The latest issue of the UCLA Lawyer magazine has a series of Q&As with yours truly about my book Corporate Governance after the Financial Crisis. I'm reprinting the Q&As in this series of blog posts. As the article intro explains, the book argues "that federalizing corporate governance impinges on state sovereignty, hobbles corporate efficiency and shortchanges both investors and the American taxpayer .... Professor Bainbridge offers an incisive analysis of the landscape-altering Sarbanes-Oxley and Dodd-Frank acts, responses to the near-cataclysmic economic downturns of the last decade," which "advances a critical dialogue about the limits of crisis-driven public policy."
Q: Why are the corporate governance provisions of federal financial reform laws like Sarbanes-Oxley and Dodd-Frank so misguided?
A: In ordinary times, Washington typically has more important issues on its plate than corporate governance. After a financial bubble bursts, however, investors burnt by losses from the breaking of the bubble and outraged by evidence of misconduct by corporate insiders and financial bigwigs create populist pressure for new regulation. Accordingly, it is in the post-bubble environment, when scandals and economic reversals are in the headlines, that Congress typically acts. Because such periods typically involve an upswing in populist anger and accompanying intense public pressure for action, they offer windows of opportunity for well- positioned policy entrepreneurs to market their preferred solutions when there is little time for reflective deliberation. As a result, you end up with laws meeting criteria for quack corporate governance laws. Indeed, according to our colleague Stuart Banner’s wonderful book, Anglo-American Securities Regulation: Cultural and Political Roots, 1690-1860 (1998), the same pattern of boom, bust and regulation can be seen far back into the nineteenth century.