(This is an updated version of a post originally published on July 5, 2017, and updated on July 27.)

This shift raises significant questions for investors. Over the last few years, environmental, social, and governance (ESG) investing has been a hot topic (see Callan’s approach here). For many plan sponsors, E and S have been on the periphery, with G getting more attention given the theory that better governance should lead to a better-run company and translate into a higher stock price. For these investors, the issuance of stock with unequal voting rights sets off alarm bells.

Many companies have multi-class stock structures; in a typical example, one class has a single vote per share while another has 10 votes. This allows a company to broaden stock ownership without affecting the control of the company. While that seems to contradict the purposes of having publicly traded companies with shareholder accountability, companies with these share classes argue that they allow management to focus on the long term and not worry about near-term performance struggles and Wall Street’s quarterly expectations.

Some of the best-performing stocks of the last few years have multi-class stock structures, such as Alphabet (Google’s parent company) and Facebook. If index providers exclude the shares of these companies from their indices, there would be significant implications for both passive investors and active managers.

Passive investors generally believe that active management cannot beat indices and that by investing in an index, they are “owning the market.” And, for capitalization-weighted indices, the larger a company’s capitalization, the larger its representation in the index. But if Alphabet, the second-largest stock in the Russell 3000, were excluded from FTSE Russell’s indices, that would have clear impact on the returns of passive investors in a wide variety of indices. At the same time, these investors would no longer “own the market,” since Alphabet makes up such a significant portion of the “market” in this case (and Facebook, among other tech firms with multiple share classes, is not far behind).

Of course, the popularity of indexing is not the sole reason these stocks are going up; their strong earnings and growth potential have attracted increasing investor dollars. If they were no longer part of certain indices, would active managers (who have struggled of late, until this year) do much better compared to their benchmarks? It would be relatively easy to beat an index that excluded some of the strongest-performing companies based purely on the voting rights of their stocks.

These are extreme examples, and the index providers are not considering an all-or-nothing approach but rather a threshold approach; i.e., if the voting rights of the shares in an index account for more than a certain percentage of the voting rights of the outstanding stock, then it would continue to be included in the index.

In its announcement, FTSE Russell said that for inclusion in its indices, developed market constituents will be “required to have greater than 5% of the company’s voting rights (aggregated across all of its equity securities, including, where identifiable, those that are not listed or trading) in the hands of unrestricted (free-float) shareholders.” The decision will take effect in September and will apply to potential new constituents at that point, and incumbent constituents in September 2022. It also said that it will review the 5% threshold on an annual basis.

The 5% threshold keeps out companies like Snap and potentially affects companies such as VMWare, Hyatt Hotels, and Dell Technologies; but does not affect larger constituents such as Facebook and Google. FTSE Russell also noted that in its consultation, 55% of respondents who thought a minimum voting rights hurdle was sensible thought the rate should be set at 25%. That would affect companies such as Square, Workday, Viacom, and CBS (but again not Facebook or Google).

S&P Dow Jones’ decision affects the S&P Composite 1500 and its constituent indices, which besides the S&P 500 include the S&P MidCap 400 and S&P SmallCap 600, and is effective immediately. It does not apply to the shares of companies already in the indices, such as Alphabet and Berkshire Hathaway. The decision also does not apply to the S&P Global BMI Indices and S&P Total Market Index.