By Ross Kerber and Noel Randewich
BOSTON/SAN FRANCISCO (Reuters) - FTSE Russell said on Wednesday it planned to exclude Snap Inc (N:SNAP) from its widely followed stock indexes because the owner of the Snapchat messaging app has an unusual share structure that denies voting rights to investors.
The stock index provider said it made the decision based on client feedback, the latest sign of the growing importance of corporate governance rights to investors even as technology companies move to concentrate power with insiders.
It plans to require new constituents of its indexes to have at least 5 percent of their voting rights in the hands of public shareholders, though current constituents will be given a five-year grace period to comply.
FTSE Russell Chief Executive Mark Makepeace told Reuters in an interview many of his clients had worried that Snap's structure could set a bad precedent.
"There were strong opinions that voting rights are an important issue. For shareholders to perform their function they have to be able to influence a company," he said. "Shareholders won't be able to hold boards accountable if they don't have voting rights," Makepeace said.
He added that some clients may now push for an even higher minimum voting standard, though he does not expect an adjustment before the plans become effective in September.
"We may hear views asking for a higher minimum, but I think this represents a very strong first step and I think it's a prudent way forward that recognizes the issues investors are raising," he said.
A Snap representative did not immediately respond to a request for comment.
Inclusion in a stock index has been an important milestone for young companies, bringing their shares into many passive funds and others that closely follow indexes like the S&P 500, a guide for trillions of dollars of capital worldwide.
The FTSE Russell decision now means that funds like the $19 billion iShares Russell 1000 ETF would not hold Snap and, potentially, other companies already in the index that have less than 5 percent of voting rights in public hands unless they make changes.
FTSE Russell said that set could include companies like Match Group (O:MTCH), owner of dating app Match.com, and software maker Mulesoft (N:MULE). A representative for Match Group did not respond to a request for comment, and a Mulesoft spokeswoman declined to comment.
How index providers should treat companies with unequal voting rights has been a hot topic for technology investors after Snap disclosed its unprecedented corporate structure ahead of its $3.4 billion initial public offering in March.
Big investment firms like BlackRock Inc (N:BLK) and State Street Corp (N:STT) have stressed their attention to shareholder rights lately.
That could put those firms on a collision course with Silicon Valley companies keen on keeping decision-making power in the hands of founders and other insiders - although to be sure many big fund managers went ahead and bought Snap despite its structure.
The Council of Institutional Investors, whose members include big pension funds critical of Snap's structure, praised FTSE Russell's decision and said it could put pressure on other index providers to take similar steps.
"FTSE Russell's decision is a rebuke to companies that would deny public shareholders any voice in company matters," said the group's executive director, Ken Bertsch, in an e-mailed statement.
Snap surged in early trading following its market debut but since then has collapsed to 21 percent below its IPO price. Investors worry about competition from Facebook (NASDAQ:FB) and the looming expiries of insider- and employee-trading restrictions that could lead to a flood of shares on the market.
Shares of Snap were unchanged in extended trade, after closing down 3.53 percent at $13.40, a new low, on the New York Stock Exchange.