In an interview with The Metropolitan Corporate Counsel, Delaware Chief Justice Myron Steele opines that:
There are many perspectives. To start, federal legislation tends to be crisis driven and rarely adds anything of enduring quality, as certainly was the case with Dodd-Frank (the Bill). Unfortunately, Dodd Frank and similar initiatives are rarely revisited, after the crisis subsides, to adjust for unintended consequences.
Of the Bill's 2,300 pages, 24 purportedly relate to corporate governance, which is a matter of state law. Traditionally, corporations decide where to charter based on the extent to which a state's legislative and judicial services fit their needs. Any sweeping federal legislation should incorporate sufficient data to convince all constituencies that those changes will result in better performance. Because it is not based on such empirical data, the Bill serves mainly as a sop to certain political constituencies.
Specifically, the Bill is politicized because the proposed changes are skewed in favor of institutional shareholders, many of whom contribute generously to political campaigns of legislators. These shareholders capitalized on what was a brief window of opportunity for sympathetic views by substantial majorities in both houses of Congress and by the President. In merging what had been six individual bills, Dodd-Frank may be less intrusive than would have been the combined legislation, had all six passed. Congress wisely declined to mandate majority voting and did not proscribe staggered boards in exchange for say-on-pay and proxy access.
In theory, requiring expanded shareholder communication about company operations is a positive step; however, broad-based federal requirements are unnecessary and certainly impose additional expense on business operations. When politics drives legislation, we are left to ponder the wisdom of subverting traditional state schemes for the unknown where interested parties in the state can explore legislation alternatives and empirically assess what change actually results in better performance - an option lost when the feds mandate a one-size-fits-all regime.
All of which is consistent with the argument I made in my article Dodd-Frank: Quack Federal Corporate Governance Round II (September 7, 2010), in which I argue that:
In 2005, Roberta Romano famously described the Sarbanes-Oxley Act as “quack corporate governance.” In this article, Professor Stephen Bainbridge argues that the corporate governance provisions of the Dodd-Frank Act of 2010 also qualify for that sobriquet.
The article identifies 8 attributes of quack corporate governance regulation: (1) The new law is a bubble act, enacted in response to a major negative economic event. (2) It is enacted in a crisis environment. (3) It is a response to a populist backlash against corporations and/or markets. (4) It is adopted at the federal rather than state level. (5) It transfers power from the states to the federal government. (6) Interest groups that are strong at the federal level but weak at the Delaware level support it. (7) Typically, it is not a novel proposal, but rather a longstanding agenda item of some powerful interest group. (8) The empirical evidence cited in support of the proposal is, at best, mixed and often shows the proposal to be unwise.
All of Dodd-Frank meets the first three criteria. It was enacted in the wake of a massive populist backlash motivated by one of the worst economic crises in modern history. As the article explains in detail, the corporate governance provisions each satisfy all or substantially all of the remaining criteria.
As for the point that we lose when the feds adopts a "one-size-fits-all regime," see my article The Creeping Federalization of Corporate Law, in which I argue that:
No one seriously doubts that Congress has the power under the Commerce Clause to create a federal law of corporations if it chooses. The question of who gets to regulate public corporations thus is not one of constitutional law but rather of prudence and federalism. In this essay, I advance both economic and non-economic arguments against federal preemption of state corporation law. Competitive federalism promotes liberty as well as shareholder wealth. When firms may freely select among multiple competing regulators, oppressive regulation becomes impractical. If one regulator overreaches, firms will exit its jurisdiction and move to one that is more laissez-faire. In contrast, when there is but a single regulator, exit is no longer an option and an essential check on excessive regulation is lost.
It's wonderful to see such a prominent corporate governance figure as CJ Steele advancing thse essential arguments.
