When 'Good' Corporate Governance Makes 'Bad' (Financial) Firms: The Global Crisis and the Limits of Private Law
In the aftermath of the global financial crisis of 2008–2009, investors, analysts, legislators, and pundits have spotlighted “good” or “improved” corporate governance as a remedy for all that presently ails us. It is one remedy in a long wish list that includes tougher requirements for risk capital, liquidity, and leverage; compensation and bonus reform; reimposition ofthe Glass-Steagall-like separation of bank “utility” and “casino” functions; the downsizing or breakup of institutions deemed “too big to fail;” enhanced consumer protection; securities law liability for secondary violators (like credit rating agencies); direct taxation of proprietary trading; “macroprudential” regulation; and new transparency requirements for derivatives trading and clearance. This time, the proposed objects of corporate governance reform are not Michael Eisner’s personal “magic kingdom” at the Walt Disney Company or Andy Fastow’s self-dealing and ultimately self-deceiving Enron Corporation, but the global financial institutions that saw their balance sheets degraded—and the global credit markets put at risk—by proprietary tradingin so-called “toxic” assets and other high-risk, high-reward, “casino” activities. The renewed focus on good corporate governance pertains not only to the perceived asymmetry between the outlandish compensation dished out at now bankrupt or massively bailed-out firms, but also to the traditional, broader roster of corporate governance mechanisms designed to enhance director-manager accountability to firm “owners”—the shareholders. In this case, however, more effective corporate governance may not be a serious part of the solution; instead, “good” (or effectively functioning) corporate governance may have been one of the major factors that contributed to the global financial meltdown. This insight highlights the existence of unalterable constraints on any corporate governance system, and emphasizes the need for even more robust government regulation of private businesses—especially firms that function at the core of a global capital allocation system.
Howson, Nicholas C. "When 'Good' Corporate Governance Makes 'Bad' (Financial) Firms: The Global Crisis and the Limits of Private Law." Mich. L. Rev. First Impressions 108 (2009): 44-50.