FTSE Russell Voting Rights
Consultation – Next Steps

ftserussell.com

July 2017

Voting Rights Consultation – Next Steps
Introduction
FTSE Russell recently consulted index users and other stakeholders on whether FTSE Russell indexes
should include a minimum hurdle rate for the percentage of a company’s voting rights in the hands of nonrestricted shareholders.
The results of the consultation showed broad support for the introduction of such a hurdle. A summary of theresults from the consultation is available here.
. The main results are provided below:••••••

68% of the respondents agreed that some minimum hurdle for the percentage of voting rights inpublic hands should be imposed.
Of the respondents who thought a minimum voting rights hurdle was sensible, 23% thought the rateshould be set at 5%, and 55% thought it should be set at 25%.
Of these respondents, 29% thought that companies that fail to meet the threshold should have all
their securities rendered ineligible for index inclusion; 31% thought only their non-voting securities
should be made ineligible, 21% thought that the weight of all the companies’ securities should bereduced; and 13% thought that non-voting securities should be ineligible and the weight of voting
securities reduced.
For potential new constituents, 83% of those respondents who agreed with a minimum voting rights
hurdle thought the restriction should remain in place until such time as the company’s capital
structure becomes compliant.
For existing constituents, 32% of those respondents who agreed with a minimum voting rights hurdle
thought the restrictions should apply immediately; 60% thought there should be a grandfathering
period lasting from three to seven years before the eligibility hurdle was applied.
There was strong support for FTSE Russell global indexes (88%) and Russell US indexes (77%) tofollow the proposal.

These results were discussed at FTSE Russell’s external advisory committees and as a result of those
discussions FTSE Russell has developed the following proposal.

FTSE Russell | Voting Rights Consultation – Next Steps, July 2017

2Proposal
In the light of the consultation results, FTSE Russell proposes to proceed as follows:•••••Developed market constituents of all FTSE Russell indexes will in future be required to have greaterthan 5% of the company’s voting rights (aggregated across all of its equity securities, including,where identifiable, those that are not listed or trading) in the hands of unrestricted (free-float)
shareholders as defined by FTSE Russell.
The hurdle will apply to all standard FTSE Russell indexes, including the Russell US indexes, FTSE
Global Equity Index Series (GEIS) and non-cap weighted indexes including the FTSE and Russell
TMRAFI Index Series and factor indexes. It will also apply to the FTSE UK Index Series; however its
application there is likely to have minimal effect given that constituents of that index are alreadyrequired to have a minimum free float of 25% for UK incorporated companies, or 50% for non-UK
incorporated companies.
Companies that have 5% or less of their voting rights in the hands of unrestricted shareholders will
have their securities rendered ineligible for index inclusion. For potential new constituents, including
IPOs, the rule will apply with effect from the September semi-annual and quarterly reviews.
For existing constituents, the rule will apply with effect from September 2022, thus affording a fiveyear grandfathering period to allow constituent companies to change their capital structure if they sowish.
The rate at which the hurdle is set, along with its definition, will be reviewed in the light ofsubsequent developments on an annual basis. If, following an annual review, FTSE Russell should
determine that a more restrictive threshold would be appropriate, the grace period will be extended
by a further year.

FTSE Russell | Voting Rights Consultation – Next Steps, July 20173

Rationale for the Proposal
The results of the consultation showed broad support for the introduction of a voting rights threshold.
However, a significant minority of respondents argued that no such eligibility criterion was necessary. Theserespondents argued that the role of an index provider was to reflect the investable universe, and not torequire minimum governance standards from constituent companies, at least not in standard, as distinct fromESG, indexes. One respondent presented an academic paper that argued that the issue price of an IPO
would reflect the economic value of any loss of voting rights. The inclusion of such an eligibility hurdle mightin addition discourage future tech IPOs should companies prefer to stay private rather than lose a degree ofcontrol; this would reduce the opportunity set for investors in public markets. Against this it was argued thatwithout the imposition of a hurdle, future tech IPOs in the US would have little incentive to offer voting rights
to public shareholders.
There were two broad types of response with respect to the appropriate size of the threshold for votingrights. Some 23% were in favour of a 5% threshold; this would be consistent with the current minimum free
float for most FTSE Russell indexes. However, 55% were in favour of a higher 25% threshold, consistent
with the minimum free float requirement for eligibility to the FTSE UK Index Series. The results of an
indicative analysis of the impact of applying 5% and 25% voting rights hurdles is provided here.

Further analysis of the responses suggests that those in favour of a 25% hurdle were predominantly users ofthe FTSE UK Series where a minimum free float threshold of 25% already applies. Although FTSE Russell
recognises the desire of these users to extend the standards embedded in the UK Index Series more widely,
we consider that the application of a 25% threshold would be unduly disruptive to global indexes. In
contrast, a 5% hurdle would have a limited, but non-zero, impact. FTSE Russell is therefore minded to
impose a 5% hurdle in the first instance but to review the threshold on an annual basis in case subsequent
events might lead it to conclude that a higher threshold would be more appropriate.
With regard to whether the hurdle should apply to all constituents or to only a subset, FTSE Russell
considers that it should apply only to constituents from developed markets, at least in the first instance.
Under the FTSE Russell country classification scheme, emerging markets are not expected to meet thesame criteria as developed markets; it might be considered unreasonable to hold constituent companies tothe same standards as their developed market peers. Further, foreign ownership restrictions are notuncommon in emerging markets. In some countries these can be overcome through the purchase of nonvoting securities. For example, FTSE GEIS includes Thai Non-Voting Depositary Receipts in addition toThai local shares. Additional support for the exclusion of emerging markets from the voting hurdle
requirement is provided by the recent willingness of FTSE Russell index users to allow the inclusion ofsecurities from Variable Interest Entity structures such as Alibaba and Baidu to FTSE GEIS with effect from
September 2017. The publicly available securities of these entities trade in the US, but although the US
securities themselves have substantial voting rights in public hands, investors in the US securities have no
direct control of the local operating companies. Instead, there are contractual arrangements to bind the US
entities to the local operating companies. As happened in the case of Alipay, there is the possibility thatthese contractual links can be broken.
The consultation asked two questions as to whether there were certain FTSE Russell indexes to which thehurdle should definitely be applied and whether there were others to which it definitely should not. The
responses suggested a lower appetite for the application of the hurdle to alternatively weighted indexes. It ispossible that some respondents felt that the hurdle was less applicable to factor indexes where the holding
period might be shorter than in a capitalisation weighted index. Nevertheless, FTSE Russell is minded thatthe hurdle should apply to all standard FTSE Russell indexes. It was pointed out in discussions at the FTSE
Russell external advisory committees that, from a fiduciary perspective, institutional asset owners andmanagers might find it hard to justify an investment in a standard alternatively weighted index that had lower
governance standards than a capitalisation weighted equivalent.

FTSE Russell | Voting Rights Consultation – Next Steps, July 20174

With regard to the sanctions to be applied to companies that fail to meet the voting rights hurdle,
respondents were evenly split between those that thought all of the securities of non-compliant companies
should be excluded, and those that thought only the non-voting securities should be excluded. Some
respondents were in favour of down-weighting the securities of companies that failed to meet the hurdle.
Others argued that the investability weight of all companies should be determined by their voting rights inpublic hands rather than their free floats.
FTSE Russell considers that weighting securities according to their voting rights has strong theoreticalappeal but would add a layer to index complexity. In contrast, the imposition of a straightforward hurdle islikely to prove more transparent and have less impact on the constitution of existing indexes. With regard towhether all the securities of non-compliant companies should be excluded, or only those securities with novoting rights, FTSE Russell is minded to exclude all the securities of non-compliant companies. Excluding
only non-voting securities risks companies seeking to avoid the sanction by replacing these securities withshare classes that confer only minimal voting rights.

FTSE Russell | Voting Rights Consultation – Next Steps, July 20175

Conclusions
FTSE Russell believes that the proposals set out in this document represent a pragmatic compromise
between those that believe the SNAP Inc. IPO set a dangerous precedent for companies to come to themarket with few, if any, voting rights attached to their securities, and those respondents who believe the roleof the index provider is to represent the investable opportunity set as comprehensively as possible.
By including a low threshold for the minimum percentage of a company’s voting rights that can be held by
unrestricted shareholders, future IPOs of companies that confer few if any voting rights will be discouraged
without there being any untoward impact on long-standing existing index constituents such as Facebook andAlphabet which have securities with differential voting rights.
The proposal set out here effectively draws a principled line in the sand. However, in recognition of thenovelty of this approach, the potential impact to FTSE Russell indexes and the possibility that constituentsmight seek to adapt their capital structures as a result of this initiative, FTSE Russell undertakes to review
both the level of the threshold and the sanction to be applied to non-compliant companies on an annualbasis.

Next Steps
Subject to any further feedback that might be received as a result of this proposal, FTSE Russell will publish
the consequent changes to the ground rules and methodology documents of affected FTSE Russell standard
indexes on Friday 25 August 2017. The modified eligibility rules will become effective at the September
quarterly and semi-annual index reviews.

Summary of Results from the Consultation on Voting Rights
FTSE Russell Voting Rights Consultation Results

Analysis of Securities affected by Voting Right Hurdles set at 5% and25%
Indicative List of Affected Securities

FTSE Russell | Voting Rights Consultation – Next Steps, July 20176For more information about our indexes, please visit ftserussell.com.
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7About FTSE Russell
FTSE Russell is a leading global index provider creating and managing awide range of indexes, data and analytic solutions to meet client needs
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