Hedge Funds Disrupt Corporate Research & Development Needed to Combat Climate Change

Interview with Lynn Parramore, senior research analyst, Institute for New Economic Thinking, conducted by Scott Harris

On March 31, President Biden announced his proposed $2 trillion infrastructure plan would deliver a “once-in-a-generation investment” in the United States that is focused on infrastructure, the care economy, climate and create “good paying jobs.”  The American Jobs Plan, as the White House is calling it, is advertised as the most important climate legislation in U.S. history. While all the specific details of the plan are not yet known, it appears that at least $1 trillion would go to sectors that fall under the broad umbrella of climate change, clean energy and environmental justice.

But Lynn Parramore, a senior research analyst at the Institute for New Economic Thinking is warning that “billionaire financiers have made sure the companies the government must partner with to achieve critical goals like clean energy are focused instead on further enriching predatory hedge fund executives.” According to Parramore, these predators “force companies to play Wall Street casino games with their resources instead of investing in research and development” to produce new clean energy technologies to more effectively combat the climate change crisis.

Between The Lines’ Scott Harris spoke with Lynn Parramore, who talks about her concern that hedge fund predators could thwart the national effort to move away from fossil fuels and adopt clean energy, that’s laid out in her recent article titled, “Meet the New Koch Brothers — the Hedge Fund Activists Wrecking America’s Green New Deal.”

LYNN PARRAMORE: Well, if you think about something like the infrastructure and climate proposal that President Biden just unveiled, one of the things he said about it is that he wants to boost America’s innovative edge and become a global leader in markets like computer chip and clean energy. You know, all of these things are very important to infrastructure and clean technology and he wants to be competitive with China in particular. Well, there is something about the way American corporations have been operating for the last few decades, really since the 1980s, that poses a real problem if you want to be competitive with China. And that has to do with a kind of Wall Street-focused activity. So big companies that the government would need to partner with to make the products, do the manufacturing and the implementing of various parts of a big proposal, like Biden’s. You know, the government can’t just snap its fingers and make computer chips.

So what hedge funds have been doing, if you remember back in the ’80s, we used to hear about these characters called corporate raiders. If you remember Oliver Stone’s movie Wall Street, Gordon Gekko was a corporate raider. He’s the one that said, “Greed is good.” And these wise guys would look for companies that were in trouble, take them over, strip them down, fire everyone, extract whatever value they could and then hit the road. So they have descendants that are with us today and they are known as shareholder activists. And that’s a misleading term because when you and I think about the word activist, we probably think of somebody trying to do good, trying to make society better. But these particular activists, which are mainly hedge fund managers, are up to something very different. And it’s a predatory activity where they look at a company and they decide to start buying up shares of that company.

And what they want is to make a profit as quickly as possible on those shares. So they will start pressuring the company to do things that will boost the stock price in the short run. Jack it up with whatever tricks they can conjure up. One of those being stock buybacks — that’s when a company buys outstanding shares of its own stock with its profits and its money — buys them up. So now you have fewer shares. This means each share is now worth more money. So anybody who owns shares such as the hedge fund activists, has just made a quick profit. Now they can dump the stock and get out of there. It’s called “pump and dump.” Pump up the stock price, then dump it after you’ve made a profit. Now what’s the problem with that? The problem is that the money the company has used to do those stock buybacks could have been used for much better purposes, like research and development, like attracting and retaining the best talent, like manufacturing. All of the kinds of things you would need a company to do if they’re going to partner with you as, the Biden administration, for any kind of big infrastructure or a climate project.

So these companies have been hamstrung by these hedge fund activists that are only interested in making a buck as quickly as possible. And they really don’t care about the long-term sustainability or health of the company. Or is it anything the company might want to do in the way of making products in the future? They’re all about the short term. So they are holding American companies back.

SCOTT HARRIS: Well Lynn, as you lay out in your article, there are several important reforms that could be made here. Generally, in terms of how corporations operate in the U.S. But more specifically, conditions that could be set up for major government investments in corporations as we go forward with the infrastructure investments as proposed by Biden’s American Jobs Plan.

LYNN PARRAMORE: If you’re going to get subsidies, then you have to play by certain rules and I think that’s where we should begin. And number one is, You cannot do stock buybacks for the duration of the contract. You know, you can do whatever you want after it’s done, but not while you’re receiving government subsidies. No way. You know, and you have to have oversight. You have to make these companies accountable. And one way of doing that is to place public representatives on the company boards. Or maybe workers on the company boards. But you need to have some kind of countervailing force against these hedge fund activists who end up just taking the boards over and calling the shots for the company. You can’t have a hedge fund activist calling the shots for a company that the government, that taxpayers are paying to step up to the plate and participate in these projects. So there has to be oversight. There has to be accountability and no more stock buybacks.

For more information, visit the Institute for New Economic Thinking at ineteconomics.org.

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