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Saving Industrial Policy from Shareholder Primacy


Will Dobbs-Allsopp (@wcd_a) is the Director of Strategic Initiatives at Governing for Impact.

Lenore Palladino (@lenorepalladino) is Assistant Professor in the School of Public Policy and the Department of Economics at UMass Amherst.

Reed Shaw (@ReedShaw16) is a Policy Counsel at Governing for Impact.

Industrial policy in the United States has moved into high gear. Recent landmark legislation, including the Inflation Reduction Act and the CHIPS and Science Act, has the potential to accelerate decarbonization, while policymakers are also paying renewed attention to longstanding policies like the Defense Production Act that could increase our productive capacities. To realize this promise, however, we must build limits on corporate value extraction directly into the regulations and federal agency practices that will guide the myriad contracts made between the government and private sector over the coming years. Without such guardrails, we risk the diversion of public investment to private coffers. 

In this post, we explain how the Biden Administration can limit the negative effects of shareholder primacy on industrial policy. Specifically, we discuss two recently-published papers that put some flesh on the bones of the argument for conditionalities in industrial policymaking in the United States. The first, a Proposed Action Memorandum written by the authors of this post and published by Governing for Impact, outlines specific ways to limit stock buybacks among recipients of Inflation Reduction Act funds—while also taking into consideration potential legal challenges to such decision making (likely of interest to administrative law scholars as well as those interested in corporate law).

The second is a publication from the Roosevelt Institute on the progressive preemption potential within the Defense Production Act, written by one of us (Lenore Palladino) along with Todd Tucker, Joel Dodge, and Joel Michaels. The DPA’s Title III authorities stipulate that projects can be undertaken with preemptions of federal, state, and local law, in the interest of expedient clean energy production. The Brief develops the legal framework for how this provision can limit the ability of private firms that benefit from DPA projects to engage in extractive practices. 

Limiting Buybacks Among Recipients of IRA Funds  

Public companies engage in open-market share repurchase programs, or “stock buybacks,” as a method of distributing corporate profits to shareholders. To make these purchases, companies use earnings that they might otherwise invest in innovation, expanding production, or compensating workers. The practice straightforwardly benefits executives and shareholders (especially those who actively sell and trade shares) at the expense of broader economic growth. Stock buybacks’ sharp growth is also relatively recent, having been deregulated just forty years ago. Between 2010 and 2019, publicly traded companies spent $6.3 trillion on stock buybacks; in 2018, nearly 60% of public companies in the United States engaged in the practice. 

Such behavior threatens to undermine the federal government’s burgeoning industrial ambitions. Without clear “guardrails,” recipients of federal funds will be able to transmute generous subsidies, intended to spur innovation, into shareholder kickbacks. Because money is fungible, a firm could use federal grants to finance pre-planned industrial projects, thereby freeing the funding previously allocated to those projects for buybacks and similar activities. To realize the full, transformative potential of the IRA, policymakers must ensure that it does not inadvertently funnel taxpayer dollars to executives and shareholders. 

This is not the first time that the government has had to contend with the threat of stock buybacks undermining fiscal policy. As Congress responded to the pandemic with massive stimulus, it recognized the risk of shoveling money into public companies who might use it to buy up a bunch of stock. For this reason, legislators included buyback bans, in various forms, in Covid-19 legislation like the CARES Act. More recently, the CHIPS Act included an explicit prohibition on engaging in stock buybacks with public funds reaped from grants and loans authorized by the statute. However, the legislation did not explicitly prohibit companies that receive CHIPS funds from engaging in stock buybacks using other funds–perhaps funds freed up by their receipt of CHIPS funds. To discourage recipients from using CHIPS funds to enable stock buybacks, the Department of Commerce announced that it would give preference to companies that commit not to engage in the practice. In a letter written by Senator Elizabeth Warren, several members of Congress “applaud[ed] the [DOC’s] commitment to ensuring that not only are CHIPS funds not used to directly fund stock buybacks, but that they also do not indirectly enable buybacks.” Current regulatory discussions address exactly how such limits will be put in place.

While Congress didn’t explicitly include such prohibitions in the IRA, our new proposed action memo explains why the government can lawfully limit such behavior. We argue that the agencies that will be distributing funds under the law (for example, EPA, USDA, and DOE) have the authority to prioritize applications from companies that promise not to engage in stock buybacks within at least the length of their grant period—if not substantially longer—or 12 months of their loan being outstanding. In general, agencies have discretion in distributing federal grants that are–like the IRA programs–not based on a statutory formula. This discretion exists as long as the prioritization and conditions they set are in line with the purposes of the statute that authorizes the programs. As described by Senator Joe Manchin of West Virginia, the climate-related purpose of the IRA is to address the United States’ “energy and climate crisis by adopting common sense solutions through strategic and historic investments that allow us to decarbonize while ensuring American energy is affordable, reliable, clean and secure.” The IRA aims to achieve these goals by encouraging innovative and significant advances in green technology. 

To give one example of a specific program that would benefit from a stock buyback prioritization scheme, section 50142 of the IRA appropriates $3 billion to the Department of Energy to issue direct loans under §136(d) of the Energy Independence and Security Act of 2007. Per the IRA, loans are intended for “reequipping, expanding, or establishing a manufacturing facility in the United States to produce, or for engineering integration performed in the United States of, advanced technology vehicles … [as defined in 42 U.S.C. § 17013(a)(1)] … only if such advanced technology vehicles emit, under any possible operational mode or condition, low or zero exhaust emissions of greenhouse gases.” 

The Department can infer the authority to prioritize recipients that commit to eschewing stock buybacks from the IRA provision’s purposive language: i.e., that loans are intended for “reequipping, expanding or establishing a manufacturing facility” or “for engineering integration.” Allowing recipient-firms to issue stock buybacks risks the prospect that federal funds will simply displace pre-planned private financing for such projects, rather than generate new investments. And accelerating the decarbonization shift above the pre-IRA baseline is, after all, the predominant objective of the Act’s climate provisions.

Such prioritization thus directly contributes to the purpose of the Act. But once federal funds have been disbursed, what is to stop a company from reneging on its promise to eschew buybacks?

The answer is three-fold. First, as one of the authors of our report has pointed out in another piece, the overall scheme creates at least a slight reputational incentive to prioritize innovation over value extraction. Second, the same legal authority that empowers agencies to prioritize applications from companies that promise not to buy back stock would support considering a firm’s history of abiding by federal commitments in future funding opportunities.

Third and finally, there is another law that can potentially help ensure compliance. The False Claims Act allows private plaintiffs and the Justice Department to sue entities that make false statements to the government that result in the government issuing payment. A crucial feature of the FCA is that anyone can file a suit on behalf of the government, and the law incentivizes such suits by offering plaintiffs a cut of the recovery. The FCA is commonly used to combat Medicare and Medicaid fraud, and has been central to the government’s effort to go after scammers that defrauded the pandemic-era paycheck protection program. The FCA could be an effective deterrent and meaningful avenue for discipline if companies jockeying for IRA grants and loans misrepresent their buyback intentions when they sign contracts to receive federal funds.

The DPA’s Progressive Preemption Potential

In addition to the more recent industrial promise of the the IRA and the CHIPS and Science Act, policymakers should also leverage existing but under-utilized statutes to place guardrails on corporate extraction. The Defense Production Act, for instance, is more than fifty years old, yet policymakers have rarely taken advantage of its Title III authorities that allow DPA-authorized industrial policy projects to be carried out “without regard to the limitations of existing law.” An Issue Brief published this past week by the Roosevelt Institute outlines how this provision for “progressive preemption” within the DPA could be utilized to “override corporate extraction, boost worker power, and expedite the clean energy transition.” 

The DPA authorizes the federal government to make critical investments in key industries to support the clean energy transition (for more background on the DPA’s history and authorities, see “Priorities and Allocations: How the Defense Production Act Allows Government to Mobilize Industry to Ensure Popular Well-Being,” by Todd Tucker from earlier this year). The DPA explicitly includes an affirmative defense to and preemption of state antitrust law, written into the statute from the outset, which is notable in and of itself for its potential to empower workers who are coordinating outside of a corporate structure to improve their productive capacity and wages and working conditions.

What has been less discussed, however, is the potential for the DPA to override other areas of law with the purpose of achieving maximum effectiveness. As noted in the paper, “advance market commitments… are not simply a tool to secure key resources for the government in the future, but to encourage firms to invest in their capacity to supply such resources in the medium term to a wide range of purchasers.” Policymakers should, for example, explore the DPA’s potential to preempt state corporate law where companies claim they are bound to engage in massive shareholder payments under Delaware corporate law, in order to ensure that corporations are engaging in the true real-world investments needed to build productive capacity for the clean energy transition. Policymakers should also use the DPA’s authorities to direct expenditures to economic entities that are high-road employers, respecting freedom of association and paying living wages. To the extent that competitive bidding regulations limit the government’s ability to do this now, these are precisely the rules that can be preempted in service of an expedited and effective clean energy transition. DPA preemption could also focus on ensuring that public investments create intellectual property that stays within the public domain.


With broad recognition that our much-needed decarbonation goals will only be met through industrial policymaking, it is time for our discussion to move from the “why” to the “how.” While the discussion here outlines only some of the options available to policymakers, it is our hope that these proposals spur even more creative thinking about how to reorient our economy towards true productivity rather than an obsession with stock market returns over all else. No less than our planetary future depends on it.