This misses a key distinction: A passive fund has a mandate to buy stocks in proportion to the stock's market cap.
Do you rank a company's market cap by the market cap of each class of shares? If not, you can essentially trick passive investors into buying a large proportion of worse stock.
Indices have been handling e.g. Berkshire Hathaway's two classes of listed stock for decades.
Some buy proportionately (i.e. if Berkshire Hathaway is 10% of a market and 15% of its value is in Class B and 85% in Class A--making up numbers for illustrative purposes--then the index puts 1.5% into B and 8.5% into A) and others defer to a single class based on judgement and rules (e.g. 10% into A). But it's a trivial problem of index construction.
I tried to look more into the decision. These seem to be the two relevant quotes:
>Companies with multiple share class structures tend to have corporate governance structures that treat different shareholder classes unequally with respect to voting rights and other governance issues
>S&P Dow Jones Indices also said that the S&P Composite 1500 indexes, like the S&P 500, follow “more restrictive eligibility rules,” such as positive earnings based on accepted accounting rules whereas its other index groups were “intended to represent the investment universe.”
So I suppose they aren't really "the very least picky possible investors". Their mandate seems to include actively curating the S&P 500, despite its tendency to be used by "passive" investors.
On the other hand, it'd be helpful if a passive fund screened stocks to exclude ones that didn't meet criteria for being investible. E.g. if a stock is obviously a scam, it would be rational to not invest in it.
Passive funds tend to track indices, so the responsibility of deciding what stocks are investible seems to be done by the folks who maintain the index.
This is what appears to be happening here: index maintainers are unimpressed with stock, stock is excluded from index, passive funds that track index won't invest in stock
Do you rank a company's market cap by the market cap of each class of shares? If not, you can essentially trick passive investors into buying a large proportion of worse stock.