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Regulating Risk by 'Strengthening Corporate Governance'

Paul Rose

Ohio State University - Moritz College of Law; Bocconi University - BAFFI Center on International Markets, Money, and Regulation; ESADE University Faculties - ESADEgeo; Tufts University - The Fletcher School of Law and Diplomacy

June 25, 2010

Ohio State Public Law Working Paper No. 130

This paper, presented at the “Regulating Risk” symposium at the University of Connecticut School of Law, April 16, 2010, briefly reviews the connection between risk and corporate governance, then examines the “strengthening corporate governance” provisions of Subtitle G of the Restoring American Financial Stability Act of 2010 (also known as the “Dodd Bill”). The corporate governance provisions, covering majority voting for director elections, proxy access, and the separation of the roles of CEO and chairman of the board, seem likely to have one of two possible effects. On the one hand, the provisions may be pernicious, in that they further enhance shareholder power without a clear justification for increased shareholder power, and more particularly without a justification for shareholder power as a risk management device. Indeed, the Dodd Bill’s corporate governance provisions may work at cross-purposes to the risk management intent of the remainder of the Dodd Bill: the corporate governance provisions operate under the assumption that enhanced shareholder power will result in better monitoring of managerial behavior, which presumably will help to prevent future crisis, but both theory and evidence suggests that diversified shareholders generally prefer companies to take risks that other constituencies (including taxpayers) would not prefer.

On the other hand, the Dodd Bill may have very little effect on investor behavior or risk management. Increases in shareholder power over the past years (fundamentally the result of increased federal regulation) have made management more responsive to - and in some cases probably overly responsive to - shareholder concerns over agency costs. Indeed, some of the proposed reforms already have been or were likely to have been put in place at most public companies. If private ordering is already working, what is the point of imposing strict governance constructs across the market as a whole, especially when most of the affected firms are victims of, rather than contributors to, the Financial Crisis‘

Number of Pages in PDF File: 31

Keywords: Dodd Bill, Financial Crisis, Financial Reform, Restoring American Financial Stability Act, risk management, corporate governance

JEL Classification: K22, G23, G28, K2

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Date posted: June 27, 2010 ; Last revised: October 2, 2010

Suggested Citation

Rose, Paul, Regulating Risk by 'Strengthening Corporate Governance' (June 25, 2010). Ohio State Public Law Working Paper No. 130. Available at SSRN: http://ssrn.com/abstract=1630122 or http://dx.doi.org/10.2139/ssrn.1630122

Contact Information

Paul Rose (Contact Author)
Ohio State University - Moritz College of Law ( email )
55 West 12th Avenue
Columbus, OH 43210
United States
Bocconi University - BAFFI Center on International Markets, Money, and Regulation ( email )
Milano, 20136
ESADE University Faculties - ESADEgeo ( email )
Mateo Inurria, 25-27
Madrid, 28036
Tufts University - The Fletcher School of Law and Diplomacy ( email )
Medford, MA 02155
United States
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