Lessons from the Subprime Debacle: Stress Testing CEO Autonomy

Abstract

Corporate governance law in the United States played a central role in the subprime debacle. Specifically, CEOs exercised sufficient autonomy to garner huge compensation payments based upon illusory income. Instead of profits, firms absorbed huge risks. The economic losses arising from this misconduct total trillions of dollars. This article seeks to reconfigure CEO autonomy in the public firm based upon the best extant empirical evidence regarding the optimal contours of CEO autonomy. This vision of optimal autonomy is then viewed through the lens of the subprime catastrophe. The article articulates the political dynamics that have led to suboptimal contours for CEO autonomy. In light of this evidence, the article proposes three specific mechanisms for curtailing autonomy pursuant to federal law: a mandatory and independent risk management committee; a mandatory and independent Qualified Legal Compliance Committee, with enhanced attributes; and, a new mechanism for contested corporate board elections. These mechanisms seek to vindicate CEO autonomy over the public firm's operations while expanding the monitoring functions of the board.

Keywords: Corporate Governance, Financial Regulation

JEL Classification: B22, K22, L22