“Farewell, Snap Inc (NYSE: SNAP), we hardly knew ye.” That was the message from the Standard & Poor’s 500 index on Tuesday, when it suddenly stopped allowing companies with dual-class share structures to join the index.
To be clear, Snap Inc, the parent company of the popular ephemeral messaging application Snapchat, isn’t even in the S&P 500. There’s no doubt, though, that it one day aspired to be — and now those aspirations are nothing more than pipe dreams.
Before you start to feel sorry for Snap though, stop. The company deserves this sort of dramatic response after its February 2017 IPO, which was frankly an insulting display of indifference and greed, even for Wall Street.
[See: 7 of the Best Cheap Stocks to Buy Under $10.]
A win for shareholder rights. Before Snap Inc’s much-hyped IPO finally arrived earlier this year, the company filed a prospectus, or S-1, with the Securities and Exchange Commission, giving public investors a chance to do some due diligence on the company before shares hit the market.
You almost had to read it twice to make sure you weren’t seeing things.
In an unprecedented move, the Snap IPO raised $3.4 billion as the company sold 200 million shares at $17 apiece — but not a single share had voting rights. That had never happened before, and it confirmed that a very troubling trend, dual-class stock, was getting out of control on Wall Street.
Problems with dual-class stock. The S&P Dow Jones Indices is essentially punishing Snap and disincentivizing others from following their wayward example.
The fundamental problem with non-voting stock is that it destroys what share ownership is all about. If you own a stock, you own a piece of a company, and if you own a piece of a company, you get a say in how that company should be run.
Snap Inc’s brash insiders, though, only want your money, not your opinion. The only SNAP stock you can buy on the public market, Class A shares, give you zero votes per share. Class B stock, for insiders and early investors, receive 1 vote per share, while Class C stock is held by just two people: co-founders Evan Spiegel and Bobby Murphy. They carry 10 votes per share.
[See: Artificial Intelligence Stocks: 10 Companies Betting on AI.]
The dual-class share structure is a way of consolidating power, and should always serve as a warning sign that the top brass may be able to do almost whatever they want to do in perpetuity — regardless of whether it’s best for other shareholders.
If public investors disagree with executive pay or the direction of the business, it doesn’t matter, because the guys with the votes will do exactly what they want to do.
Except now, they won’t ever be in the S&P 500. Or the S&P MidCap 400, or the S&P SmallCap 600, as it turns out.
About the S&P’s ban. The ban, which the index provider announced Monday after considering months of feedback from shareholder groups spurred largely by the shocking display that was the Snap IPO, ultimately does hurt SNAP stock.
Companies in the S&P 500 can expect higher trading volumes, and passive index funds — which own trillions of dollars worth of stock — would be forced to buy SNAP stock if they claimed to track the S&P 500, the pre-eminent stock market benchmark in the world.
What the S&P 500 isn’t doing is kicking out stocks that already have a dual-class voting structure. Facebook ( FB), Alphabet ( GOOG, GOOGL), Berkshire Hathaway ( BRK.A, BRK.B) and Under Armour ( UA, UAA) will be grandfathered in.
A check on corporate excess. Ultimately, the sudden decision by the S&P Dow Jones Indices should help reign in the desire to rob shareholders of what should be a common-sense right: “One share, one vote.”
There are legitimate reasons to use dual-class voting stock — news media companies, for instance, need to retain stability, credibility and independence — but being an entitled millennial billionaire doesn’t qualify as a legitimate reason.
Snapchat, which lost $2.2 billion in the first quarter and is getting a free lesson from Facebook subsidiary Instagram on how to get your product copied and your butt kicked, looks destined to remain a second-tier stock on Wall Street in perpetuity.
[Read: The 10 Most Anticipated IPOs of 2017.]
This new rule is a big step forward in corporate governance, and the folks at S&P Dow Jones Indices deserve a pat on the back for ushering that along.
More from U.S. News
The 25 Best Blue-Chip Stocks to Buy for 2017
7 of the Best Stocks to Buy for 2017
7 Best Tech Stocks to Buy for 2017
Karma for SNAP Stock: S&P 500 Bans Dual-Class Shares originally appeared on usnews.com
