If 90% of shares are non-intervening that means hostile takeovers are now 10x cheaper to implement. It would be weird to be a company with market cap $100M, where $10M could buy a controlling interest in voting shares.
That seems like a different kind of problem though. If funds that vote according to the recommendations of the board own >50% of the company, the board becomes unaccountable. (Unless they apply different rules to board elections, but then we're back to the original problem because the minority activist can elect their own board.)
This seems to be mostly in keeping with the spirit of index funds. It's a hands off approach that lets the company run itself.
In theory an index fund should never own that much of a company, because that means it would own >50% of all publicly traded companies. The whole point is to spread the risk evenly so you can realize the average returns without having to put any thought into it. It shouldn't mean it's buying $100k shares of GE and also $100k shares of Mom&Pop Pickle Fork Inc.
But if all the index funds together own >50%, and they all go with the board, then it's the same as if it was a single company that went with the board.
> If 90% of shares are non-intervening that means hostile takeovers are now 10x cheaper to implement.
Naively (ignoring other dynamics of index funds), sure, compared to 100% investors actively engaged in governance. But I suspect investment in index funds replaces largely hands-off direct investment and so, market wide, has virtually no average effect on that (though it may shift the effect among firms compared to those investors doing so directly.)
It's not any easier (to a first approximation), because the share price will increase as you try to buy in, and the lower fraction of actively traded shares makes them that much more scarce and ramp up in value that much more quickly.
To expound what you're suggesting, which is completely ridiculous, is that if someone buys 5.1% of actively traded float, the price will exponentially surge such that it would be equivalently priced to purchasing 51% of float in a market without a 90% passive stake.
Not only that, it doesn't account for short sellers. Index funds will happily lend their "passive" shares to anyone (i.e. short sellers) willing to pay interest. So if prices start to rise as someone tries to buy 5%+1 of the shares, others will rightly determine that the shares are now overvalued and start selling them short (especially if the buyer is expected to harm the company), allowing the buyer to keep buying at a minor premium over the original price. Or even at a discount, if the purchase is seen as inevitable and the damage they're expected to do gets priced in.