By Ross Kerber

June 3 (Reuters) - The opinions expressed in this column are those of the author, a correspondent for Reuters.

The run-up to SpaceX's IPO, valuing the company at some $1.75 trillion, has something for everyone. Fans of SpaceX CEO Elon Musk will be captivated by the company's starstruck talk of human colonies on Mars while skeptics will note its $4.28 billion first-quarter loss and strategic challenges.

Both sides can agree this company is Musk's baby, thanks to a dual-class share structure and a Texas incorporation that leaves outsiders with little say. The setup has renewed old debates about the merits of leaving insiders with outsized leverage over companies that raise money from public markets.

I got a taste of these arguments in the feedback to my column last month, reviewing the retreat of the big investors like index fund firms from their advocacy of equal voting rights, sometimes referred to as "one share, one vote." Many once saw voting rights as a way to protect shareholder value, and a review by Equilar found plenty of insider-controlled young companies with poor recent returns.

Bernard Sharfman, a research fellow with the Law & Economics Center at George Mason University's Antonin Scalia Law School, pointed out academic papers that came to different conclusions, however. One of his own from 2022, with co-author Vincent Deluard, StoneX global macro strategy director, looked at two decisions of S&P Global: its delayed inclusion of Tesla into the S&P 500 in 2020, and the 2017 decision to ban new multi-class shares from the index. Both decisions cost investors returns, they found.

ROOT BEER RETURNS

My favorite part of the paper notes that from 1926 until 1984 the New York Stock Exchange banned nonvoting stock due to the activism of Harvard professor William Ripley.

"Ripley was an early champion of the idea of one share, one vote, who found support from both the press and then-President Calvin Coolidge in his condemnation of the issuance of nonvoting shares by high-profile companies, such as Dodge Brothers, Industrial Rayon Corporation, A&W Root Beer, and Fox Theaters."

Sharfman and Deluard argue that the S&P Global committee making index decisions should aim to build portfolios "that most accurately represent the market risk and expected returns of large cap, Blue Chip America," which they say is best done by minimizing value judgments about a company's leadership, viability or product quality.

Another suggestion would be to drop profit requirements for index inclusion because modern drivers of brand value like intellectual property or network effects don't show up on financial statements.

Sharfman also sent me a paper titled "Dual-Class IPOs: A Solution to Unicorn Governance Failure." The idea is that the IPO process at least screens out which companies have a viable business model and helps avoid the collapse of big companies that stayed private like Theranos or WeWork.

The bottom line: "If you exclude dual class shares from an index, that index has performed less well than if they were included," Sharfman told me by phone.

HEY META WE TOLD YOU SO

I sent Sharfman's paper off to S&P Global. A spokesman declined to comment except to note a review it has under way of the eligibility criteria for including so-called "MegaCap" companies, which could make it easier for SpaceX to be included in big indexes and, in turn, big index funds.

Since we're talking academic studies, I should also point out other papers that make cases against dual-class shares. Here's one from the European Corporate Governance ​Institute saying the valuation ​premium enjoyed by dual-class ⁠firms tends to diminish over time.

Critics say there is more to the story. They note that companies with a lot of insider control, like Meta or Tesla, can stave off reforms that in hindsight everyone wishes they had put in place.

Andy Behar, CEO of shareholder activist group As You Sow, points to a proposal his group filed for the annual meeting of Meta in 2022 calling for a report reviewing why its policies had "proven ineffective at controlling the dissemination of user content that contains or promotes hate speech, disinformation, or content that incites violence and/or harm to public health or personal safety."

The proposal won support from a majority of independent shares but not enough to offset Meta CEO Mark Zuckerberg's extra-powerful control.

Now recent legal actions against Meta could leave it liable for massive damages and shows that equal voting rights can protect investors by giving them a way to address management flaws, Behar said.

"Meta’s current predicament is a textbook case of why shareholder democracy is so critical to a functioning free market: shareholder proposals are early warnings that companies can use to assess and address specific risks before they become a full-blown crisis," Behar told me by email.

Meta representatives did not respond to questions.