Over the past decade, global capital markets have witnessed two transformations moving in very different directions at the same time. On one side, passive investing has surged ahead: index funds and ETFs have become the default choice for mass asset allocation, and buying and holding the entire market has turned from a slogan into reality. On the other side, dual-class share structures have flourished amid the wave of tech IPOs—an arrangement where founders lock in majority voting power with a minority economic stake has evolved from a Silicon Valley anomaly into a standard option that major exchanges worldwide compete to embrace. As these two currents converge, a long-overlooked structural contradiction has come to the surface: the take-everything mechanism of passive money is quietly absorbing the governance risks embedded in dual-class shares while nearly losing the most important self-protection tool of active investors—voting with their feet.
The Right to Exit: The Prerequisite for Pricing Dual-Class Share Risk
Dual-class share structures refer to companies issuing two or more classes of stock: publicly traded Class A shares typically carry one vote per share, while Class B shares held by founders or management carry several to dozens of times the voting power per share. Google's parent company championed this arrangement when it went public in 2004; since then, many high-profile tech companies have adopted similar structures, with founders often controlling more than half the voting power through economic stakes of just over ten percent.
For active investors, this asymmetry between power and economic interest is not necessarily unacceptable, because the market has its own pricing mechanism: if investors believe founder dominance harms governance quality, the most direct response is to sell, and the share price discount becomes the market's price tag on governance risk. In other words, dual-class share risk can be priced only because investors have a full right of exit.
The rise of passive investing has shaken precisely this premise. An index fund's job is to replicate its benchmark: when a constituent enters the index, it buys; when a constituent stays in the index, it holds. It does not judge the governance quality of individual companies, nor can it exclude a single stock simply because it disapproves of a particular founder. As passive money's share of listed-company ownership keeps climbing, the traditional check of voting with one's feet is being systematically weakened.
Three Answers from Index Providers
Major index providers around the world do not handle companies with unequal voting rights the same way, resulting in a thought-provoking divergence of rules.
- Strict exclusion camp: After the 2017 listing of social media platform Snap with non-voting shares sparked widespread controversy, S&P Dow Jones Indices excluded newly listed companies with multiple-class or non-voting share structures from eligibility for the S&P 500. This means dual-class companies, no matter how large their market cap or how strong their liquidity, struggle to enter the core index pool of U.S. equities.
- Conditional inclusion camp: Global index providers such as FTSE Russell and MSCI, after extensive market consultation, chose to accept such companies with conditions attached, including corresponding requirements on the voting rights of publicly held share classes and enhanced disclosure, allowing dual-class companies to still receive allocations of global passive capital.
- Local compromise camp: After the Hong Kong Exchange introduced its dual-class share listing regime in 2018 and the Singapore Exchange followed suit, the flagship indices of both markets also included such companies, but with prudential arrangements on weighting and eligibility.
The direct consequence of this rule divergence is that the same company can be treated completely differently across index systems: those excluded from core indices systematically miss out on massive index-driven buying, while those included may attract capital inflows that do not match their governance quality. Index rules are becoming an easily overlooked technical variable in the pricing of dual-class shares.
The Pinning Effect: The Dilemma of Passive Shareholders
A deeper tension than the divergence of rules lies in the governance role of passive institutions. Several of the world's largest asset managers are perennial shareholders in nearly every large index constituent, holding considerable aggregate voting power; but what they hold is mainly one-vote-per-share public stock. Facing the solid voting bloc of founder camps with several times the voting power, their influence has a natural ceiling—even if all public shareholders united, they might still fail to shake the majority position.
This puts passive institutions in a dilemma: exit is not feasible, and voting can hardly change the power structure, so engaged governance has become the mainstream narrative—exerting soft influence through dialogue with management, publishing voting policies, and disclosing voting records, while advocating balancing mechanisms such as sunset clauses, under which super-voting rights gradually revert to one share, one vote upon triggers like a founder's departure. For ordinary investors, however, the more critical question is: how much of these commitments actually materializes in proxy voting? The answer can only be verified from the voting records institutions regularly disclose, not from statements of principle.
A derivative phenomenon is equally worth noting: passive money holds regardless of governance quality, so the market constraints dual-class companies face when raising capital are effectively weakening. Market observers worry that if index rules remain loose over the long term, dual-class structures may slide from exception to convention, further diluting the bargaining position of public-market shareholders.
A Three-Step Verification Checklist for Investors
For ordinary investors, this topic is not merely theoretical; it can be put into practice through three actionable verification steps.
- Step one: verify index eligibility. When evaluating a dual-class company, first confirm the flagship index of its primary listing venue's policy on admitting unequal-voting-rights companies and whether the company is currently in the index pool. If inclusion is expected, passive buying provides hidden support for valuation; if excluded from core indices, a lower valuation is needed to compensate for the absence of index-driven liquidity demand.
- Step two: measure the voting power gap. Subtract the founder camp's economic interest from its voting power percentage: the larger the gap, the higher the required pricing of governance risk. Also check the sunset clauses and trigger conditions in the company's charter—the longer the term and the looser the conditions, the greater the risk discount should be.
- Step three: track institutional voting records. Leading asset managers disclose proxy voting details under the rules; investors can search their actual voting tendencies on unequal-voting-rights issues to judge whether engaged governance is a substantive constraint or PR talk. If major institutions consistently side with management on key proposals, this check cannot be relied upon, and investment decisions should lean more heavily on one's own discount discipline.
Outlook: Rules Are Being Rebalanced
Looking ahead, the relationship between dual-class shares and indexation remains in dynamic rebalancing. On one hand, in the new wave of tech entrepreneurship, founders' demands for control keep growing, and some frontier companies are even testing more aggressive power arrangements in their listing documents, subjecting regulators and exchanges to continuing stress tests. On the other hand, innovative mechanisms such as time-weighted voting rights—where voting power gradually increases with the holding period—are entering market discussions, attempting to balance long-termist incentives with checks on power. Index providers' periodic reviews of inclusion rules are also worth tracking: any adjustment to thresholds could marginally change the funding environment for dual-class companies.
Ultimately, the lens for tracking dual-class shares needs an upgrade: in the past we mainly watched the power provisions in corporate charters, but now we must also bring index rules, the holdings structure of passive capital, and institutional voting behavior into the analytical framework. The pricing of governance risk is evolving from a valuation-discount issue for individual companies into a systemic topic concerning the capital structure of the entire market. Only by understanding this layer can investors truly stay clear-headed in the era of unequal voting rights.
