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Comment by blakesterz | Hacker News Reader

I never thought about how a stock ends up on the Index before! Apparently it's by committee:

https://en.wikipedia.org/wiki/S%26P_500_Index#Selection_crit...

"When considering the eligibility of a new addition, the committee assesses the company's merit using eight primary criteria: market capitalization, liquidity, domicile, public float, Global Industry Classification Standard and representation of the industries in the economy of the United States, financial viability, length of time publicly traded, and stock exchange."

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Actual reason is Tesla has multiple class shares: https://www.dividend.com/news/2017/11/03/companies-multiple-...

"On July 31 [2017], S&P Dow Jones Indices, the outfit that oversees the S&P 500 and its constituency, announced that it would take steps to exclude companies with multiple share class structures. ... The move comes amid blowback from investors who have complained about company practices that are designed to keep majority, or total, voting control in the hands of its management and founders"

This is very interesting. However, it doesn't appear this rule is applied consistently as Facebook is in the S&P500 and is probably the most infamous example of a multi-class share structure.

Facebook is grandfathered in, having been added in 2013. Although the linked article says the following:

> Companies with multiple share classes already in one of the indices will have until September 2022 to change their structures or face removal.

That's not S&P -- that's FTSE Russell [1]:

> For existing constituents, the rule will apply with effect from September 2022, thus affording a five year grandfathering period to allow constituent companies to change their capital structure if they so wish.

From my reading, S&P has not yet announced a similar policy.

[1] https://research.ftserussell.com/products/downloads/FTSE_Rus...

Facebook joined in 2013. Social Media Valley companies already in the S&P 500 were allowed to remain.

I guess it would apply to Alphabet as well

Funnily enough one of the owners of S&P Dow Jones Indices is News Corp, which itself has a multiple share class structure (and is in the S&P 500).

Great. There is no point in "shares" without votes.

I mean, dividends no? I would wager that most people care more about investment income than voting to approve a board member they probably never heard of.

For the individual you are correct, which is why companies haven't had much trouble getting people to buy non-voting stock.

But for the system as a whole, it's pretty important that the shareholders have the ability to vote for board members who will protect their interests, even if the power doesn't get used very often. That's why the SP committee is pushing back against multiclass shares...if the company's management controls the voting shares then they control the board which is supposed to be overseeing them, removing even a vague threat of accountability in a system that's already far from perfect.

The dividends that Facebook, Google, Netflix, Tesla and so on have never paid?

Of course it's rational enough from the CEO's perspective - if your shareholders don't have any leverage over you, why would you give them money?

Facebook and Google have both bought tens of billions of dollars worth of their stock back which is effectively just dividends that are reinvested for you.

Define "ownshership." These are supposedly publicly-owned entities. What does that even mean if the public has no control or say in how the entity is managed?

Good hour-long interview on someone that was (at the time) on that committee:

> Today on the Rational Reminder Podcast we have joining us Dr. David Blitzer who is the Managing Director and Chairman of the S&P Dow Jones index committee. He has been there from the time when indexes were barely even being traded and the first time S&P Futures began trading, and since then, indexing has turned into the massive phenomenon we all know today. Indeed, S&P indexes were (and still is) at the center of this explosion. Today Dr. Blitzer talks to us about the early days of indexing and shares some of his ideas about why indexing became so popular. We also discuss the possible reasons why some people still choose actively managed funds and the effect that the abundance of research has had on their dwindling appeal. Ever wondered where the rapid growth in indexing will end up? What happens after indexing? Can indexing become too big? Be sure to join us for this masterclass on indexing!

* https://rationalreminder.ca/podcast/54

* https://www.youtube.com/watch?v=LQbA_vBleU8

> David M. Blitzer is the former chairman of S&P Dow Jones Indices, where he was head of the index committee that determines which stocks are added to the S&P 500 Index, the Dow Jones Industrial Average, and all other stock market indices calculated by the company.[1] He held overall responsibility for index security selection, as well as index analysis and management.[2]

* https://en.wikipedia.org/wiki/David_M._Blitzer

I guess there's still some "active" even in "passive" investing; it's just the market index managers making the determinations rather than a fund manager.

I suppose you could look at it that way, although this case it’s the market that made the decision (s&p 500) which then trickled down to the index. You could use an index like CRSP US Total Market which didn’t have this issue. The index reflects reality, not so much impacted it

The S&P 500 isn't "the market"; it's an index. The actual market is very clearly arguing for the inclusion of Tesla given how it's valued so highly over the vast majority of the stock that the index managers have included in the S&P 500. The S&P 500 purports to be representative of the 500 largest public US corporations, and by excluding Tesla they are absolutely failing to do so. When I buy A&P 500 tracking index funds I am not expecting that the index managers themselves are arbitrarily excluding companies that meet the qualifications.

From the S&P's own literature:

> To be eligible for S&P 500 index inclusion, a company should be a U.S. company, have a market capitalization of at least USD 8.2 billion, be highly liquid, have a public float of at least 50% of its shares outstanding, and its most recent quarter’s earnings and the sum of its trailing four consecutive quarters’ earnings must be positive.

Tesla meets all of these qualifications as near as I can tell. It blows the market cap requirement out of the water and has been profitable for the trailing 4 consecutive quarters.

Tesla has multiple share classes which is an exclusion criteria.

Maybe this will be the push for Tesla to fix it then.

In the mean time, I would love the option of an index that is literally just "the largest companies", without all these exclusion criteria. I wonder how it would fare against indexes with lots of exclusion criteria.

Well at least there's still the Russell 3000!

Russell is clamping down on multi-class shares, too: https://research.ftserussell.com/products/downloads/FTSE_Rus...

"Going forward, eligible companies need to have at least 5% of voting rights held by the public. Companies with multiple share classes already in one of the indices will have until September 2022 to change their structures or face removal." ( https://www.dividend.com/news/2017/11/03/companies-multiple-... ). Same link as before.

Do I not understand what "voting rights" means in this context? Doesn't this leave the door open for a CEO to retain 95% of voting stock, when all they need to maintain control is 50% + 1 share?

Note that indices differ in this regard, the FTSE100 (350) for example is simply the 100 (resp. 350, the 250 being the set difference) largest listed by market cap (determined quarterly - or the bottom couple would be quite volatile).

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