In the Interests of Avoiding Further Federal "Quackery" CORPORATE GOVERNANCE AFTER THE FINANCIAL CRISIS. By Stephen M. Bainbridge. New York, New York: Oxford University Press, 2012. 283 pages. $65.00.
Professor Stephen M. Bainbridge's Corporate Governance After the Financial Crisis1 presents a cogent discussion of the congressional and regulatory reaction to two significant economic crises within the past decade and the unprecedented federal expansion into the traditional state bulwark of corporate law that resulted. Much has been written about corporate governance and the federal reaction to these crises in the aftermath of the Sarbanes-Oxley Act of 20022 (the Sarbanes-Oxley Act or Sarbanes-Oxley) and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 20103 (the Dodd-Frank Act or Dodd-Frank). For those trying to understand the state of corporate governance regulation today and the key debates and tensions that are at work, Bainbridge's book is a must read, along with Lynn Stout's The Shareholder Value Myth,4 and-to balance things out with a broader perspective about how crises drive governance regulation and change-Ira Millstein's and Paul MacAvoy's book, The Recurring Crisis in Corporate Governance.5 Indeed, when the next crisis comes along, but before the federal legislators and regulators pick up their pens, these should all be required reading to help avoid further federal imposition of "quack corporate governance" as Bainbridge-borrowing from Professor Roberta Romano6-colorfully terms the recent federal efforts.7
I. Sarbanes-Oxley and Dodd-Frank as Federal "Quackery"
Lest there be any doubt about Bainbridge's views on the breadth of federal quackery, he states at the outset:
Are Dodd-Frank's governance provisions quackery, as were Sarbanes- Oxley's? In short, yes. Without exception, the proposals lack strong empirical or theoretical justification. To the contrary, there are theoretical and empirical reasons to believe that each will be at best bootless and most will be affirmatively bad public policy. Finally, each of Dodd-Frank's governance provisions erodes the system of competitive federalism that is the unique genius of American corporate law by displacing state regulation with federal law. Dodd- Frank is thus shaping up to be round two of federal quack corporate governance regulation.8
The Sarbanes-Oxley Act was adopted in reaction to the Enron and WorldCom accounting frauds and concerns about the potential for management malfeasance in public companies.9 The Dodd-Frank Act was enacted just eight years later in reaction to the failure of various financial institutions and regulators to adequately assess risks in the housing market and related market for mortgage securities.10 In both instances, Congress apparently believed corporate governance failures played a role and that new regulations were needed, but the focus of the legislated corporate governance fixes were dramatically different: The corporate governance provisions in Sarbanes-Oxley were designed in large measure to position boards to hold the CEO and CFO and other members of senior management more accountable.11 Sarbanes-Oxley focused on enhancing the independence of board audit committees and on enhancing the board's oversight of internal controls.12 Underlying the federal legislation (as well as amendments to listing rules at about the same time) was the decided view that strong, independent boards were key to avoiding similar problems in the future.13 While Sarbanes-Oxley worked a fundamental expansion of federal corporate governance regulation, at least the underlying philosophy was generally in line with notions of director primacy under state law. In contrast, the corporate governance provisions of Dodd-Frank veer sharply away from director primacy. Rather than look to strong independent boards as the solution, Dodd-Frank provides shareholders with enhanced powers (through regulations promulgated by the Securities and Exchange Commission (the SEC)) to hold boards accountable14-and this is a clear departure from the director primacy that is embodied in state corporate law, with implications for our economy at large. …