What makes a listed company "public" enough for inclusion on the world's most important stock index?
Snap Inc, the parent company of Snapchat, listed on March 1 with two classes of shares. One class, issued only to the founders of the company, has voting control over the entire company. The second class, issued in the IPO, has no voting rights at all.
This has created a dilemma for S&P; Dow Jones Indices, which runs the world's most powerful index committees.
The US Council of Institutional Investors, who represent the billions of dollars held in US pension funds, is fiercely arguing Snap should never be included in any index at all.
Many institutional investors only invest in stocks in major indices, and the swelling pot of money invested through passive vehicles is usually similarly tied to the stocks in specific indices.
If Snap is kept out, millions of investors, including Australians who invest in the US market through exchange-traded funds, will miss out on exposure to a company that, while not profitable, has swelled 22 per cent in the month and a bit since its IPO.
Process 'a concern'
The S&P; 500, operated by S&P; Dow Jones Indices, has a history of tricky calls on this.
In the late 1980s, it famously kept Microsoft out of the index for years, because its two founders kept hold of around two thirds of its shares after its initial public offering. It took Bill Gates and Paul Allen eventually selling out, to make the public float equal to more than half of the company, for Microsoft to finally make the S&P; 500 in 1994.
The S&P; 500 index committee only includes companies that have been listed for at least a year in the index, meaning the committee has a while to decide how to proceed. But there's a lot to puzzle out in the meantime.
"It's created a lot of questions," managing director and chairman of the S&P; Dow Jones' index committee David Blitzer told Fairfax Media on a recent visit to Melbourne.
"It's not clear, from what I've read, whether they absolutely have to publish things like proxy statements, because of the lack of voting shareholders. That's a concern for us – we like to see some of that data for other purposes.
"The big issue is, should we react to the voting issues? Or treat them differently? Or should we not?"
"They've gone further than anybody else. It's my understanding that there's no public company out there where no member of the public has any votes."
Must be worth over $US6b
Several companies on the S&P; 500, including Alphabet Inc (formerly Google) and News Corp, do have different classes of shares with different voting rights.
But for a small premium, investors are able to access shares that include voting rights. The S&P; 500 includes both share classes of such companies in the index – it gives exposure, as Mr Blitzer put it, to "500 companies, not 500 stocks".
Like many of the world's oldest indices, the S&P; 500 – which turned 60 this year – isn't a strict collection of the largest US companies by market capitalisation. It's intended to reflect the broad spread of public companies listed on US stock exchanges, with regards to weighting, industry spread and market capitalisation.
But it has a few extra rules: the companies have to be worth over $US6 billion ($8 billion), they have to be profitable over the year, at least half of the company has to be publicly traded, the company has to be liquid enough for its entire value to turn over at least once over a year, and its filings have to the US Securities and Exchange Commission have to list it as a US company.
Inclusion in the 17-year-old S&P;/ASX200, which is also operated by S&P; Dow Jones Indices, is, like most newer indices, a stricter matter of market cap and liquidity. Its constituents are reviewed quarterly. Many institutional funds have strict mandates to only invest in index-listed stocks, while the rising tide of money invested in passive vehicles is also tied to particular indices.
This means being kicked out can have heavy repercussions for the share price the departing stock, as institutions and index funds are forced to sell out.
ASX200 index readjustments take place every 3 months, usually on market capitalisation grounds. The liquidity requirements though have caused some surprises. In 2008, for example, Premier Investments lost its spot on the ASX200 just two weeks after being admitted to it amidst its takeover of Just Group – the closely held stock, S&P; warned at the time, was being "monitored for liquidity".