Dimitris Melas is Managing Director and Global Head of Core Equity Research at MSCI, Inc. This post is based on his MSCI publication.
Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here) and The Perils of Small-Minority Controllers (discussed on the Forum here), both by Lucian Bebchuk and Kobi Kastiel.
Equity indexes have evolved to fulfil multiple roles in the investment process and meet the needs of various types of investors. All institutional investors use indexes as market indicators and research tools. Asset owners employ them as policy benchmarks in their asset allocation. Active managers use them as performance benchmarks while passive investors use indexes as the basis for investment vehicles. To fulfil these multiple roles successfully, equity indexes aim to achieve comprehensive coverage of the underlying opportunity set by including all investable equity securities listed in the markets they seek to represent. In the MSCI consultation discussion paper, [1] we address the question of whether stocks of companies with multiple share classes having unequal voting rights (“unequal voting shares or stocks”) should be eligible for inclusion in equity indexes. We approach the question in two steps. First, we assess if unequal voting shares meet the definition of equity. Then, we examine the impact of unequal voting stocks from different institutional investor perspectives.