Stock Industry Classifications Are Changing – What This Means for You

Increasingly often we hear that “every company is a tech company” in one way or another, so it’s perhaps fitting that the organizations overseeing stock industry classifications would modernize the way they categorize the stocks currently trading on U.S. exchanges.

S&P Dow Jones Indices and MSCI Inc. have decided to broaden what used to be the Telecommunication Services sector, now renamed the Communication Services sector in the Global Industry Classification System (GICS). S&P Dow Jones’ branded indices reflected this change as of the close of trading on Friday, September 21, 2018. MSCI’s branded indices will follow suit on Monday, December 3, 2018.

What do the changes entail?

This new Communication Services grouping is the fourth biggest out of 11 GICS sectors, behind only Technology, Healthcare, and Financials. With the creation of a new sector comes the reshuffling of other sectors, including whittling down the size of the existing Technology sector significantly as some of the largest “tech” stocks migrate to Communication Services. In addition, with this shake-up, several sectors are now dominated by a few big names – most notably Apple in Technology, Amazon in Consumer Discretionary, and Facebook and Google in Communication Services.

Why does this matter?

This migration of hundreds of stocks will have broad investor relations-related implications for many public companies, including in the areas of share price valuation benchmarking, industry growth rate comparisons, and shareholder composition.  For example, a company traditionally benchmarked against lower-growth peers may suddenly find itself lagging compared to a redefined, higher-growth pack. Or alternatively, given the number of funds that track sectors, a company may find itself watching previous long-term holders migrate out of its stock and suddenly need to revisit its shareholder engagement program.

Additionally, these changes could have an impact on compensation-related voting recommendations by Institutional Shareholder Services and other proxy advisory firms for companies affected by the GICS changes. The construction of new peer sets resulting from the re-shuffling of stocks will certainly impact how executive compensation measures up to a new peer group, and it could change who votes and how on important issues like Say on Pay.

What can we do?

With the biggest reorganization of stock industry classification in decades, there is certainly work to be done, including developing meaningful peer sets and peer analyses, bolstering shareholder engagement programs, and defending compensation practices. We encourage all companies to take a fresh look at how the changes may impact them, and with over 30 years of experience helping clients navigate special situations like these and formulating solutions to address them, we would like to be part of that re-evaluation. Please contact us here to schedule a conversation.

 

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