The Future of Corporate Governance Part I: The Problem of Twelve

I've heard of this problem being floated before but this is the first time I've seen this paper. (Referred from Levine's new column -- the author of this paper has been named the acting director of SEC’s Division of Corporation Finance -- hence why its newsworthy.)

I haven't read it yet but as I understand the argument even though index funds are great for the consumer (why pay someone to try and beat the market for you) they consolidate shareholders such that the interests of two otherwise competitors may be aligned. Additionally, the controllers of the these blue-chip index funds wield a ton of indirect power over publicly traded companies.

Abstract:

Three ongoing mega-trends are reshaping corporate governance: indexing, private equity, and globalization. These trends threaten to permanently entangle business with the state and create organizations controlled by a small number of individuals with unsurpassed power. The essay focuses on indexation. After providing background, the essay describes the rise of and reasons for indexation, noting that “passive” indexed investing takes a variety of forms. Data on indexation are presented — with the bottom line that indexation has progressed farther than most realize, because foreign ownership, institutional indexation, and “closet” indexation are often neglected by observers. Index providers’ incentives, resources, and methods are reviewed, with an emphasis on the how such providers have greater practical importance than simpler analytical approaches might suggest. The essay ends with an outline of policy options, and preliminary analyses of which seem likely to address the “Problem of Twelve” — the likelihood that in the near future roughly twelve individuals will have practical power over the majority of U.S. public companies.