Steven Ramirez, The End of Corporate Governance Law: Optimizing Regulatory Structures for a Race to the Top

Steven Ramirez has posted the The End of Corporate Governance Law: Optimizing Regulatory Structures for a Race to the Top , 24 Yale Journal on Regulation (2007) on SSRN.  The article calls for the creation of a new federal agency modeled after the Federal Reserve Board to oversee corporate governance rules for corporations.  Ramirez envisions the new federal regime as an “opt in” regime that that shareholders could choose as an alternative to state corporate law.  He argues that his alternative regime would offer benefits when compared to current federal law and state law, because the agency he envisions would be more impartial and politically independent than the agencies and officials who contribute to the current hodgepodge of corporate governance rules. 

Ramirez’s analysis seems sensible, but his prescription leaves me with two queries:  (1) In what way would the Fed-modeled structure he proposes be superior to the SEC which is ostensibly an independent, bipartisan commission; (2) How could shareholders meaningfully be empowered to opt in to the regulatory scheme he proposes?

Here is the abstract:

The pernicious influence of politics continues to pollute corporate governance applicable to public corporations in the United States. In particular, the political process has yielded a corporate governance regime that simultaneously imposes excessive regulatory costs and impairs investor confidence. CEOs continue to enjoy too much autonomy over the public corporation. Increasingly, empirical evidence shows that corporate governance standards in the U.S. are sub-optimal. This Article proposes to change the legal structure by which corporate governance standards are articulated. Using the Federal Reserve Board as a model, this Article urges the creation of a depoliticized federal agency with authority over an optional federal regime selected by shareholders. As such, corporate governance would be based upon market verdicts and the best corporate governance science rather than institutions (legislatures, courts, and the SEC), which are poorly equipped to impose standards based upon science instead of political caprice.

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2 Responses to Steven Ramirez, The End of Corporate Governance Law: Optimizing Regulatory Structures for a Race to the Top

  1. Steven A. Ramirez says:

    In 2000, I proposed the creation of a self-funded amd more depoliticized SEC. with chartering authority. Ramirez, Depoliticizing, 41 Wm. & Mary L. Rev. at 574, 589. I have abandoned that idea in favor of the more aggressive proposal of a depoliticized federal chartering authority modeled upon the FED, for three reasons. First, although I was pessimistic in 2000 regarding the ability of corporate federalism to appropriately operate to optimize corporate governance, I underestimated how seriously flawed corporate governance had become until the parade of corporate corruption scandals in 2001-2002. Id. at 561, 584 (stating that financial regulation as then structured faced “grave difficulties” acting in the public interest, but that crises in investor confidence may only occur “once a century”). Second, I underestimated the degree of special interest influence over the SEC until its senior officers blew the whistle on the operation of such influence. Third, in 2000 the science of corporate governance was more primitive than its current infancy; there is little reason to think that the SEC has the institutional capability to interpret that science.

    In terms of the mechanics of implementing shareholder choice over chartering authority, I basically passed on that issue in this article. Instead, I merely cited to Bebchuk’s proposals on this point which I termed “thoughtful.” FN 272. I am toying with a follow up piece on shareholder democracy.

    Steve R.

  2. reneejones says:

    Steve,

    Thanks for your reply. I agree that the SEC is politically vulnerable vis a vis Congress and the Executive, and a Fed-based model may therefore be more successful.

    I remain doubtful about the efficacy of shareholder choice. A mandatory version of your Fed model may make more sense. If shareholder “choice” is unworkable isn’t a mandatory Fed-style model the second-best solution?

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