The following is a chapter excerpt from The Problem of Twelve: When a Few Financial Institutions Control Everything, written by John Coates and published today by Columbia Global Reports.

Public companies were a core part of the economy and government in the middle part of the twentieth century. They were legitimated by war, securities law, progressive taxation, labor unions, and regulation. But from 1970 on, they changed and were changed by politics and economics.

Corporate leaders invested in their own political capital, and applied the resulting power to reduce the constraints of antitrust law, taxation, and regulation, and, most importantly, to lay low what had been one of their most powerful political rivals—private sector labor unions. In the same period, however, public companies’ economic freedom dramatically shrank. Indeed, they faced an existential crisis—in the form of globalization, inflation, automation, hostile takeovers, and buyouts. Since 1990, they have also faced an ongoing challenge in the form of a shareholder rights movement, in which institutional investors—first public pension funds and hedge funds, and lately index funds, organized politically to reduce their autonomy. Meanwhile, the private equity industry, which seemed to diminish in the recession of 1989–91, has more than recovered and has been growing much faster than the public equity markets, displacing public companies in both the economy and the political system.

Today, index funds and private equity funds are themselves politically active and influential, and other political actors—civil society organizations, social activists, and political parties and politicians themselves—have responded to these funds’ growing economic clout and political power. Index funds have become increasingly politically influential on issues such as diversity, treatment of workers, and climate change, drawing charges of socialism from the right, and of antitrust harm and of dragging their feet on other issues, such as corporate political disclosure, from the left. Private equity funds, by contrast, are drawing a veil over more sectors of the economy, partly by leveraging politically controversial tax breaks, partly by continuing the suppression of labor and increasing wealth disparities, and partly by simply doing an excellent job at whatever private for-profit business can do—whether it’s satisfying or defrauding consumers, increasing productivity and innovation, or imposing negative consequences on unwitting third parties.

The Contemporary Setting for Index Funds and Private Equity Funds in the Political Arena

Berle-and-Means public companies remain politically organized and active. They are no longer threatened by socialism, internationally, or labor, domestically, nor are they strongly constrained by antitrust law. They have, compared to the mid-twentieth century, reduced taxes (even lower after further cuts under Donald Trump) and regulation, particularly economic regulation. Free market ideas are far more prevalent in policy debates than they were in 1965. Nixonian wage-and-price controls are not even being considered in the post-COVID inflationary spike. The primary constraints on business are no longer government or labor, but market-aligned shareholder governance.

Much of government regulation remains in force, if weakened. Worker’s compensation, minimum wage laws, and unemployment insurance remain, if effectively reduced by inflation. Workplace and safety rules persist, if erratically enforced. Environmental regulations continue, if only weakly updated to reflect climate change. Corporations do pay taxes, and plan around tax law. Federal securities laws—and the transparency, legitimacy and accountability they create for big business—remain largely intact as applied to public companies.

Some Sixties-era organized political adversaries—consumer groups, human rights organizations, and left-leaning think tanks—continue to press for laws contrary to business interests. The same is true at times of both political parties: Democrats more so, but Republicans too, on issues such as diversity and immigration (where large companies are generally more open to cosmopolitanism and free movement of labor than the Republican Party). But Democrats since Clinton have been far more openly and consistently pro-business than they were in the middle of the twentieth century, and Republicans continue to be strongly anti-tax and on most business issues anti-regulation.

In sum, the policy state for large companies has markedly improved since 1970. Companies are used to winning in the domestic political sphere.

At the same time, they lack public trust and legitimacy, and this forces them to find allies or work through channels such as litigation, highly technical laws, and regulatory appointments that much of the voting public does not track. Public companies have been increasingly regulated by a new organized opposition group: shareholders generally, institutional shareholders in particular, and increasingly index funds above all others. No longer can the presumptive passivity of dispersed shareholders of Berle and Means companies be taken for granted. Institutional shareholders are a new political force, acting both in struggles for control over individual companies, but also more generally. The number of anti-management shareholder resolutions increased from fewer than 40 in 1987 to 153 in 1991, or about one proposal at every forty-two US public companies. In 2022, there were 797 such proposals, or roughly one proposal for every eight companies, and among the S&P 500 (the largest public companies), each year each company receives at least one proposal, on average.

In 1990 alone, “more shareholder proposals passed . . . than in the entire history of shareholder proposals prior to 1990.” Most recently, the number of approved proposals has jumped markedly, from 1 percent over the period from 2010 to 2019 to 12.4 percent in 2020 and 19.2 percent in 2021. Since most companies who anticipate losing give in and settle, the impact of these resolutions has been ever larger than these numbers suggest. Gerald Davis and Tracy Thompson have argued that the shareholder rights movement’s rapid success—from its creation in 1985 to significant political influence by 1990—suggests how important growth in institutional ownership was from 1960 to 1990.

The consequence of corporate political success in the 1970s, and the emergence of shareholders as a political force in the 1980s is that index funds and private equity funds have emerged as political organizations in a political landscape significantly altered from what it was in the mid-twentieth century. Without labor as a force, with business lacking public trust, and with government itself weak, the potential power of index funds and private equity funds is significant. More than any other types of organizations, they have power to rival that of big business generally, in a moment that is starkly different, if no less dangerous for democracy and capitalism, than the 1920s and 1930s.

The comfortable corporate alliances with labor of the mid-twentieth century are gone. Many features of the New Deal that helped legitimate capitalism and business generally have been eliminated or reduced. The transparency imposed on public companies by securities laws remains largely intact, but only for companies not owned by private equity firms. US businesses as a whole survived globalization and automation, but only by becoming global, coming to rely on contractors who lack job security and employer-based benefits, and offshoring increasing amounts of work to geographically remote polities. In so doing, they have lost much of their legitimacy in the eyes of the American public, even as they remain vulnerable to hostile takeovers and shareholder activism.

As a result, the perception is that corporate leaders are increasingly detached from ground-level US politics. Public opinion of large companies is at an all-time low. Populism is not confined to the left—it helped elect Donald Trump. In this moment, public companies are under threat from index funds and private equity funds, in different ways. Index funds threaten directly to build their influence over public companies, in part because broader segments of the public are channeling their money and efforts into governance via such funds. Meanwhile, private equity funds threaten to supplant public companies altogether, taking them private and outside of both index fund ownership and SEC disclosure rules. In turn, both types of funds are under political pressure themselves. Index funds are being attacked by Republicans as socialist tools; private equity funds are being attacked by Democrats as tools of plutocracy.

This is an excerpt from The Problem of Twelve: When a Few Financial Institutions Control Everything just published by Columbia Global Reports.

Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.

Coates joins Capitalisn’t co-hosts Bethany and Luigi to dissect the potential dangers of this new era of financial consolidation and explore possible solutions, including democratic accountability and transparency, to ensure a more equitable economic system.