How The Standard & Poor's 500 Index Took The Side Of Shareholders
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The S&P 500 is a stock index of 500 very large companies. And being part of that index means some bragging rights for any firm. When the tech company Snapchat recently tried to join, the S&P said no. Noel King from our Planet Money podcast explains why.
NOEL KING, BYLINE: Keeping Snapchat - technically called Snap - out of the S&P 500 index might seem pretty minor, but it's a big deal because it's going to affect most retirement plans in the U.S., probably yours and definitely mine. Like a lot of people, I take some money out of my paycheck and put in a 401k, which is managed by fund companies, like Vanguard or TIAA-CREF.
They take my money and instead of choosing specific stocks, they buy every stock in an index, like the S&P 500. S&P goes up, my retirement fund grows. S&P goes down, my investment takes a hit. This is not an exciting way to invest. But it's growing more popular because often, it gets you a better return on your money, and it's cheaper than hiring someone to pick specific stocks. Laura Martin is an analyst with Needham & Company.
LAURA MARTIN: About 45 percent of all money managed in America today is managed by passive funds.
KING: That's trillions of dollars invested in indexes like the S&P. The rise of this kind of investing is on a collision course with another trend. More companies are moving to limit the rights of their shareholders. And that is what Snapchat tried to do.
Snap said, we're going to issue different types of shares. One type for the founders comes with a very important power. They can vote on who's in charge of the company. Another type of share for regular people, like you and me, comes with no voting rights. That means the founders of Snap have all the control - forever. Here's Laura Martin again.
MARTIN: They control this company even after they were dead, even after they were either fired or dead.
KING: Well, not literally. But no, control of the company doesn't suddenly go to the common shareholders if the founders die. We reached out to Snap for comment but didn't hear back. In the case of a normal public company, if the CEO is doing a terrible job, you, the shareholder and other shareholders can vote the CEO out. Not in this case. And it's not just Snap that's moving to limit shareholder rights. We also saw this with Facebook.
MARTIN: We have a new era now, where these are 23-year-olds and 27-year-olds. And it is unclear how good a manager they will be.
KING: And maybe Snap's founders will turn out to be the greatest managers in history. But if Snap is in the S&P index, all of us investing our retirement money in the S&P are taking a big bet on them. Charles Elson directs the Weinberg Center for Corporate Governance at the University of Delaware.
CHARLES ELSON: When you invest in a company that gives you no voting rights, you're basically investing in the, quote, "genius," unquote. And the view is I'm investing in a genius who can do no wrong. Unfortunately though, when you invest without a vote, if the genius makes a mistake, there's absolutely nothing you can do about it.
KING: And that makes funds that invest in the S&P index very nervous. They're worried about this becoming a precedent when other big companies go public. So Elson says funds started to pressure the S&P. Don't let these companies into your index.
And that led to this move in which the S&P was suddenly more than a list of the biggest publicly traded companies. It was taking the side of shareholders. S&P effectively said to companies, we don't care how big you are, you give your shareholders some power, or you're not getting into our index. Noel King, NPR News.
(SOUNDBITE OF SONG, "POWER")
KANYE WEST: (Singing) No one man should have all that power. Transcript provided by NPR, Copyright NPR.