Market-cap-weighted indexes create a perverse momentum loop. As a stock's price rises, its weight in the index increases, forcing new passive capital to buy more of it at inflated prices. This mechanism is the structural opposite of a value-oriented 'buy low, sell high' discipline.

Musk argues that proxy advisory firms, infiltrated by activists, effectively control half the stock market without any fiduciary duty. This creates a risk where they could fire him from Tesla for political reasons, jeopardizing its AI safety mission.

Proxy advisory firms ISS and Glass Lewis, which hold immense influence over index fund votes, are recommending against Musk's pay package. These are the same organizations that have been the primary drivers of DEI and ESG mandates in corporate America, illustrating their broad power.

Data since 2008 shows that companies with so-called "bad governance"—often founder-controlled with less board independence—have, in aggregate, financially outperformed those following conventional "good governance" best practices, challenging the entire framework.

As part of its equity deal with Intel, the U.S. government has agreed to vote its 9.9% stake according to the board's recommendations. This arrangement effectively hands the board a powerful, stable voting bloc, insulating management from shareholder activism and reinforcing the existing power structure.

Terry Smith contends that passive investing is mislabeled. It's a momentum strategy that forces capital into the largest companies regardless of valuation. With over 50% of AUM in passive funds (up from <10% in 2000), this creates a powerful feedback loop that distorts markets more than the dot-com bubble ever did.

Investment research suggests the significant performance signal in governance isn't achieving a perfect score, but rather avoiding companies in the worst decile. The key is to steer clear of clear red flags—like misaligned boards or poor capital allocation—as this is where underperformance is most clearly correlated.

Jack Bogle's indexing assumed efficient markets where passive funds accept prices. Now, with passive strategies dominating capital flows, they collectively set prices. This ironically creates the market inefficiencies and price distortions that the original theory assumed didn't exist on such a large scale.

Created to help ordinary Americans invest cheaply, index funds became so successful that the top four now own over 25% of most large U.S. companies. According to Harvard's John Coates, this runaway success has given them massive, unintended power over corporate governance without a mandate to wield it.