¶1 In his latest book, Corporate Governance After the Financial Crisis, Professor Stephen M. Bainbridge asserts that, in the wake of the significant economic setbacks of the past decade, Congress abandoned its traditional reticence on the matter of corporate governance, yielded to emotionally charged mainstream political demands, and enacted a deeply flawed set of corporate reforms. Specifically, Bainbridge objects to the various corporate governance provisions included in the Sarbanes-Oxley Act of 20021 and in 2010’s Dodd-Frank Act.2 Soundly denouncing both laws, he rejects these purported reforms as “quackery . . . lack[ing] strong empirical or theoretical justification” (p.15) and submits that the offending “provi- sions erode the system of competitive federalism that is the unique genius of American corporate law by displacing state regulation with federal law” (id.).
¶2 A prolific author and blogger and a self-proclaimed “Burkean conservative,”3 Stephen M. Bainbridge serves as the William D. Warren Distinguished Professor of Law at UCLA where he teaches courses on business associations, corporations, and corporate governance. In the past few years, Bainbridge has written several law review articles and books addressing the law and governance of public corporations.4
¶3 In Corporate Governance After the Financial Crisis, Bainbridge argues that Congress blundered badly with both of its recent efforts to regulate in these areas, in each case reacting hastily to a postcrisis atmosphere dominated by anticorpo- rate sentiment and passing legislation that usurps state corporations laws (most critically those of Delaware) and effects federal control over significant aspects of corporate governance. In the late 1990s and early 2000s, the bursting of the dot- com bubble and the massive corporate and accounting fraud uncovered at companies like Enron and Worldcom prompted populist pleas for federal intervention, pleas that soon led to the Sarbanes-Oxley Act. In 2007–08, as the collapse of the housing bubble and the subprime mortgage meltdown were followed in quick succession by the failures of Bear Stearns and Lehman Brothers and the ensuing credit crisis, federal legislators received similar pleas and reacted again, this time with the Dodd-Frank Act. Bainbridge sees a pattern here: “scandals and economic reversals” (p.38)5 regularly mark the aftermath of economic boom times, leading Congress to intervene in corporate governance with reactive bubble laws that are passed quickly under rising political pressures provoked “by populist anti-corpo- rate emotions” (p.16). This cycle, according to Bainbridge, “tends to result in flawed legislation” (id.).
¶4 Bainbridge presents his argument in a straightforward fashion, defending his position chapter by chapter and provision by provision, and he employs a scholarly style well suited for legal and academic audiences with preexisting knowledge of basic corporations law and economic theory. The book’s title, Corporate Governance After the Financial Crisis, however, is something of a misnomer; Bainbridge devotes far more space to detailing the faulty corporate governance provisions in Sarbanes-Oxley than he does to discussing Dodd-Frank, legislation actually passed in response to what is commonly known as “the financial crisis.” (As Bainbridge admits, it may yet be too early to fairly assess the full effects of Dodd-Frank.) Throughout the book, Bainbridge assiduously champions the views of Roberta Romano, a Yale law professor who maintained in a partisan 2005 article that the federal legislative process typically—in the case of Sarbanes-Oxley, specifically—produces “quack corporate governance.”6 Bainbridge specifies in rather redundant terms how both Sarbanes-Oxley and Dodd-Frank meet the cri- teria that define such legislation, but his arguments are less than completely per- suasive, and his persistent allusions to “quack” governance impart a polemical tone to what is otherwise a thoughtful treatise.
¶5 Bainbridge’s analysis of federal legislative responses to economic crises is generally well presented, and his position is bolstered by a variety of academic studies. However, many of Bainbridge’s arguments can be and are countered by authors with similar credentials citing equally credible studies in support of their assertions. Columbia law professor John C. Coffee, who dubs Bainbridge, Romano, and similarly disposed academics the “Tea Party Caucus,”7 suggests in a recent article that even flawed federal legislation is better than nothing and proffers, in direct response to the caucus, that with time and reflection most statutory defects will be corrected.8 With respect to Sarbanes-Oxley, scholars Robert A. Prentice and David B. Spence, both with the University of Texas at Austin’s McCombs School of Business, reject the notion that the act interferes unduly with state authority, argu- ing convincingly that it more accurately represents “a congressional attempt to shore up a federal system of securities regulation that has generally served the nation well.”9 They further assert that the very “empirical evidence that [Sarbanes- Oxley’s] critics believe Congress ignored strongly indicates that vigorous securities regulation is necessary for capital markets to reach their potential.”10
¶6 Ultimately, it is Bainbridge’s evident concern over the “creeping federalization of corporate governance” (p.19) that delineates his position within the wider political context. Federal versus state, reform versus free market, shareholder versus management, main street versus Wall Street—these are the constructs that make up the overarching themes of this book. These topics are also particularly relevant in light of today’s highly divisive political climate, and despite some weaknesses, Cor- porate Governance After the Financial Crisis is a worthy contribution to the debate. It is recommended for academic libraries, particularly those associated with schools of law or business, and to anyone interested in corporate governance practices.
1. Sarbanes-Oxley Act of 2002, Pub.L.No.107-204,116 Stat. 745 (codified as amended in scattered sections of 15 & 18 U.S.C.).
2. Dodd-Frank Wal Street Reform and Consumer Protection Act,Pub.L.No.111-203,124Stat. 1376 (2010) (codified as amended in scattered sections of 7, 12, 15, 18, 22, 31 & 42 U.S.C.).
3. Stephen Bainbridge@ProfBainbridge, Twitter, http://twitter.com/profbainbridge (last visited Aug. 14, 2012).
4. Stephen M. Bainbridge, Response, Director Primacy and Shareholder Disempowerment, 119 hARv. L. Rev. 1735 (2006); Stephen M. Bainbridge, Dodd-Frank: Quack Federal Corporate Governance Round II, 95 Minn. L. Rev. 1779 (2011).
5. Quoting MarkJ.Roe,Washington and Delaware as Corporate Lawmakers, 34DeL.J.Corp.L. 1, 8 (2009).
6. Roberta Romano, The Sarbanes-Oxley Act and the Making of Quack Corporate Governance, 114 Yale L.J. 1521 (2005).
7. John C. Coffee, Jr., The Political Economy of Dodd-Frank: Why Financial Reform Tends to Be Frustrated and Systemic Risk Perpetuated, 97 Cornell L. Rev. 1019, 1024 (2012).