Passives in the New SpaceX World

Passive investing has enjoyed an extraordinary run over the last decade.  The proposition sounds wonderfully simple: buy the market cheaply, avoid expensive stock-pickers, and let capitalism do the hard work for you.  Yet the next generation of giant US flotations may expose one of the weaknesses in that model.  The eventual listings of companies such as SpaceX, and perhaps Anthropic, could leave passive investors owning businesses with governance structures they might once have regarded as completely unacceptable.

This is not an entirely new phenomenon.  Silicon Valley has spent years reshaping the balance of power between founders and shareholders.  Dual-class share structures, enhanced voting rights and tightly controlled boards are now commonplace among large US technology companies.  However, the scale and influence of the next wave of private businesses means that the issue could become even more pronounced.  Some of the most important companies in the world may arrive on public markets with governance standards that would once have been considered highly questionable.

An active manager can simply decide that a company’s governance is unacceptable and refuse to own it.  A passive fund generally does not have that option.  Once a company enters the major indices, trackers are effectively obliged to buy it regardless of whether shareholders have any meaningful influence at all.  That creates an uncomfortable contradiction at the heart of modern investing.  Passive funds are marketed as neutral, rules-based products that reduce the risks associated with stock-picking.  Yet they can end up becoming large, permanent shareholders in companies where outside investors have remarkably little influence over management decisions.

The likely flotation of SpaceX illustrates the issue clearly.  Elon Musk has already demonstrated at Tesla and X Corp a willingness to operate with highly concentrated authority and an unconventional approach to governance.  Reuters recently noted that the proposed SpaceX structure would give Musk “outsized control” through super-voting shares, reviving “one of Wall Street’s oldest debates” around governance.  Reports suggest that SpaceX is considering a dual-class structure that would allow insiders to dominate decision-making even with a minority economic stake.  Reuters also reported that under the draft structure, Musk could not be removed as chief executive without his own consent because of the voting control attached to Class B shares.  That is an extraordinary position for a future public company of potentially systemic importance.

Yet if SpaceX eventually enters the major indices because of its sheer scale, tracker funds will still be expected to buy it.  Millions of people saving for retirement through passive funds may ultimately end up as minority investors in a company where the founder retains near-total control.  They will technically own the shares, but perhaps not much else.  The Financial Times has also highlighted another concern around the evolving IPO market structure.  In a widely discussed commentary on the SpaceX flotation, the FT warned that proposals to relax traditional lock-up rules could allow insiders to sell shares into the public market almost immediately after listing.  The article described this as “an insidious trend” that has been “quietly eroding investor protections for over a decade.”  In other words, public investors may increasingly be providing liquidity for earlier private shareholders rather than participating on equal terms.

Anthropic raises similar questions from a different angle.  The artificial intelligence sector is attracting unprecedented levels of capital, and companies at the frontier of AI development increasingly present themselves not merely as commercial enterprises but as organisations with broader societal missions.  That can lead to unusual governance arrangements, including boards or structures designed to prioritise safety, research or mission objectives over conventional shareholder interests.  Again, an active manager can assess whether those arrangements are acceptable.  A passive vehicle does not really have that luxury.  If AI companies become dominant components of market indices, tracker funds will end up heavily exposed almost by default.

There is also a broader structural issue here.  Companies are staying private for far longer than they did in previous decades.  By the time they finally reach public markets, much of the explosive growth has already accrued to venture capital firms, sovereign wealth funds and wealthy insiders.  Public shareholders are often arriving rather late to the party — and on terms largely dictated by the founders.  That leaves ordinary investors in a difficult position.  They may end up buying companies at mature valuations, after years of private appreciation, while simultaneously accepting governance arrangements that sharply limit accountability.  In earlier eras, public shareholders often gained exposure to businesses much earlier in their development and with more conventional shareholder protections.

Supporters of passive investing argue, with justification, that governance concerns are sometimes overstated. Founder-led businesses have occasionally generated extraordinary wealth precisely because strong control allowed management to focus on long-term strategy rather than quarterly market pressures.  Companies such as Meta Platforms and Alphabet have both used enhanced voting structures while delivering exceptional shareholder returns over long periods.

There is also a practical argument that index funds cannot realistically become arbiters of corporate governance.  Their mandate is to track markets, not to impose subjective judgements about management structures.  Excluding successful companies because of governance concerns could leave passive investors underexposed to some of the most innovative and economically important parts of the global economy.

Nevertheless, the concentration of ownership and influence in modern technology businesses does raise legitimate questions.  Reuters quoted the Council of Institutional Investors warning that over time the “founder-knows-best approach” can entrench management and leave companies resistant to necessary strategic change.  Another investor quoted by Reuters remarked that “most investors have thrown out the idea that voting rights are valuable anymore.”  That observation perhaps goes to the heart of the issue.  Passive investing works best in markets where shareholders retain meaningful rights and where capital allocation remains disciplined by market accountability.  If an increasing proportion of the index consists of companies where founders enjoy near-permanent control, the traditional relationship between ownership and influence begins to weaken.

Passive investing still has enormous advantages, particularly on cost.  However, investors should not pretend that it is entirely neutral or risk-free.  Buying ‘the market’ increasingly means accepting the governance choices of Silicon Valley founders and private capital backers, whether one likes them or not.  The next wave of mega-flotations may therefore strengthen the case for genuinely active investing.  An active manager can still say “no”.  A tracker fund, almost by definition, usually cannot.