Market consultation

Voting rights consultation

Important Information
The proposals set out in this consultation document are included in order to gather feedback andmay or may not result in changes to FTSE Russell Index rules.

ftserussell.com

May 2017

Voting rights consultation
Responding to the Consultation
Please submit your response to the questions included in this consultation online athttps://www.surveymonkey.co.uk/r/SLF662Z
If you have any questions about this survey, or if you encounter any technical issues, please contact
rpawson@FTSERussell.com.

Introduction
The SNAP IPO was highly unusual in that there were no voting rights attached to the offered share class.
The lack of voting rights raised governance concerns, particularly for pure passive managers who areforced buyers. In the light of these concerns, FTSE Russell announced that it would defer consideration of
SNAP at the forthcoming Russell index reconstitution and FTSE index quarterly reviews pending a
consultation with index users and other stakeholders with regard to the future inclusion of such securities.
This consultation accordingly sets out FTSE Russell’s analysis of the issue and provides a number of
options for future index inclusion rules. Users and stakeholders are invited to respond by 16th June 2017.
The responses will be considered at the June meetings of the FTSE Russell Regional Equity Advisory
Committees, and an update on FTSE Russell’s proposed approach will be communicated at the end ofJune 2017.

Analysis
FTSE Russell considers that the inclusion of non-voting shares per se in equity indexes is not in itself the
problem. There are several examples of non-voting securities that are eligible for global index inclusion: forexample, preference shares (for some markets only) and savings and investment certificates. Non-voting
standard listings in the UK have always been eligible for inclusion in FTSE Global Equity Index Series(GEIS). Further, in some markets, such as Thailand, non-voting securities or depositary receipts are taken
into account when calculating the headroom available to foreign investors.
FTSE Russell considers that the key criterion that might determine index eligibility is the percentage of acompany’s voting rights that lie in the hands of non-restricted (free float) shareholders. Enforcing such aminimum threshold for voting rights in the hands of non-restricted shareholders would ensure that minority
investors would have some minimum, albeit limited, degree of control over the company. Further, FTSE
Russell considers that the imposition of such a threshold would be operationally feasible and would not entail
wholesale changes to the construction of standard FTSE Russell indexes.

FTSE Russell | Voting rights consultation2

Proposal
Specifically, FTSE Russell would like to receive feedback on the following proposal:
Certain FTSE Russell index series should implement a minimum threshold for the percentage of voting
1
rights controlled by the shares of the company held in the index (“Index Shares” ). The percentage of acompany’s voting rights held in Index Shares is calculated by aggregating the voting rights of the Index
Shares of all the eligible share classes in the company, and dividing this by the total voting rights of theshares outstanding of all the company’s share classes. Wherever possible, the denominator should
2
include the votes of those share classes that are not listed , for example share classes that are reserved
for the company’s founders. A company that fails to exceed this threshold would have the eligibility of its
securities restricted.
To provide context to the consultation, provisional estimates of the percentage of voting rights conferred by
the Index Shares for some US companies are provided in the Appendix.

Questions
1. Do you agree with FTSE Russell’s analysis of the issue?
Yes, voting rights matter and some minimum threshold with respect to voting rights in the hands of
non-restricted shareholders should be set.
No, we disagree with FTSE Russell’s analysis. Please go to Question 8.

2. For those index series where you believe a threshold for the minimum percentage of voting
rights in non-restricted hands is appropriate (please see Questions 6 and 7), where should thisthreshold be set?
5% (consistent with the minimum free float requirement in Russell 3000 and FTSE Global Equity
Index Series).
10%
25% (consistent with the minimum free float in the FTSE UK Index Series for UK incorporated
companies).
Some other percentage. Please state which.

3. For constituents that fail to meet the voting rights hurdle, what restrictions on the index eligibilityof their securities should be imposed?
All of the company’s securities, including all classes of common stock and non-voting securities suchas preference shares, savings and investment certificates, should be considered ineligible for index
inclusion.
All of the company’s securities, including all classes of common stock and non-voting securities suchas preference shares, savings and investment certificates, should have their investability weight
reduced. For example, their investability weights might be multiplied by the ratio of the number ofvotes conferred by one Index Share to the number of votes conferred by one share of the (possibly
non-listed) class with the highest voting rights.

1

Index Shares are calculated as Shares Outstanding x Min (Free Float Weight, Foreign Ownership Restriction). They therefore
represent the shares in the hands of non-restricted shareholders.
2Note that information on non-listed shares may not be readily available in all jurisdictions. Should the application of such a rule befavoured, in the first instance its implementation would be limited to those countries where this information is readily available,
particularly the US.

FTSE Russell | Voting rights consultation3

Only the company’s non-voting shares and other non-voting securities should be ineligible for index
inclusion. The investability weight of the company’s voting securities should be reduced. For
example, the investability weight might be multipled by the ratio of the number of votes conferred by
one Index Share to the number of votes conferred by one share of the class (possibly non-listed)with the highest voting rights.
Only the company’s non-voting shares and other non-voting securities should be ineligible for index
inclusion. All voting shares should remain at their full investability weight.
Some other restriction. Please state which.

4. For new index constituents, for what period do you believe that the restrictions from Question 3
should be applied?
Until such time as the company restructures its securities to meet the voting rights threshold.
After a set period, for example two or five years. Please state how long.
After a seasoning period in which the company’s management has evidenced its adherence to good
governance principles. If so, please state how long the seasoning period should be and how
adherence to good governance principles might be evidenced.
Some other period. Please state which.

5. For existing constituents, when do you believe that the restrictions for Question 3 should beapplied?
Existing constituents should be tested against the new rule at the next index review/reconstitution
cut-off/rank date.
Existing constituents should be tested against the new rule at the next index review/reconstitution
cut-off/rank date following a grandfathering period. Please state how long.
Existing constituents should be grandfathered indefinitely.
Some other period/condition. Please state which.

6. The desire to impose additional eligibility requirements might differ for different types of indexes.
For example, the perceived requirements for FTSE Russell local and domestic indexes might
differ from those for global indexes.
To which FTSE Russell indexes do you believe the minimum voting rights criterion should be applied?
Please tick all that apply.
FTSE Russell global indexes including FTSE Global Equity Index Series, Russell Global Index andindexes directly derived from these.
Russell US indexes.
FTSE UK Index Series.
Other local index series, for example FTSE exchange partner indexes where FTSE is theadministrator. Please state which.
FTSE EPRA/NAREIT Global Real Estate indexes.
FTSE Hong Kong Mandatory Provident Fund indexes.
Other indexes. Please state which.

FTSE Russell | Voting rights consultation

4

7. There may be some index series where the application of a minimum voting rights hurdle would
be inappropriate or redundant. For example, the FTSE UK Index Series includes only thosesecurities with a premium listing from the UK Listing Authority, and the premium listing in turnrequires issuing companies to adhere to a one share, one vote principle. Further, the FTSE UK
Index Series sets higher free float hurdles for companies incorporated outside the UK; this might
be considered as a proxy for the minimum voting rights that should be afforded to UK
shareholders.
A further example might be afforded by index series for regions where governance standards are
accepted to be less developed. Feedback from the recent consultation on the eligibility of N-shares suchas Alibaba and Baidu was that these should be included in certain FTSE China indexes from September
2017. Although the US listed securities of these companies place 40.2% and 27.3% respectively of thevotes in the hands of index shareholders, the Chinese operating local operating companies to which thelisted companies are contractually bound are wholly owned by consortia which include the company
founders.
Are there any FTSE Russell indexes where you believe a voting rights eligibility rule should explicitly not
apply?
FTSE UK Index Series (where premium listing and minimum free float rules already apply).
FTSE China indices (where N-shares will be eligible from September 2017, some of which such as
Alibaba and Baidu are structured as Variable Interest Entities; and where some very large
constituents, such as some banks, are included at low floats).
FTSE Russell fundamental indexes including FTSE RAFI.
FTSE Russell factor based (Smart Beta) indexes.
Other indexes. Please state which.

8. If your answer to Question 1 was no, please state why.
There is no need to consider any exclusion rule based on the proportion of voting rights in the handsof non-restricted shareholders or any other criterion. No changes to the existing index eligibility rules
are required.
There are ways other than imposing a threshold on the aggregate voting rights in the hands of nonrestricted shareholders that would address the problem better. Please see Question 9.
The issue is the inclusion of non-voting securities per se in FTSE Russell indexes and all securities
without voting rights should be excluded.

9. What other ways of dealing with the problem should FTSE Russell consider?
Non-voting securities of companies that fail to meet the threshold for the minimum percentage ofvoting rights in the hands of non-restricted shareholders should be eligible for index inclusion
provided they embed a sunset provision in which they convert to voting shares after some period. If
so, how long should this period be?
Index securities should be weighted according to the percentage of the company’s voting rights thatthey confer, rather than according to their free floats.
Some other approach. Please state which.

FTSE Russell | Voting rights consultation

5

Appendix – Examples of the percentage of votes conferred byindex sharesCompany Name

TickerShare Classes(Voting Power)

Total
SharesAlibaba

BABA

Common(1); VIE

2,473,927,859

2,473,927,859

40.19%

Alphabet

GOOG

A(1), B(10)691,748,603

769,155,721

38.64%

Baidu

BIDU

A(1), B(10); VIE

34,687,377

100,398,663

27.28%

Berkshire Hathaway

BRK'A

A(1), B(0.0001)

1,314,270,563

900,260

74.74%

Brown Forman

BF'B

A(1), B(0)383,900,566

169,051,360

31.93%

CBS

CBS

A(1), B(0)405,956,688

37,598,604

20.23%CME Group

CME

A(1), B(1)339,791,219

339,791,219

99.51%

Comcast

CMCSA

A(0.0599),B(15)4,742,956,869

425,203,023

66.25%

Constellation Brands

STZ

A(1), B(10), Class 1(0)194,800,645

404,904,468

41.67%

Discovery
Communications

DISCA

A(1), B(10), C(0)384,572,732

218,894,616

70.41%

Estee LauderELA(1), B(10),367,832,334

1,663,487,967

13.08%

Expedia

EXPE

Common(1), B(10)150,946,989

266,146,980

45.46%

Facebook

FB

A(1), B(10)2,898,176,948

7,698,725,945

30.27%

Ford

F

Common(1), B(36.8)

3,981,986,307

6,518,490,628

59.64%

Hershey

HSY

Common(1), B(10)212,689,540

758,267,533

18.32%

Lennar

LEN

A(1), B(10)234,463,080

516,191,835

57.35%

McCormick & Company

MKC

124,678,471

11,451,748

78.47%

Molson-Coors Brewing

TAP

197,307,560

215,279,515

80.06%

News Corp

NWSA

A(0), B(1)581,811,578

199,630,240

60.56%Nike

NKE

A(1), B(1)1,650,766,552

1,650,766,552

79.93%

Ralph Lauren

RL

A(1), B(10)82,212,629

315,144,113

17.81%

REGN

Common(1), A(10)106,290,608

123,493,712

63.28%

SNI

Common(1), A(1)129,708,682

129,708,682

66.14%

Snap inc

SNAP

A(0), B(1), C(10)1,179,125,792

2,439,980,459

0.00%

TripAdvisor

TRIP

Common(1), B(10)141,226,959

256,426,950

42.79%

Twenty-First Century
Fox

FOXA

A(0), B(1)1,850,855,467

798,520,953

54.76%

Tyson Foods

TSN

A(1), B(10)358,202,802

988,299,597

28.11%

Under Armour

UAA

A(1), B(10), C(0)440,318,477

529,171,024

34.60%

United Parcel Service

UPS

A(10), B(1)867,763,120

2,478,698,212

27.78%

Universal HealthServices

UHS

A(1), B(0.1), C(100)96,689,924

82,150,770

10.52%

Viacom

VIAB

A(1), B(0)401,731,773

49,431,379

20.20%

RegeneronPharmaceuticals
Scripps Networks
Interactive

FTSE Russell | Voting rights consultation

Common(1), Non
Voting(0)A(1), B(1), Special ClassA(2,878,936), Special
Class B(15,093,021)

Total Voting
RightsTotal Voting %Held by Public

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7About FTSE Russell
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