The New Federalism of the American Corporate Governance System: Preliminary Reflections of Two Residents of One Small State

Abstract

The year 2002 was a tumultuous one for the American system of corporate governance. High-profile scandals at large firms propelled reform initiatives from both Congress (in the form of the Sarbanes-Oxley Act) and the major stock exchanges (in the form of new listing standards and rules). These reforms - what we call the 2002 Reforms - include provisions that regulate the internal affairs of public corporations. As a result, the Reforms represent a challenge to the existing division of responsibilities among the federal government, the stock exchanges, and the states, in which the states have been given the primary role in articulating and enforcing substantive principles of corporation law governing the internal affairs of corporations and the responsibility of directors to stockholders. In fact, the 2002 Reforms can be viewed as creating a shadow corporation law that has a prescriptive quality at odds with the corporate law system in place in states like Delaware.In this essay, we examine some of the more interesting ways in which the 2002 Reforms will affect state corporation law and the traditional policy domain of states. Although many aspects of the Reforms hold promise as guarantors of greater corporate integrity, other elements are less obviously useful. We discuss some of our initial impressions of the Reforms, both pro and con, and highlight some of the more interesting policy implications of the Reforms for state corporate law.We conclude by counseling state policymakers to be active participants in the process of breathing life into the Reforms and in addressing the crisis in corporate confidence that arose in 2002. If states assume these responsibilities with vigor, we have confidence that the existing division of responsibilities among the federal government, the stock exchanges, and the states will persist. Because that division has, on balance, served investors and the public well, it should not be lightly abandoned.