ProfessorBainbridge.com

Fixing the Big Banks

In a wonderful article in the latest Atlantic, Frank Partnoy and Jesse Eisinger track the continuing major problems with the major banks, which makes for very scary reading. They then offer a new approach to bank regulation:

Until the 1980s, bank rules were few in number, but broad in scope. Regulation was focused on commonsense standards. Commercial banks were not permitted to engage in investment-banking activity, and were required to set aside a reasonable amount of capital. Bankers were prohibited from taking outsize risks. Not every financial institution complied with the rules, but many bankers who strayed were judged, and punished.

Since then, however, the rules have proliferated, the arguments about compliance have become ever more technical, and the punishments have been minor and rare. ...

What if legislators and regulators gave up trying to adopt detailed rules after the fact and instead set up broad standards of conduct before the fact? For example, consider one of the most heated Dodd-Frank battles, over the “Volcker Rule,” named after former Federal Reserve Chairman Paul Volcker. The rule is an attempt to ban banks from being able to make speculative bets if they also take in federally insured deposits. The idea is straightforward: the government guarantees deposits, so these banks should not gamble with what is effectively taxpayer money.

Yet, under constant pressure from banking lobbyists, Congress wrote a complicated rule. Then regulators larded it up with even more complications. They tried to cover any and every contingency. Two and a half years after Dodd-Frank was passed, the Volcker Rule still hasn’t been finalized. By the time it is, only a handful of partners at the world’s biggest law firms will understand it.

Congress and regulators could have written a simple rule: “Banks are not permitted to engage in proprietary trading.” Period. Then, regulators, prosecutors, and the courts could have set about defining what proprietary trading meant. They could have established reasonable and limited exceptions in individual cases. Meanwhile, bankers considering engaging in practices that might be labeled proprietary trading would have been forced to consider the law in the sense Oliver Wendell Holmes Jr. advocated.

Implementing this approach, they argue, requires just two simple rules:

First, there must be a straightforward standard of disclosure ...: describe risks in commonsense terms that an investor can understand. Second, there must be a real risk of punishment for bank executives who mislead investors, or otherwise perpetrate fraud and abuse.

Today's must read.

Zywicki on Skeel on Dodd-Frank

Todd Zywicki reviews David Skeel's book The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences at considerable length. Here's the teaser:

Those looking for a roadmap that lays out the basic ideas that animate Dodd-Frank and its key provisions should turn to David Skeel’s book, The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences.  Skeel summarizes Dodd-Frank in 200 readable pages that leads the reader through the basic provisions of the historic legislation and its consequences, both intended and unintended.

During the final debates over the passage of Dodd-Frank, Texas Republican CongressmanJeb Hensarling observed that “There are at least three unintended consequences on every page of this legislation.”  Quite a few for a bill that ran to 2,319 pages.  Skeel picks up on this theme and after starting by explaining the intended goals of Dodd-Frank and the ways in which the legislation attempts to implement them, concludes that in fact Dodd-Frank will have negative unintended consequences that will vastly exceed the beneficial intended effects of the legislation.

Go read the review, but be sure to buy the book. It's a great read.

How far should the Fed be able to go to save the economy?

The indispensable Alison Frankel reports on an 89-page opinion by U.S. District Judge Paul Engelmayer dismissing claims againt the Fed by a former major AIG shareholder:

Starr’s lawyers at Boies, Schiller & Flexner and Skadden, Arps, Slate, Meagher & Flom offered a different (and singular) view of recent financial history, in which the U.S. government pushed AIG to the brink of bankruptcy by refusing it access to capital; seized control of the company via an offer AIG’s board had no choice but to accept; plundered the company’s assets while paying off AIG’s credit-default swap counterparties in full; and then illegally engineered a reverse stock split to dilute the interests of AIG’s pre-bailout shareholders. “Starr’s amended complaint paints a portrait of government treachery worthy of an Oliver Stone movie,” Engelmayer wrote.

What's striking about Engelmayer's opinion is that he decided the case as a matter of law. In other words, assuming all of Starr's claims to be true, what the Fed did was okay as a matter of law because of dire economic necessity:

The judge, in a gracefully written decision, concluded that, indeed, Delaware fiduciary law is pre-empted by the Fed’s mission. “(The Fed’s) challenged actions with regard to AIG during the financial crisis were integrally bound up in the rescue loan packages it furnished AIG in fall 2008, made with the goal of stabilizing the American economy,” he wrote. “And, where imposing state-law duties upon a federal instrumentality would squarely conflict with its federal responsibilities, as would subjecting (the Fed) to Delaware fiduciary duty law in connection with the terms of its serial rescues of AIG, such state law is pre-empted.”

One wonders what if any limits will remain on the Fed's power to screw creditors and shareholders if Engelmayer's analysis is upheld. If the government can "treachery worthy of an Oliver Stone movie,” could the Fed use unmanned drones to conduct targeted assassinations? And, if not, where's the damned line?

Fortunately, as Ms Frankel reports:

Judge Thomas Wheeler of the U.S. Court of Federal Claims kept alive Starr’s parallel claim that the Fed’s takeover of AIG, including the company’s common shares, was unconstitutional under the takings clause. Wheeler said that the takings claim rests on whether AIG’s board was forced to accept the terms of the government bailout or did so voluntarily; he split with Engelmayer and said that Starr had presented sufficient facts to support the theory that AIG had no choice.

Starr counsel at Boies Schiller sent an email statement, pointing out that Monday’s ruling by Engelmayer will have no impact on the Court of Federal Claims case, which also seeks $25 billion. 

Unfortunately, since Kelo, I've completely lost faith in the court's willingeness to use the takings clause to defend private property from government theft.

"Corporate Governance After the Financial Crisis" reviewed

Karen I. Heusel in Keeping Up with New Legal Titles, 104 Law Library Journal 579 (2012):

¶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).

Fama on "too big to fail"

Economist Eugene Fama in a selection from a fascinating interview opines that:

Basically, the institutions that are con- sidered to be too big to fail have their debt priced as if it’s riskless, which gives them a low cost of capital and makes it very easy for them to expand and become an even bigger problem. Plus, everybody now accepts the assertion that they are too big to fail, which creates a terrible moral hazard for the management of these financial institutions. Business leaders won’t consciously tank their com- panies, but too big to fail will push them toward taking more risk, whether they realize it or not. I don’t think Dodd–Frank (the Dodd–Frank Wall Street Reform and Consumer Protection Act) cures that moral hazard problem. Even if lawmakers could devise the perfect regulation for such a cure, the chance that it will be implemented by the regulators in the way designed is pretty close to zero. 

The simplest solution would be to raise the capital requirements of banks. A nice place to start would be a 25% equity capital ratio, and if that doesn’t work, raise it more. The equity capital ratio needs to be high enough that a too-big-to-fail financial institution’s debt is riskless, not because of what is essentially a government guarantee but because the equity ratio is very high. 

 

The case against a floating money market NAV

James Hamilton:

In a letter to the SEC, former Comptroller of the Currency John D. Hawke, Jr. cautioned that requiring money market funds to utilize a floating NAV would accelerate the flow of assets to “Too Big to Fail” banks, further concentrating risk in that sector. The former federal official, now with the Arnold & Porter firm, noted that, even bank regulators have acknowledged that a broad shift of institutional cash to the banking system could lead to a large increase in uninsured, “hot money,” deposits, which would increase systemic risk. Similarly, and importantly, he noted that requiring a floating NAV would force current users of money market funds to less regulated and less transparent products, which alternatives may be more susceptible to market risk. More broadly, he said that a review of the record developed by the SEC over the past three and a half years reveals no evidence of any benefits that would be derived from requiring money market funds to use a floating NAV.

Go read the whole thing.

How Dodd-Frank turned into a major gift for the biggest banks at the expense of small banks and consumers

C Boyden Gray and Adam White:

Big Wall Street banks caused a financial crisis and brought the nation to the brink of economic collapse; President Obama signed the Dodd-Frank Act to punish those banks and end government bailouts of too-big-to-fail financial institutions. 

That’s what President Obama believes, at least. He said so when he signed Dodd-Frank into law on July 21, 2010 ...

Gray and White explain just how wrong Obama was:

As many analysts and officials have explained, Dodd-Frank subsidizes large, influential Wall Street financial institutions, while imposing disproportionately heavy burdens on Main Street banks and the communities they serve. Even if we take President Obama, Senator Dodd, Representative Frank, and the rest of Dodd-Frank’s supporters at face value when they protest that they actually intended to rein in Wall Street banks, the laws they passed accomplish the opposite result. Intentional or not, a kiss is still a kiss.

Dodd-Frank Challenge is not just a non-delegation case

Ammon Simon explains that:

Over at Media Matters, David Lyle responds to my Washington Times op-ed,  claiming that the Dodd-Frank constitutionality lawsuit is just another non-delegation case. As CEI’s complaint explains, it’s actually a separation-of-powers challenge:   

While the Supreme Court may have approved the constitutionality of any single removal of a check or balance in isolation—e.g., a limit on the Congress’s power of the purse—the Court has never approved all of Title II’s delegations, and eliminations of checks and balances, in a single law. In particular, the Supreme Court has never sustained the constitutionality of a statute that prohibits any meaningful judicial review of the Government’s action in the manner of Title II of the Dodd-Frank Act. Title II’s combinations of delegations, and eliminations of checks and balances, is unprecedented and unconstitutional.

I can find common ground with Lyle on one matter though: “Supporters of Wall Street reform should not take this anti-Dodd-Frank lawsuit lightly.”

 

Too few too rotate

Erik Gerding notes that:

On Thursday, I travelled to Houston and gave a statement before the Public Company Accounting Oversight Board in a roundtable hearing, as the PCAOB considers whether to impose a mandatory auditor rotation rule. In using its new inspection powers, the PCAOB has found worrying evidence of auditors compromising their independence, objectivity, and professional skepticism (see the PCAOB’s concept release soliciting public feedback).

This problem and whether mandatory auditor rotation is an appropriate solution present a bramble bush of questions that have solicited a great deal of comments (you can see the statements at the Houston roundtable (including my own) here); the PCAOB also held roundtables previously inWashington, D.C. and San Francisco).

Gerding then proceeds to review the state of the art in legal scholarship on the foundational question of whether true auditor independence can ever be achieved. It's a very good summary, which I recommend highly. (FWIW, I tend to come down on Bill Bratton's side of the debate.)

In any case, I don't see how mandatory auditor rotation can work in an environment in which there are only 4 big accounting firms. Because most public companies get a variety of non-audit services from one or more of the Big 4, as well as having another as their independent auditor, mandatory rotation will create huge conflict of interests.

Lawsuit to strike down SEC's resource extraction disclosure rules

Broc Romanek has details and links.

Q&A on Corporate Governance After the Financial Crisis Part 6: "The past decade has witnessed a gradual narrowing of the scope of boards of directors and an increasing reliance on director independence"

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: The past decade has witnessed a gradual narrowing of the scope of boards of directors and an increasing reliance on director independence. Why is this not a panacea for the ills of corporate governance?

A: This is such an important question that I devoted an entire chapter to the ever-increasing reliance on independent directors. In it, I argue that director independence rules not only failed to prevent the financial crises of the last decade, but may well have contributed to them. I admit that’s a provocative claim, but I’m confident it’s correct.

The strict conflict of interest rules embedded in the new definitions of independence made it difficult for financial institutions to find independent directors with expertise in their industry. A survey of eight U.S. major financial institutions, for example, found that two thirds of directors had no banking experience. Given the inherent information asymmetries between insiders and outsiders, the lack of board expertise significantly compounded the inability of financial institution boards to effectively monitor their firms during the pre-crisis period. More expert boards could have done more with the information made available to them and, moreover, would have been better equipped to identify gaps therein that needed filling.

In addition, the need to find independent directors put an emphasis on avoiding conflicted interests at the expense of competence. In other words, the problem was not just that the new definition of independence excluded many candidates with industry expertise. It was also that the emphasis on objective indicia of conflicts dominated the selection process to the exclusion of indicia of basic competence and good judgment. The financial crisis thus appears, in part, to have been an unintended consequence of the Sarbanes-Oxley Act. 

Q&A on Corporate Governance After the Financial Crisis Part 5: "What is the link between shareholder involvement and corporate performance?"

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: What is the link between shareholder involvement and corporate performance? Does an increase in the former always trigger an improvement in the latter?

A: Actually, the bulk of the evidence is that shareholder involvement does not—outside a few special cases—improve firm performance. I review the evidence at length in Chapter 7 of Corporate Governance after the Financial Crisis. While there is little evidence that activism has benefits for investors as a class, there is considerable evidence for the proposition that activist shareholders can profit through private rent seeking.

This result is not surprising, of course. First, the high costs and low success rate of activism suggest that its net gains are substantially lower than many proponents of shareholder activism claim. Second, if activism increases the target firm’s stock price, all of its shareholders can free ride on the activist’s efforts. It makes no sense for an activist to expend substantial resources when the bulk of the gains from doing so will be captured by others. Instead, we would expect activists to pursue an agenda of private rent seeking rather than altruistic public service. And that’s exactly what we tend to see. 

Floating NAV for money funds floated again

It briefly looked like the idea of forcing money market mutual funds to let their net asset values float had died a well-deserved death. It is an absurd idea, that would devastate the industry and do serious harm to retail investors and savers (at a time when those folks have been getting bashed by the Federal Reserve's absurdly low interest rate policy). As I have observed previously:

Speaking personally, given the minuscule returns money market funds are paying these days, I probably would stop using them and just leave my rainy day savings/cash flow management funds in my checking account rather than trying to deal with headaches come tax time of having a constantly fluctuating NAV. Who wants to deal with paying taxes on, say, 10 cents worth of capital gains because you sold 1000 shares at $1.00 and had a basis in those shares of $0.9999? And what if you want to use actual cost basis instead of average cost basis? Maybe it'd be worth doing if you're a billion dollar institution, but my guess is that a floating NAV would drive retail investors out of the money market industry.

Unfortunately, as the WSJ reports today, this awful idea is once again rearing its ugly head:

SEC Commissioner Daniel Gallagher on Sunday said he believed talks could be restarted at the commission. Mr. Gallagher, who helped to torpedo SEC Chairman Mary Schapiro's plan, on Friday said he could support requiring money funds to abandon their stable $1 share price and allow it to float like other mutual funds. Ms. Schapiro said she could back issuing such a proposal as a stand-alone measure, though it isn't clear the developments could lead to a break in the impasse.

Why Commissioner Gallagher would back this boneheaded proposal as a stand alone "reform" befuddles yours truly. But, just in case, I'm going to open a savings account at my local bank as a receptacle for the money I currently have invested in money market funds. I feel sorry for the fund employees who will probably lose their jobs when this proposal--if adopted--smashes their industry, but maybe Obama can find them some of those green jobs he keeps talking about.

FSOC Gives Regulators Second Bite at Apple

From the a pro-limited government perspective, one of the most pernicious aspects of the Dodd-Frank Act was its creation of the Financial Stability Oversight Council. As Wikipedia explains:

The Financial Stability Oversight Council (FSOC) is a United States Federal government organization, established by Title I of the Dodd–Frank Wall Street Reform and Consumer Protection Act, which was signed into law by President Barack Obama on July 21, 2010. The Dodd-Frank Act provides the Council with broad authorities to identify and monitor excessive risks to the U.S. financial system arising from the distress or failure of large, interconnected bank holding companies or non-bank financial companies, or from risks that could arise outside the financial system; to eliminate expectations that any American financial firm is "too big to fail"; and to respond to emerging threats to U.S. financial stability. The Act also designates the Secretary of the Treasury as Chairperson. Inherent to the FSOC's role as a consultative council is facilitation of communication among financial regulators.

When the FSOC was proposed, many of us feared that it would routinely give proponents of new regulatory initiatives a second bite at the apple in cases in which the agency with principal responsibility for oversight of a particular area decided not to adopt some proposed regulation. Well, we were right. Activist SEC Chairman Mary Shapiro has been pushing proposals for money market mutual fund "reform" for a while now, but she failed to get her new regulatory proposals through the SEC. Three members of the Commission recognized that there were serious flaws in the regulations.

Instead of accepting defeat, however, Shapiro has gotten Treasury Secretary Geithner to propose that the FSOC "consider proposing new rules for money funds to get around the SEC impasse." Of course, impasse is precisely the wrong word. The SEC wasn't deadlocked. Shapiro withdrew the proposal because it would have lost.

And so the forces of big government are likely to win yet another round, thanks to having written a law that gives them two bites at every financial services apple.

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.