It seems like their duty to the index fund owners is to vote like other shareholders (which is most easily achieved by abstaining) and not like management.
It's interesting to think about index fund providers incentives:
(1) track the market
(2) do it very cheaply
Voting shares is a cost center with no benefit towards the business. Fund providers don't want to spend time and money to do research on individual proposals, that would be too expensive. So they do the cheapest thing possible and default to following corporate recs.
(That's actually a simplification, what happens in practice is, they use third party proxy voting advisors, but the end results is mostly the same, except that they vote down really egregious proposals, e.g. crazy CEO pay in the context of a free falling share price)
Suppose index funds collectively own 80% of the shares. If they don't vote or do something that causes their vote to equal the other shareholders, someone else can buy 10% of the shares and effectively have majority voting power, or even fewer than that since most likely some of the other non-index fund owners wouldn't vote either.
The problem is that you need somebody who is paying attention to be in control of the company. Putting that on management is problematic because they obviously have different interest than owners, e.g. on matters of executive compensation or whether to return profits to shareholders instead of using them to build a personal empire/reputation or funneling money to cronies through mergers and acquisitions.
Index funds are passive by design. In your scenario, allowing 10% ownership to exert control seems like it’s functioning as it should. The alternative is that control is held by the advisor that the index fund listens to.
> Suppose index funds collectively own 80% of the shares. If they don't vote or do something that causes their vote to equal the other shareholders, someone else can buy 10% of the shares and effectively have majority voting power, or even fewer than that since most likely some of the other non-index fund owners wouldn't vote either.
Instead, they vote the board recommendations, disenfranchise all the individual shareholders, and rubber stamp almost anything the board wants. I'm not sure that's any better.
Individuals are exempt for that.
It's interesting to think about index fund providers incentives:
(1) track the market (2) do it very cheaply
Voting shares is a cost center with no benefit towards the business. Fund providers don't want to spend time and money to do research on individual proposals, that would be too expensive. So they do the cheapest thing possible and default to following corporate recs.
(That's actually a simplification, what happens in practice is, they use third party proxy voting advisors, but the end results is mostly the same, except that they vote down really egregious proposals, e.g. crazy CEO pay in the context of a free falling share price)