> Companies exploit this relationship now by destroying their balance sheets and using buybacks to boost their relative market caps vs other companies.

Buying back shares doesn't increase your market cap, it increases the value of each individual stock since they now own a larger percentage share of future earnings.

> to capture more passive investment money flow.

It has no real effect because index funds will actually have to sell stock from companies who do buybacks in order to decrease their share of the company back to normal proportional levels.