and the emergence of alternative investment vehicles could call into question established power structures.
If you’re thinking that this sounds like a full-blown attack on the capitalist model, you could be right.
Only this time, the resulting schism is unlikely to be as ephemeral as Snapchat’s messages.