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More investors standing behind '1 share, 1 vote' principle, index exec says

Sustainable investments now make up more than a quarter of all invested assets, but one FTSE Russell executive believes the trend is far from done.

➤ FTSE Russell changed its index rules in 2017 to exclude companies with dual-class share structures, a corporate governance issue that has gained steam in recent years.

Investors believe companies with dual-class shares should not be a part of their "investable choices," FTSE Russell's Waqas Samad said.

A year after FTSE Russell's move to cut dual-class share structures from its indexes, the company's CEO of benchmarks, Waqas Samad, does not believe that the market's concerns over corporate governance are subsiding.

In 2017, the London Stock Exchange Group PLC-owned index provider said any company going public without at least 5% of its voting rights held by public shareholders would not be included in its benchmarks. Companies already included in FTSE Russell's indexes would have until 2022 to become compliant with the change.

Investors have been calling on U.S. listing exchanges and index providers to curb the use of dual-class share structures for several years. From Alphabet Inc. to Snap Inc., executives say they have used dual-class shares when taking their companies public to prevent short-termism among their shareholders. The model ultimately allows executives and founders to retain the majority of voting rights in their companies.

FTSE Russell's Samad recently sat down with S&P Global Market Intelligence at a Washington, D.C., conference to discuss FTSE Russell's decision, dual-class shares and the rise of environmental, social and governance, or ESG, investing.

The following is a transcript of that conversation edited for length and clarity.

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Waqas Samad, CEO of benchmarks at FTSE Russell
Source: London Stock Exchange Group

S&P Global Market Intelligence: Last year, FTSE Russell decided to revise its index inclusion rules for dual-class share structures. What led to that call? How have customers reacted?

Waqas Samad: What we infer from our discussions with the end investors is that this is something that affects their view of what's investable.

The broad market indexes that we construct as tools for those investors to use are oriented to represent the investable choices for those markets. So what those investors are saying is that effectively these should not be a part of their investable choices because they have the viewpoint of "one share, one vote" as the standard and traditional measure from a corporate governance perspective.

Broadly speaking, on the buy side, they were supportive of the decision. We ended up taking that decision through a very thorough consultation process that's very inclusive of all their views.

What about from the issuers themselves? Do you expect existing companies in FTSE Russell indexes to switch to a one-share-one-vote governance standard as the 2022 deadline to stay in the indexes nears?

Samad: I don't think we've heard anything from the issuance side. The change that's really going to happen is in the index inclusion rules, so it's not really that we're asking the issuers to make any changes.

The Council of Institutional Investors, or CII, recently petitioned the Intercontinental Exchange Inc.-owned New York Stock Exchange and Nasdaq Inc. to introduce a sunset provision that would phase out dual-class models after a certain number of years. What was your impression of that move? Is this idea of banishing dual-class shares spreading?

Samad: It's something [CII has] supported for a while. Interestingly, I think CII's membership base is very very similar to our user base on the index side. We build indices as a tool set for the investment community.

We stay in close touch with all of those constituencies when it comes to understanding what we should do in terms of evolving the methodology of the indices. When they have an issue that is really agitating them or really driving them to think about how they should invest, they come to us to say, "This is an issue; we want you to look at it," in the context of how the methodologies of the indices work. We're very much driven by the desires of the end investment community.

It's not a surprise to us that this sentiment is filtering through the CII as well. It's what led us last year to examine the issue of dual-class share structures.

With the broader push for ESG taking place across Wall Street, do you think there is more traction for changing dual-class structures?

Samad: Do I think this is an issue that will continue to prevail in the markets? I think that governance is and rightly should be.

ESG in general is something that's grown as a trend over the last several years quite significantly, [and] not just in the U.S. We see that as an index provider because customers are always asking us to customize our existing indices or to build new indices. That will continue to play out in the markets.

With this particular issue on dual-class shares, we went through that process. We don't have a current plan to revisit that decision. But, as I said before, we are driven to consider issues by the investors in our user base. So if that's something they want us to look at in the future, then that's something we could do.

A recent study found that ESG assets now account for 26% of all professionally managed money in the U.S. Do you think there's still room for this movement to grow?

Samad: We don't see [ESG] abating. We see this as something that's just gaining momentum.

We've had a lot of conversations with our clients, who we stay very close to, and we're building our ESG data business in response to the demand we're seeing, and that's something that we're growing quite effectively across our business. We're in a phase where this is quite new territory. A few years old, of course, but it's still quite new territory that is growing very rapidly.