BlackRock, the world’s largest asset management group, has called for regulators to be tasked with setting corporate governance standards rather than relying on index providers to screen prospective or existing members of their benchmarks.
In a letter to Baer Pettit, president of MSCI, the global index provider, BlackRock’s vice-chairman Barbara Novick said regulators in collaboration with listing exchanges should be “the arbiters of corporate governance standards for publicly listed companies”.
Novick was responding to a consultation paper issued by the index provider “on the treatment of unequal voting structures” in MSCI’s equity indices.
She added: “While the objectives of MSCI’s proposal are aligned with our view that ‘one vote for one share’ is the preferable structure for publicly-traded companies, we believe that an alternative approach would be more effective in achieving this objective.”
The issue stems from the rising popularity – particularly among Silicon Valley start-ups – for dual class share structures, which give greater voting rights to one category and sometimes lead to “an overconcentration of power in the hands of a few shareholders”, BlackRock said.
Social media giant Facebook’s dual share class structure, for example, means that while co-founder Mark Zuckerberg owns a relatively small proportion of Class A shares, his holdings in Class B stock give him 60% of the voting rights.
Swedish pension fund AP7 – one of the biggest shareholders in Facebook – last year succeeded in forcing the US company to abandon plans to issue voteless Class C shares. Richard Gröttheim, chief executive of AP7, claimed the move would have cost investors as much as $10bn (€8.1bn).
BlackRock’s Novick said in her letter: “We recognise the potential benefits of dual class shares to newly public companies as they establish themselves. However, we believe that these structures should have a specific and limited duration.”
Novick said that “a global agreement is necessary to establish minimum corporate governance standards that would ensure a minimum level of investor protection”.
Index providers could aid good governance by creating “alternative indices” to allow investors to reduce or screen out their exposure to companies with “unequal voting rights”.
In this instance, this would allow investors who felt strongly about corporate governance issues to “vote with their feet”, Novick added.
George Dallas, policy director of International Corporate Governance Network, welcomed BlackRock’s move: “I think [BlackRock is] rightly identifying the fact that individual providers can be put in an awkward position if they are trying to balance the pressures of many different investors.
“A top-down policy mandate would help to make things unambiguous.”