Dodd-Frank and Board Governance: New Political-Legal Risks to Monetary Policy and Business Judgments?

Abstract:     
While Dodd-Frank promises to better govern U.S. financial markets, it also creates new political-legal risks. We consider a particular set of risks here, and their implications for legal, financial, and business strategy.

1. By weakening the voice of inflation-averse commercial bankers in nominating Federal Reserve District Bank presidents, Dodd-Frank risks shifting the center-of-gravity in monetary policy meetings toward a more accommodative stance.

2. Through theoretically related channels, the Act’s weakening of “director primacy” in corporate governance may favor shareholders at the expense of other stakeholders, shrinking corporate wealth to benefit one interest over others (rather than reducing agency costs to improve business performance more generally).

In short, increased accountability risks tipping policy toward stakeholders who benefit more from negative-sum redistributions than increased productivity. Appreciating how this common risk can impact seemingly unrelated dimensions of governance should, we think, help professionals in organizational planning, risk management, and proxy advising more consistently succeed in the new institutional setting that Dodd-Frank created, as well as others that will likely evolve from administrative and case law developments.

Number of Pages in PDF File: 20

Keywords: Dodd-Frank, financial regulation, director accountability, Federal Reserve, corporate governance, political-legal risk, non-market strategy

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