Public Equity Stakes in U.S. Economic Policymaking

The passage of the Bipartisan Infrastructure Law, the CHIPS and Science Act, and the Inflation Reduction Act mark a new moment of robust industrial policy. The Biden Administration’s policies authorize $4 trillion across industrial policy programs, including $1.2 trillion on the clean energy transformation of the U.S. economy. Advocates of industrial policy argue that it can achieve social goals by incentivizing the creation of well-paying jobs and building more resilient economic structures. The Administration has made it clear throughout its ramp-up in industrial policymaking that its goal is to crowd in private investment, rather than to fully publicly fund the resources necessary for the clean energy transition. Because the government must work with private companies to achieve goals like urgently decarbonizing our economy, there is a risk that industrial policy enables the necessary renewable energy transition while the economic gains of such activity will only benefit business and financial elites. The flow of funds from the public to private sector contained in the Biden Administration’s industrial policy making has, thus far, contained no role for the public in corporate governance. U.S. industrial policy must include corporate ‘guardrails’ to challenge the dominant corporate governance framework of shareholder primacy to be successful. This article discusses public equity stakes as one such mechanism for active participation by the public in companies receiving investment as a result of industrial policy.

Since the 1980s, U.S. corporations have operated according to the principle of shareholder primacy: the concept that the sole purpose of the corporation is to enrich its shareholders, rather than to produce goods and services. This has meant that the laws and norms of corporate governance have focused on maximizing shareholder value rather than establishing and maintaining the organizational, social, and financial conditions necessary for ongoing productive innovation. In practice, U.S. corporate leaders have focused on increasing their company’s share prices, which not coincidentally, are central to executive pay, while in many cases neglecting the long-term investments in the workforce and production process necessary for innovation. In the context of industrial policy, firms that use public funding will consider it their goal to respond to the needs of their shareholders rather than the public interest that policy attempts to foster. It is critical for successful policy design that public investment in private companies contain mechanisms to ensure that the public interest goals of public policy are met. This is utterly essential if we are to maintain the innovative capacity of the U.S. economy for the long term. In this paper, we propose that policymakers use equity stakes held by the government as a central tool in its industrial policy toolbox.

A public equity stake in a private company is when the government holds a set of corporate stock. It means that the public would have rights in the corporate governance process of that company, just as such a financial investment does for private financiers.The effects of public investment in private companies can never be predicted with certainty – by its nature, the innovation process is full of risk. A public equity stake would function differently from a loan or grant in that it would enable the public to remain involved in the key choice points as private companies produce, make investment decisions, and innovate when a public investment has been made, making it possible – though not certain – that the public stakes contribute to the kinds of organizational capabilities that companies need to produce, rather than extractive corporate practices. A public equity stake gives the public a meaningful way to continue to engage when companies and projects have been deemed in the public interest such that they are worth public investment.

The U.S. government has a history of taking public equity stakes in times of crisis in the private markets, most recently during the financial crisis, when stakes were taken in the financial and auto companies that were at risk of collapse. As the government engages in more proactive industrial policy, for example to encourage the transformation of the auto industry towards electric vehicles, it has an opportunity to use equity stakes for proactive purposes. The substantive implementation questions for proactive public participation in corporate decision-making are manifold. Public equity stakes could mean the federal government receives a variable financial return on an investment, but what kinds of shares should be issued to the government and what dividend rights should they have? Public equity stakes could enable involvement in governance, including the ability to veto certain company actions, and accompany both economic and governance rights. How should the public interest be defined in terms of the federal government’s responsibilities in voting? Within the institutional structure of the government, who should manage public equity stakes? The recent historical experience of public equity stakes in the United States has been in moments of crisis. What lessons have been learned? What fresh approaches are needed? While there is a wide variety of international experience with public equity stakes, the U.S. corporate and financial context is unique. This article offers an overview of the key benefits of public equity stakes in U.S. industrial policy and the policy design questions that arise in an effort to spur further discussion and attention to this critical public policy.