Signed into law on August 16, 2022 the Inflation Reduction Act (IRA) is, according to many, the most important piece of legislation to combat climate change ever passed in the United States. It includes provisions on lowering the cost of prescription drugs, sets a new corporate minimum tax, and shores up enforcement capacity at the IRS. Among these elements it also contains key pieces of green industrial policy that, by some measures, will move the United States two-thirds of the way toward the Paris Agreement goals, though it is still deeply flawed in much of its approach to confronting the fossil fuel industry. The act has immense capacity to reshape the U.S. economy, along with other new initiatives. In the past year, U.S. politicians have taken to actively market-crafting with new legislation: the Infrastructure and Investment Jobs Act (IIJA) and the CHIPS and Science Act. These policies mark a new moment in activist industrial policymaking. In other words, the government is prioritizing certain industrial sectors and approaches to influence the production of goods and services. It is using policy tools far beyond the typical broad-based tax cuts for business, for example, with public investment in semiconductor and renewable energy manufacturing.
Yet these welcome policies are layered on top of decades of neoliberal decision-making by U.S. corporations during which corporate and financial leaders have prioritized using corporate profits to increase the wealth of shareholders at the expense of other goals—an ideology known as “shareholder primacy.” This framework for corporate decision-making is one of the reasons why wealth inequality is so stark across lines of race and class: white wealthy households benefit from this approach to running the economy as they hold the vast majority of stock.
Without clear “guardrails” for corporate behavior—rules that limit prioritizing shareholder wealth over investing in a company’s future, outlined in my and Isabel Estevez’s recent working paper—companies will remain embedded in the existing orientation toward shareholder primacy even while they receive public funding for investment and innovation. The corporate orientation to maximize shareholder payments directly opposes the goals of industrial policy.
Now the Administration and Congress have an opportunity to use industrial policy funding to encourage a broader reorientation of U.S. businesses away from extractive shareholder primacy and toward innovation and productivity. If they do, the new industrial policy programs could be the impetus for a broader reorientation of corporate decision-making that outlasts infusions of public money into specific industries and that truly transforms the economy.
For the last forty years, U.S. corporations have operated under this corporate governance framework of shareholder primacy. This framework holds that shareholders are the main actors within corporations and thus deserve the benefits from innovation. However, this belief is based on the false claim that shareholders are the residual risk takers and that they add value to large, publicly-traded corporations. Corporations with publicly-traded equity face enormous pressure to maximize shareholder value from the financial institutions that own assets and manage pooled funds as well as so-called “activist” shareholders who seek short-term profits.
As a result of such pressures, for example, corporations spent $6.3 trillion on open market share repurchases in the decade from 2010 to 2019 and are projected to spend $1 trillion in 2022. Stock buybacks are a corporate practice where corporations repurchase their own shares on the open market from willing share-sellers with the goal of raising the price of the outstanding shares. Buybacks serve to manipulate the market price of a company’s stock. They also provide an opportunity for corporate insiders to benefit, as insiders know when they transact buybacks before they have to disclose the transactions publicly and can thus sell their own personal shares and benefit from the share price bounce. Perhaps most importantly, though, corporate activity has centered buybacks at the expense of investment in productivity and innovation. The Securities and Exchange Commission’s Rule 10b-18 purports to regulate stock buybacks but in practice places no limits or liability on companies attempting to manipulate the market price of their own stock. For this reason, it is even more crucial that all industrial policy agreements include clear limits on stock buybacks.
The recently-passed CHIPS and Science Act authorizes the federal government to direct $52 billion in subsidies and tax credits to chip manufacturers in the United States. The rise of “fab-less” companies—those that designed chips but did not produce them—made U.S. corporations such as Apple and Qualcomm dependent on actual production on companies such as TMSC in Taiwan and Samsung in South Korea. The act was promoted as “re-shoring” the critical semiconductor industry with the implicit argument that public funds are necessary to entice companies onto U.S. shores: the Semiconductor Industry Association claimed that the decline in U.S. semiconductor manufacturing dominance was due to the incentives offered by competitor governments. However, they neglected to discuss how member companies have prioritized shareholder payments and stock buybacks over the last decade.
The largest companies lobbying for the bill—Intel, IBM, Qualcomm, Texas Instruments, and Broadcom—spent 71 percent of their net income on stock buybacks alone from 2011 to 2020. Their total spending on buybacks totaled $249 billion, nearly $200 billion more than the federal subsidies proposed in the CHIPS Act. Intel, once the leader in semiconductor production, spent all of its net income on shareholder payments from 2011 to 2015, which, as William Lazonick and Matt Hopkins put it, resulted in “Intel’s failure in organizational integration [that] lies in the financialized character of strategic control within the company.” Intel CEO Bob Swan, who led the company from 2016 to 2021, raised buybacks 186 percent as compared to his predecessor. However, in a sign of a reorientation toward productive investment inside the business community, Intel’s current CEO Pat Gelsinger declared upon taking over that “we will not be anywhere near as focused on buybacks going forward as we have in the past.”
The drafters of the CHIPS and Science Act recognized the need to explicitly disallow shareholder value extraction: the bill provides for a set of guardrails limiting companies from using public funds for stock buybacks and dividends. Yet because money is fungible—public funds cannot be cleanly separated from the rest of corporate funds—the legislation itself does not provide clear overall limits on shareholder payments. In an encouraging move, however, the Department of Commerce put out guidelines for “Taxpayer Protections” as part of its responsibility for implementing the CHIPS Act, which is intended to “sustain, over the long term, a vibrant domestic semiconductor industry,” specifically gesturing to the harms of stock buybacks. The guidelines understand the need to grow a commercially successful semiconductor industry while ensuring that “CHIPS funds [do] not create windfalls for the companies that receive them.” This includes prioritizing companies that “commit to make future investments that grow the domestic semiconductor industry (such as through research and development, workforce training, or manufacturing investments) and not engage in stock buybacks.” Such preferences could meaningfully limit shareholder payments.
In November 2021 President Biden signed the Infrastructure Investment and Jobs Act (IIJA), which provided $1.2 trillion in government investment to U.S. physical infrastructure sectors such as transportation, electric vehicles, and high-speed internet. The IIJA focuses on physical investments to update U.S. infrastructure for the twenty-first century. While some of these investments fund infrastructure services that are publicly provisioned by either the federal or state and local governments, many of the investments run through large corporations in telecommunications and utilities.
Ensuring access to broadband internet service is one component of the IIJA that will be channeled through large business corporations. The Biden-Harris administration launched the Affordable Connectivity Program to expand access to high-speed broadband internet for U.S. households by subsidizing the costs. This means that while the program can meet the critical goal of affordable internet access, it is also vulnerable to the shareholder primacy orientation of the large Internet Service Provider (ISP) companies that it necessarily runs through. Public investment in affordable broadband raises the question of how major ISPs will utilize the government subsidies that will flow to them from the IIJA. Without clear rules reorienting behavior, past corporate practices are indicative of future priorities. The ISP industry is profitable and growing, taking in $132 billion in annual revenue and $13.2 billion in profits. It is dominated by five large corporations, which accounted for 70 percent of industry revenue in 2021: AT&T, Comcast, Charter, Verizon, and Lumen. Because of the networked nature of internet service, barriers to entry are extremely high. Companies maintain their market power through network dominance.
There is now growing recognition that internet access is essential for U.S. households to participate in work, school, and community life. Indeed, many reformers now seek recognition of internet access as a public utility. Yet the large ISP companies making wider internet access possible are also acting to maximize their own shareholders’ wealth. Comcast spent $36.25 billion on stock buybacks over the last decade and authorized an additional $10 billion in 2022. AT&T spent $850 million on stock buybacks from July 1, 2021 to June 30, 2022. The company spent the vast majority ($673 million) in the second quarter of 2022 after activist investor Elliott Management pressured AT&T to spend $4 billion on stock buybacks to raise short-term share prices in 2020. Without clear guardrails in place, dominant ISPs will gain public subsidies without having to commit to improving service, investing in innovation, or curbing short-term share price appreciation.
The IIJA also invests $65 billion toward upgrading the U.S. power grid and lowering costs in the transition to a zero-emission economy. As with investment in broadband, the Biden-Harris administration’s investments will work through a mix of public and private utilities that provide power to households and businesses. Private companies that offer publicly-traded securities currently provide electricity to three-quarters of U.S. households. According to recent research by Niko Lusiani, the thirty-nine publicly listed electric utilities spent 86 percent of their earnings on shareholder payments in the last decade, mainly in dividends and totaling $250 billion. To be sure, the intensity of shareholder payments has increased in the last decade: companies increased annual shareholder payments by 65 percent, including a 10 percent increase between 2019 and 2020. Meanwhile, electricity is expensive: the price of electricity rose 4.3 percent nationally in 2021 and was more than triple that in key states such as Florida and New York. How Congress will ensure the $65 billion public investment is not used to maximize shareholder payments remains to be seen.
The IRA has received the most attention of these pieces of legislation primarily for its climate measures. Another interesting element of the final bill, however, is a one percent excise tax on stock buybacks. The tax—a rare instance of a financial transaction tax in the United States that is the result of a political compromise—could impact stock buybacks, especially in conjunction with potential new disclosure requirements and prohibitions on stock buybacks in other industrial policy programs. The tax, however, is low enough that it alone may not deter corporate executives from using stock buybacks to manipulate stock market prices and raise their own compensation.
Equally consequential are the corporate guardrails in the major lending programs the IRA authorized the Department of Energy to initiate. The Loan Program Office is now authorized to issue up to $250 billion in loans, funded with just $5 billion in appropriations. The real question is what corporate guardrails such loans and loan guarantees could include moving forward.
A wide range of guardrails could be implemented, from those that limit extraction, to those that empower workers, to those that ensure the government benefits on the upside while sharing the risks of the downside with private companies. One straightforward step that policymakers implement is ensuring that corporations with stock trading on open markets do not engage in stock buybacks while receiving funds from U.S. industrial policy—especially because no limits currently exist in securities regulation. This approach was taken in the emergency lending programs in the Coronavirus Aid, Relief, and Economic Security (CARES) Act—companies were simply restricted from conducting stock buybacks or paying shareholder dividends while receiving funds from CARES programs. If such limits are not contained in statute, policymakers can construct lending or grant programs that give precedence to companies that commit to prioritizing investments during the investment period. While this raises critical questions about enforcement if companies break their commitment once the loan or grant has been made, it does incentivize corporate leaders to demonstrate their commitments to innovation rather than value extraction.
One of the express reasons policymakers engage in industrial policy is to support “good jobs.” Public investments should contain project labor and prevailing wage agreements where appropriate, both of which are staples of local and municipal economic development. Any company receiving public funds, whether loan or grant, should commit to union neutrality. Policymakers should also experiment with new ways to incentivize worker voice inside companies.
While the National Labor Relations Act (NLRA) contains important provisions to preserve workers’ rights to collective bargaining free from “company unionism,” U.S. labor law does permit labor management committees to form for the purpose of health and safety that would otherwise be impermissible under NLRA §8(a)(2). A number of states require employers to create safety and health committees (SHCs) that include both management and employee representatives. If the establishment of joint SHCs was a requirement for federal loans and grants and the conditions for the committees were well-specified in the contracts, it could not plausibly contradict §8(a)(2). This is because employers would have lawful control over the committees, which is the focus of the prohibition of employer-dominated organizations under the NLRA. Such a requirement could strengthen public funds’ ability to support resilient workplaces in the face of current and future public health crises.
A public financial investment in a private company could also be accompanied by a public equity stake with rights in corporate governance. This would operate just as financial investments with private financiers, including shareholders who purchase shares on secondary markets and never contribute directly to a firm’s available financial resources. Public equity stakes could mean the federal government receives a variable financial return on an investment. They might also enable involvement in governance, including the ability to veto certain kinds of company actions, and accompany both economic and governance rights. Public equity stakes could be tied to the scale of financial commitment or could be established through “golden shares”—specific types of equity that only grant the government the right to vote on major corporate decisions such as dissolutions or mergers.
Golden shares are not common in the United States; indeed, they are prohibited in many jurisdictions. However, entity forms that are seeking to preserve a “mission” orientation have begun to discuss using golden shares to maintain the pro-social character of a corporation. Professor Saule Omarova has proposed golden shares in the context of the National Investment Authority (NIA). If issued through congressional authorization as part of the NIA for critical sectors or as part of specific public support packages for the private sector, the government could “receive and hold, on a permanent basis, a special ‘golden share’ in each such firm.” Omarova distinguishes between a passive monitoring role in “normal” situations and in crisis situations, in which the golden share would grant its holder—in her proposal, the NIA itself—control over certain kinds of corporate transactions, all while oriented toward public interest.
For industrial policy to meet this decade’s goals, all public financial commitments should include substantive guardrails to which corporations must adhere. Otherwise, public funding will sit in uneasy tension with the incentives for shareholder primacy. The most straightforward approach to implement clear guardrails is to include them as specifically as possible in legislative text as was done with the CARES Act’s prohibition on companies engaging in shareholder payments while receiving public support. However, legislation is written in broad, enabling language that delegates authority to governmental agencies to carry out the purpose of the statute. The administrative state will play an important role in determining the conditions companies and sectors must meet to partner with the government. The terms and conditions of any given financing agreement will be substantially more specific than those laid out in legislation.
One opportunity that administrative government branches might explore is how to craft loan, loan guarantee, and grant program applications such that preferences for limited funding can be given to companies that agree to the substantive conditions described in their contracts with the agency. For example, in the CHIPS and Science Act, the Commerce Secretary has discretion to choose among applicants and to tailor the “amount and funding type for each financial assistance award” in the public interest. Expressing a preference for business entities that commit to engaging in productive real investment when receiving public funding—not just with those specific public funds but across the business—supports the intent of industrial policy programs that are meant to strengthen the “economic interest” of the United States.
Financially extractive policies not only go against public interest but actively divert from the purpose of industrial policy programs such as the IIJA, CHIPS and Science Act, and IRA. For this reason, policymakers can write conditions into the contracts to which businesses must agree. Public investment agreements can include prohibitions on extractive behavior when they are financing under the terms of legislation that support productive innovation by U.S. private businesses. Such agreements can also include specific steps for monitoring—requiring the submission of financial reports, for example—and for clawbacks if the terms of the agreement are violated. Specifying clear guardrails to limit corporate extraction and promote public benefit—including limits on extractive behavior and preferences for companies that include workers and the public in the innovative process—will be crucial in attempting to meet U.S. industrial policy goals.