Paul Rose

Abstract

This essay, prepared for the “Regulating Risk” symposium of the Connecticut Insurance Law Journal, reviews the connection between risk and corporate governance and then examines the “Strengthening Corporate Governance” provisions of Subtitle G of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010. These provisions, which address proxy access and the separation of the roles of CEO and board chairman, seem likely to have one of two effects. On one hand, they may be pernicious: by further enhancing shareholder power without a clear justification—particularly without demonstrating that increased shareholder power functions as an effective risk management device—they may undercut the risk-management goals of the broader statute. The provisions assume that enhanced shareholder authority will improve monitoring of managerial behavior and thereby help prevent future crises, but theory and evidence suggest that diversified shareholders often prefer levels of corporate risk-taking that other constituencies, including taxpayers, would not. On the other hand, Dodd–Frank’s governance reforms may have minimal impact on investor behavior or risk management. Recent increases in shareholder power, largely due to expanded federal regulation, have already made management more responsive—perhaps too responsive—to shareholder concerns about agency costs, and many of the proposed reforms have either already been adopted or were likely to be adopted by most public companies. If private ordering is functioning effectively, the essay asks, what is gained by imposing uniform governance structures across the entire market, particularly when most affected firms were victims rather than contributors to the Financial Crisis?

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