From 'Federalization' to 'Mixed Governance' in Corporate Law: A Defense of Sarbanes-Oxley

Abstract:     
Among a litany of criticisms of the Sarbanes-Oxley Act, its asserted federalization of corporate law is perhaps the most consistent object of criticism. This is also among the most damning objections to the Act - given its seeming insusceptibility to cure. Here, I attempt to deconstruct the broad rhetoric of this critique. Absent the identification of a consistent line between the realms of corporate law and securities regulation, or some aspiration to diversity in the rules of corporate governance, attacks on Sarbanes-Oxley's federalization of corporate law are not about federal versus state authority, at least in any inherent sense. Nor are they, at heart, about the regulatory benefits of competition. Instead, they reduce to general critiques of the imposition of regulation, where private incentives and the market have previously held sway.

Once we appreciate as much, we can begin by replacing the misleading rhetoric of federalization. More importantly, we might start to conceptualize a theory of corporate law that is both more effective in advancing our desired ends and perhaps closer to market realities than the competing paradigms presently in ascendance. In that spirit, I offer a model of jurisdictional redundancy - in which public and private dynamics intertwine, and federal mandatory rules overlap with state enabling rules, to create a more indeterminate regulatory regime than we might otherwise pursue. Such a scheme of mixed governance may deprive legal scholars of the opportunity to draw clean distinctions, but may allow the regulation of corporate governance to operate more effectively, and to evolve efficiently over time.

Keywords: Sarbanes-Oxley, federalization, federalism, nationalization, corporate law, regulatory competition, charter competition, public/private, process/substance

JEL Classifications: E44, G14, G18, G34, K12, K22

Working Paper Series