My issue with it is that index funds don't compete on the quality of their contribution to governance. Many index funds are kind of fungible with similar low costs and performance relatively to the index they are supposed to track.

So how much money (and by extension votes) these index funds wield is not connected to the quality of their contribution to governance. It also seems to me like there isn't much accountability and visibility into how they are voting from the perspective of people deciding which index fund to invest in.

So you have people collecting massive amounts of clout, but no feedback loop ensuring that they lose that clout if they underperform at that particular task.

Also one of the talking points of passive investing is that the trained professionals aren't as qualified or smart as they think they are. Active management risk is something to be avoided. As some of these funds grow in size they wield significant power and introduce active management risk. You just don't see it because the fund still tracks the index.

I know that last bit is splitting hairs. Some active management always occurs otherwise how can companies function.

One question is why should a passive fund be treated differently from an active fund in terms of how they contribute to governance? One difference is some of these index funds are absolutely massive and wield more power then a typical active fund.

Yeah, definitely good points. Even with a department looking after voting, they're not nearly as "vested" in the results of their voting as something like an actively managed long value fund is.

They also have large conflicts of interest -- they don't just own a big chunk of a company, they own a big chunk of its competitors too.

Index funds are agents of their certificate owners, so no principal-agent problem. Seems fine to me.

It's not principal agent problem, it's a competition problem. Maybe Sprint can't buy T-Mobile, but if Vanguard owns both it amounts to the same thing.