investors (index funds, diversified mutual funds, whatever) who own shares in multiple companies in the same industry cause those companies to compete with each other less vigorously. These investors want to maximize the profits of the industry, not the individual firm, and fierce competition is not in their interests. So -- the theory goes -- managers increasingly manage in the interests of those investors, leading to less competition, higher prices for consumers and a host of other problems. Posner and Weyl blame institutional investors for income inequality. Elhauge blames them for runaway executive pay, and for the rise in corporate profits unaccompanied by economic growth and investment.

None of this has much to do with voting. Shareholder voting just isn't very important; it's not like shareholders get to vote on airline ticket prices or route decisions. If you think that institutional investors are causing managers to stop competing, there are more plausible mechanisms for that than voting. Just leaving managers alone, for instance, probably itself tends toward anti-competitiveness: If shareholders don't pester management, they will probably compete less hard, just because that is easier. "Voting with their feet" is another: If shareholders invest indifferently in both the best and the fourth-best firm in an industry, that will keep up the fourth-best firm's stock price and lower the best's, reducing incentives to be the best. Or there is just fiduciary duty: Managers may want to do what's in their shareholders' best interests because that is what they are supposed to be doing. Even if the shareholders don't actively force them to.

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Should companies be managed as a self-contained unit, maximizing the value of their own shares for their shareholders? Or should they be managed as part of a marketplace influenced by modern portfolio theory, maximizing the value of their -- mostly diversified -- shareholders' overall investments?

More abstractly, this is a fight over how to conceive of corporate capitalism. The old-fashioned way of thinking is organized around distinct companies. Company X is its own thing; its managers should dislike the managers of Company Y, its workers should dislike the workers of Company Y, its consumers should dislike the products of Company Y and its shareholders should dislike the shareholders of Company Y. And all of them should like each other: They're all in it together, down at Company X, against the world.

The modern way of thinking abstracts shareholders away from their companies : Company X isn't Company X, it's just a beta, a collection of risk factors that deserve a certain weight in your portfolio. Shareholders have no emotional connection to any particular company. They follow investing best practices, seeking diversification and shareholder-friendly governance and efficient capital allocation and maximum risk-adjusted return. And by abandoning individual companies, shareholders attain a certain class consciousness, pushing all companies to do what is right for the shareholder class, rather than pushing each company to do what is right for itself. This is the dominant line of thinking in modern finance. You can see why some people find it scary.

Now, for myself, I wouldn't ban index funds. Most of my money is in index funds. I am willing to believe that sometimes managers act anticompetitively because they think it's in shareholders' best interests, but the evidence of the magnitude of the problem seems a bit thin, and I think that the well-established benefits of diversification outweigh the still uncertain costs.

Index Funds, first posted by Lumifer (thanks)