Q&A on Corporate Governance After the Financial Crisis Part 4: "In what ways does an expanded federal regulatory role in corporate governance potentially exacerbate the very problems it purports to solve?"

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: In what ways does an expanded federal regulatory role in corporate governance potentially exacerbate the very problems it purports to solve?

A: Bubble laws like Sarbanes-Oxley and Dodd-Frank tend to be adopted in a hurry. As we have seen, the pressure of time tends to give advantages to interest groups and other policy entrepreneurs who have prepackaged purported solutions that can be readily adapted into legislative form. Hence, for example, many of both statutes’ provisions were recycled ideas that had been advocated for quite some time by corporate governance “reformers.” Unfortunately, because these so-called reformers tend to be critics of markets and corporations, both statutes imposed regulations that penalize or outlaw potentially useful devices and practices and more generally discourage risk-taking by punishing negative results and reducing the rewards for success. 

Q: When it comes to regulating corporations, what is the problem with a one-size-fits-all approach?

A: Anybody who has ever shopped for a Speedo knows that “one size fits all” simply isn’t true. Like people, not all corporations are the same.