At the Davos World Economic Forum last week, S&P Dow Jones Indices announced the launch of its S&P Long-Term Value Creation (LTVC) Global Index, with a further announcement of support made by a group of six of the world’s largest institutional investors, including the Canada Pension Plan Investment Board (CPPIB) and the Ontario Teachers’ Pension Plan (OTPP).
In addition to standard quantitative measures for selecting stocks, the new index incorporates qualitative measures intended to reflect the best indications of long-term value creation to address the concerns of long-term investors over the dominant market focus on short-term quarterly earnings.
I don’t normally write about investment matters, but in this case I was persuaded to make an exception. It appears there is some controversy around the new LTVC Global Index. According to another commentator, Alphabet (which owns Google) and Facebook have been excluded from the index, possibly because of their multi-class (or “super voting”) share structures. Of course, other factors may also have applied, but there are interesting questions that arise from the idea that a long-term value index would exclude companies with multi-class shares.
Read: CPPIB to acquire student housing portfolio
Under a multi-class share structure, founders’ shares provide multiple votes per share allowing them to maintain management control even when common shareholders have a larger economic interest in the corporation. Multi-class shares present a problem for “engaged investors,” such as the CPPIB and OTPP, in that it weakens their ability to influence corporate management.
The implication is that multi-class share corporations do not create long-term value. This raised the question: who creates long-term value – corporate managers or shareholders?
Generally, I think most would agree that managers must be far more influential in long-term value creation than shareholders. However, large problems can arise when managers sacrifice long-term value creation to focus on short-term (ie. quarterly) financial results which are generally seen as the focus of shareholders. This happens a lot – I suspect more frequently than not in the perception of many observers. This is where engaged investors, such as the CPPIB or the OTPP, desire to step in and influence management to steer back to a long-term focus and away from problems arising from a short-term view, as an alternative to simply selling off their interest as shareholders.
Read: OTPP and Borealis look to buy part of National Grid
This conflicts with the primary purpose of multi-class shares, which is to make it difficult for engaged investors, who may be perceived by corporate founders more as shareholder activists (or meddlers) than business partners, to have influence in how the company is run. Corporate founders who establish super-voting shares do so because they too have a long-term vision for their company, and it is likely more finely honed than investors who have holdings in multiple, and often competing, businesses. Is this conflict sufficient to justify exclusion of multi-class share companies from a long-term value creation index?
I don’t think so. The fact of multi-class shares, it would seem to me, is independent of long-term value creation. The issue of multi-class shares is really more about power and corporate politics than it is about long-term value creation or short-term focus.
I like the idea of a long-term value creation index, but I am somewhat less comfortable with the influence engaged investors may wish to wield in corporate boardrooms. As lofty and laudable as their objectives may be, they may not be representative of other stakeholders that have valid interests in regard to a particular company’s activities. Such stakeholders include founders and other shareholders, employees, customers and, very often, the general public.
Read: A four-factor strategy for stable returns
From the perspective of a pension practitioner, the S&P LTVC Global Index could be generally useful and attractive to pension plans as investors if it can be fairly representative in its portfolio of stocks, independently of any underlying spectre of power wielded by larger institutions that act as engaged investors.
Greg Hurst is a Vancouver-based pension consultant with Greg Hurst & Associates Ltd. These are the views of the author and not necessarily those of Benefits Canada.