Listing Standards and Dividend Shares

Also desk commentary, a United theory, a dog, a bull and dispirited CEOs.

Listing standards.

A slightly odd fact about global capital markets is that public companies with dual-class shares -- where insiders can have a majority of the votes without a majority of the economic interest in the company -- are allowed in the U.S., but not in a lot of other places. This means that founders in other places who want to go public but retain control of their companies often want to list in the U.S. The other places don't love losing those listings, which leads to a bit of a race to the bottom. "Hong Kong Exchanges & Clearing Ltd. in January said it would look again at dual-class shares more than a year after its regulator turned down the idea," and Singapore is also considering it, though there are objections:

International investors including BlackRock Inc. and the Ontario Teachers Pension Plan have voiced their concerns about moves to allow dual-class share listings in Singapore, saying they risk damaging the city’s stock market and harming the region.

Of course BlackRock and OTPP buy lots of U.S. stocks, including dual-class ones. They just feel bad each time they do it.

My natural inclination is to disagree with them on the listing-standards point: Companies are essentially negotiations among entrepreneurs and investors, and if big grown-up companies want to sell stock without selling control, and big grown-up investors like BlackRock and OTPP want to buy that stock without getting control, then why should regulators stop them? 

But as we discussed the other day, the investors don't always get a choice. BlackRock, for instance, runs a lot of index funds. (OTPP does not, but it does benchmark to various indexes.) If a company with dual-class shares is in an index, BlackRock more or less has to buy it, no matter what it thinks about its governance. BlackRock has, in a large chunk of its business, given up the ability to make its own decisions about whether to buy a stock -- which gives entrepreneurs a lot more leverage on governance terms. Whatever the entrepreneurs offer, index funds can't say no!

Of course index providers can say no, so they have become a popular place to contest governance issues. (FTSE Russell, for instance, "plans to consult with investors and other stakeholders over the next few months about whether to include companies with no voting rights in its indexes.") But, as I have said before, it's a weird role for them: Really they're just in the business of writing down lists of stocks in a country, or a sector, or the world; they're not in the business of evaluating proper corporate governance.

But stock exchanges -- for some reason -- are in that business. There is a long tradition of corporate governance standards being imposed by stock exchanges, as "listing standards," a sort of seal of approval that listed companies have been screened by the exchange and found to be plausible investments. So the New York Stock Exchange regulates director independence and shareholder voting and other governance obligations of companies listed on NYSE. And the exchanges in Singapore and Hong Kong -- for now -- prohibit dual-class shares in companies listed on their exchanges.

And of course keeping a stock off an exchange is one way to keep it off an index. I mean, index methodologies vary, but in general a stock listed on no exchanges won't be on many indexes, and a stock listed on a U.S. exchange might be left off some Asian indexes. "This stock is not listed on an exchange" (or "on a particular exchange") is a good simple objective criterion for index providers to use in choosing whether to leave it off the index, a clean division between what is in the investable universe and what isn't. If investing is increasingly about buying everything in the universe, defining the universe becomes crucial. Listing standards don't just limit what stocks investors can buy; they also limit what stocks investors have to buy. 

Einhorn vs. GM.


Investor David Einhorn ramped up pressure on General Motors Co. to split its common stock into two classes, as he proposed candidates for the company’s board and accused the Detroit auto giant of misrepresenting his proposal to investors and ratings firms.

In a filing Wednesday, Mr. Einhorn’s hedge fund, Greenlight Capital Inc., said GM hadn’t given his plan a fair vetting and has tried to undermine it by misleading rating firms, which have warned that the dual-class structure would hurt GM’s credit rating.

Einhorn and GM disagree, essentially, about whether Einhorn's proposed "Dividend Shares" would be treated by ratings agencies like preferred stock (meaning that they're partly debt-like and would hurt its credit rating) or like common stock (meaning that they're not). Greenlight says that GM "substantially altered" its Dividend Share termsheet to present to the ratings agencies to make the shares seem more credit-negative.

When we talked about the Dividend Shares, I called them "preferred stock," so I guess you know whose side I'm on. The point is pretty basic: Einhorn thinks GM could be more valuable if it split its stock into Capital Appreciation Shares and Dividend Shares. GM, and the ratings agencies, meanwhile, are worried that splitting the stock would reduce GM's financial flexibility: If it is running low on money, it will have a hard time cutting the dividend on the Dividend Shares, which have "Dividend" right in their name. Einhorn disagrees: "They would have the same problem with that as they do today," he told Business Insider.

There is some technical sense in which that is true: The board can cut the dividend now, and it could cut the dividend after Einhorn's proposed split. But the whole point of the proposed split is that it will increase the value of the company by making investors value the dividend more. "GM's dividend is not respected by the market," says Einhorn's presentation. So he'd make the market respect it more, by splitting it into its own separate instrument and finding yield-focused investors to buy it. Of course those investors, in that instrument, would be more concerned about dividend cuts than the current investors. That's the only way Einhorn's proposal could create value: by making investors count on the dividend more. If you make the dividend more salient, cutting it will be more salient too.

Desk commentary.

We talk a lot about sell-side research around here, but we also talk occasionally about "desk commentary," research's pushier cousin. Research is supposed to be driven by an objective search for truth, untainted by crass commercial considerations like drumming up business. Desk commentary is just a form of sales. If a salesperson emails a client and says "hey do you want to buy some XYZ stock?," that is sales. If she emails and says "hey we are seeing a lot of activity in XYZ stock and I think it could be a good trade for you right now," that is desk commentary. (Or sales. The point is, there's not much difference between them.) If she changes her job title to Research Analyst and sends you an eight-page PDF with a title ("XYZ Co.: The best days in the widget business are still ahead") and a rating ("Conviction Buy") and a price target ("$28"), then that is research. Research is heavily regulated, needs to be shared with all clients at the same time, and needs to reflect the analyst's honest beliefs. Sales is ... sales. Desk commentary is ... also sales. Research is sales too, of course -- why would a bank pay for research if not to sell stock? -- but a more genteel and indirect form of sales.

Anyway the problem is that people might confuse desk commentary with research, or more to the point that desk commentary might get caught up in regulations meant to cover research. So the Financial Industry Regulatory Authority has proposed a safe harbor to exempt desk commentary from research rules. Here is some of the reasoning:

FINRA understands that many institutional investors value the timely flow of information and trade ideas from desk personnel but do not base their investment decisions on the commentary. Instead, these investors, which are capable of exercising independent judgment in evaluating recommendations and reaching investment decisions, selectively incorporate the information as a data point into their own analysis and trading process.

Of course that is exactly true of research too: Institutional investors make their own investment decisions, and incorporate research "as a data point into their own analysis" rather than relying on sell-side analysts to tell them which stocks to buy. The important difference between research and desk commentary is that the latter is only sent to institutions: The safe harbor requires that it be produced by non-research personnel, be "limited to brief observations" without a price target or rating, and "only be distributed solely to consenting investors that meet the definition of 'institutional account.'" If you only send your commentary to big investors who know how the game is played, it's fine. If you send it to retail investors, it is heavily regulated. 


We talked yesterday about how, if you owned United Continental Holdings stock, you lost a bit of money on Tuesday on the negative reaction to United's invocation of state violence against a passenger, but if you owned all the airlines, you made money, suggesting that the violence was good for the industry as a whole. One shouldn't take that too seriously -- the stock price moves were all small and noisy, and it seems unlikely to me that United's recent public-relations troubles will have much business effect one way or the other -- but if one did take it too seriously, one might consider it evidence for the theory that companies with diversified investors might act differently from companies whose investors own only their stocks.

In that vein, reader Ben Appen sent me an email that I think is the best analysis I have read of the United fiasco, so I will just reproduce it for you here:

In general, it’s hard to make a lot of money selling a commodity. Airline seats are mostly commodities—most buyers want the cheapest path to where they’re going. So that means the impact of brands on pricing strategy is low. 

By contrast, if brand importance were high, everyone could charge a little more. Any brand strategy is effectively an agreement among industry members to somewhat avoid the other firms’ customers and to charge higher prices because they aren’t competing directly.  Apple and Dell have different strategies and can enjoy higher margins than if they competed directly. 

So the United incident has (possibly) introduced more brand sensitivity into a market which was historically a commodity market. On this theory, American can now charge a little bit more because there are some passengers who care enough about not being beaten that they will pay for that privilege. And United can charge a little bit more because American no longer has to be a low cost competitor, they can be the “we don’t attack our customers” competitor. And if United is the only player in the “low cost” end of the market, they don’t have to be quite so low cost as they did in a more competitive, less branded world. 

Obviously the "low cost" end of the market is in fact crowded -- literally! -- but I like this idea. Being so bad that your competitors can charge a premium just for not being you might be bad for your business, but if your shareholders also own your competitors then it might leave them better off.

Elsewhere, here are Derek Thompson on the "Cult of Low Prices" in air travel, and Farhad Manjoo on "How Technology Has Failed to Improve Your Airline Experience." About $500,000 of United's chief executive officer's bonus is tied to customer satisfaction surveys. And United is going to give refunds to everyone who watched that guy get dragged off a plane, which seems a little random, but okay.

A dog.

Here is a profile of Scott Minerd, a fund manager at Guggenheim Partners, who has tried to analyze himself with diagrams:

Inspired, he drew four boxes inside a wheel. For Minerd, each box represented a specific part of the investing process: ­macroeconomic analysis, security selection, portfolio construction, and portfolio management. The simple structure let “the data talk,” he immedi­ately realized. Managing money could be a ­coolheaded, calculated process with scalable, replicable ­results, “not me just sitting in a room saying, ‘We need to do mortgage-backed securities.’ ”

We talked yesterday about the inscrutability of artificial intelligence, the worry that deep-learning technology will produce investment recommendations for reasons that its human handlers can't understand. But as reader Ryan McCullough pointed out to me, that is a little true of human intelligence too: Lots of talented human fund managers will produce investment recommendations for reasons that their human colleagues, investors, etc., can't quite understand. Sure you can list some heuristics, but in many cases the heuristics are insufficient: "XYZ Co. seems well-managed and underpriced" is a comprehensible-sounding reason to buy its stock, but it doesn't exactly explain how you got to those conclusions. I guess if you build "a coolheaded, calculated process with scalable, replicable results," that is better. Though that sounds like the sort of process that should be automated.

Anyway! If anyone ever writes a profile of me in a magazine, it had better end with me and my dog leaving to chase squirrels:

“We’ve been here too long,” Minerd says, as if reading Grace’s mind. “There’s squirrels to be seen.”

The two walk out, slowly.

A bull.

I don't know, I think I'm with the "Charging Bull" sculptor, Arturo Di Modica, who is complaining that State Street Corp.'s "Fearless Girl" statue distorts his art. As Christina Cauterucci writes:

Before Fearless Girl came on the scene, the bull was an encouraging representation of a booming economy. Now, charging toward a tiny human, it’s a stand-in for the gendered forces that work against women’s success in the workplace.

The problem is not what the "Fearless Girl" means; it's that she has changed what the "Charging Bull" means. The guy made a guerrilla sculpture of a bull to celebrate the resilience of capitalism, and now a giant investment firm has turned his bull into a sexist child abuser as part of an advertising campaign. Of course in a larger sense his sculpture is about the unbridled inhuman power of Wall Street, so maybe he should be happy to be trampled by State Street.

Blockchain blockchain blockchain blockchain.

Here's an article about how nobody uses bitcoin, still:

“It doesn’t feel like it’s going in the right direction,” said Brian Hoffman, chief executive of OB1, which runs an online marketplace called OpenBazaar that accepts bitcoin.

Also, yesterday, in talking about the United fiasco, I said:

Elsewhere, Tyler Cowen thinks notes that "due to social media it will be increasingly difficult to write and enforce retail contracts with legal meanings very different from their 'common sense' meanings." That seems like important straightforward progress to me, but I suppose there is a Straussian reading. And what about smart contracts

My point was that, as we have discussed, early smart contract experiments have tended to privilege the technical language of the contract -- the "immutable, unstoppable, and irrefutable computer code" -- over the reasonable expectations of the parties. The United situation shows some of the problems with that: It turns out that people don't always want companies to enforce the fine print of their contracts literally. (The blockchain would have no qualms about dragging you off a plane if its algorithm randomly selected you!) But today Cowen linked to a paper by Omri Ben-Shahar and Lior Strahilevitz of the University of Chicago on "Interpreting Contracts via Surveys and Experiments," whose basic point is that if you want to know how to interpret a consumer contract, you can just go ask a bunch of consumers. Combine a smart contract with an online polling mechanism -- say, a contract-interpretation captcha -- and you're getting somewhere.

How to tell if your CEO has given up.

Here's a story about Qingan Huang, a management academic who has built a machine to decide if chief executive officers are going to get fired:

Your impending sacking — or your permanent move to golf course or garden — will supposedly be given away by two key indicators: an ominous lack of future-focus in your writing; a surfeit of negative emotion; or both.

Hahaha I hope no one analyzes my wr -- I mean, this is a wonderful idea that makes me happy and fills me with joy and contentment and delight and glee and all-around bonhomie. I am sure that I will think about it fondly tomorrow, and next week, and in the third quarter, and in 2018, and over the coming decades.

People are worried about unicorns.

"London’s First Fintech Unicorn Says Brexit Means It Would Look Elsewhere Now," it says here. The unicorns are plunging into the sea to flee the Enchanted Island. Fortunately Dublin is only a short swim away.

People are worried about bond market liquidity.

Well, the Bank for International Settlements is worried about repo market functioning, anyway:

Underneath the relative stability in headline measures of activity and pricing, there are signs of banks being less willing to undertake repo market intermediation, compared to the period before the crisis. The volatility in prices and volumes around balance sheet reporting dates can be associated with banks in some jurisdictions contracting their repo exposure in order to "window dress" their regulatory ratios.

The BIS blames regulation and also "exceptionally accommodative monetary policy, which provided ample central bank liquidity to the market and reduced the need for banks to trade reserves through the repo market." Here is Izabella Kaminska on the report.

Things happen.

JPMorgan Beats Analysts' Estimates as Trading Revenue Rises. (Earnings release, presentation, supplement.) Citigroup Rides Three-Year High in Bond Trading to Earnings Beat. (Release, presentation, supplement.) Wells Fargo Revenue Misses Wall Street Estimates as Costs Climb. (Release, supplement.) Indexes Beat Stock Pickers Even Over 15 Years. Donald Trump: "I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me." Ben Bernanke: "How big a problem is the zero lower bound on interest rates?" Investors Are Cherry Picking the Assets of a Fallen Renewable Energy Giant. Saudi Arabia Raises $9 Billion in First International Sukuk Issuance. The new back office: inside Goldman Sachs’ Bangalore hub. Venezuela Staves Off Default, but Low Oil Prices Pose a Threat. The Eurogroup is asking Greece to do something unprecedented. Istanbul Welcomes Bets of Mystery Trader Known as 'The Dude.' Curious Case of Billion-Dollar Lithium Mine Sold for a Song. Paul Singer’s son screws up, hits ‘Send’ on email to merger target. Amazon Said to Mull Whole Foods Bid Before Jana Stepped In. Jeff Bezos on decision-making under uncertainty ("Most decisions should probably be made with somewhere around 70% of the information you wish you had"). Cliff Asness on data mining. Felix Salmon on "our crowdfunded dystopia." Burger King ‘O.K. Google’ Ad Doesn’t Seem O.K. With Google. Morgan Stanley reaches $1 million settlement with Massachusetts over high-pressure sales contest. (Earlier.) The Stats of the Furious. Alabama Senate Votes to Allow Church to Form Police Dept. Ben Carson gets trapped in public housing elevator. It's impossible to buy a home in Brooklyn. Why I won’t date hot women anymore. Toby the whippet sets new dog balloon-popping world record. A Shrimp That Can Kill With Sound Is Named After Pink Floyd. World's Largest Pig Producer to Look at Human Organ Transplants

If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Thanks! 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Matt Levine at

    To contact the editor responsible for this story:
    James Greiff at

    Before it's here, it's on the Bloomberg Terminal.