rations have an effective voice in corporate affairs. "In other be a powerful engine for focusing the efforts of individuals to words, state regulation not only protects shareholders, but also maintain the requisite sphere of economic liberty.Those protects investor and entrepreneurial confidence in the fairness whose livelihoods depend on corporate enterprise cannot be and effectiveness of the state corporation law. neutral about political systems. Only democratic capitalist According to the Supreme Courts CTS decision, the country societies permit voluntary formation of private corporations as a whole benefits from state regulation in this area. As Justice and allot them a sphere of economic liberty within which to Powell explained, the markets that facilitate national and inter- function, which gives those who value such enterprises a pow national participation in ownership of corporations are essen- erfulincentive to resist both statism and socialism. As Michael tial for providing capital not only for new enterprises but also for Novak observed in Toward a Theology of the Corporation, private established companies that need to expand theirbusinesses. This property and freedom of contract were"indispensable if pri- beneficial free market system depends at its core upon the fact vate business corporations were to come into existence. "In that corporations generally are organized under, and governed turn, the corporation gives"liberty economic substance over by, the law of the state of theirincorporation. That is so in large and against the state part because ousting the states from their traditional role as the primary regulators of corporate governance would eliminate a CONCLUSION valuable opportunity forexperimentation with alternative solu- What then is to be done? In the first place, Congress should tions to the many difficult regulatory problems that arise in cor- back off. Edmund Burke famously echoed Plato in his assertion porate law. As Justice Brandeis famously pointed out in his dis- that prudence was the chiefvirtue of true statesmen.Prudence senting opinion to New York Ice Co. v Liebman, "It is one of the demands that the law of unintended consequences be given its happy incidents of the federal system that a single courageous due. The prudent legislator is hesitant to promulgate purported state may, fits citizens choose, serve as a laboratory and try novel reforms that may give rise to new and unforeseen abuses worse social and economic experiments without risk to the rest of the than the evil to be cured. Sarbanes-Oxley's many so-called country."So long as state legislation is limited to regulation of reforms likely to do just that. At the very least, prudence firms incorporated within the state, as it generally is, there is no demands that Congress allow Sarbanes-Oxley to shake out and riskofconflictingrules applying to the same corporation. Exper- reveal its flaws before attempting further tinkering imentation thus does not result in confusion, but instead may Second, in implementing Sarbanes-Oxley, the SEC and other lead to more efficient corporate law rules regulators must pay due respect to the principles of federalism In contrast, the uniformity imposed by Sarbanes-Oxley will that have governed corporation law since the New Deal.As a preclude experimentation with differing modes of regulation. general rule of thumb, federal law appropriately is concerned As such, there will be no opportunity for new and better reg- mainly with disclosure obligations, as well as procedural and ulatory ideas to be developed-no"laboratory"of federalism. antifraud rules designed to make disclosure more effective.In Instead, we will be stuck with rules that may well be wrong contrast, regulating the substance of corporate governancestan from the outset and, in any case, may quickly become obsolete. dards is appropriately left to the states.Sarbanes-Oxley disrupted The point is not merely to restate the race to the top argu- that balance. The SEC now should set about restoringit. R ment. Competitive federalism promotes liberty as well as share holder wealth. When firms may freely select among multiple competing regulators, oppressive regulation becomes impac tical. If one regulator overreaches, firms will exit its jurisdiction and move to one that is more laissez-faire. In contrast, when there is but a single regulator, exit is no longer an option and an essential check on excessive regulation is lost In other words, by promoting the economic freedom to pur- sue wealth, competitive federalism does more than just expand the economic pie. A legal system that pursues wealth maxi- mization necessarily must allow individuals freedom to pursue READINGS the accumulation of wealth. Economic liberty, in turn, is a ne a major factor in destroying arbitrary class distinctions, more- ."Does Delaware Law Improve Firm Values?"by Robert over, by enhancing personal and social mobility. At the same Daines Joumal of Financial Economics, Vol. 62(2001) time, the manifest failure of socialist systems to deliver reason-."Federalism and Corporate Law: The Race to Protect able standards ofliving has undermined their viability as an alter- Managers from Takeovers, "by Lucian Ayre Bebchuk and Allen native to democratic capitalist societies in which wealth maxi- mization is a paramount societal goal. Accordingly, it seems fair ."Law as a Product: Some Pieces of the Incorporation Puzzle to argue that the economic liberty to pursue wealth is an effec- by Roberta Romano. Journal of legal Economics and Organization, tive means for achieving a variety of moral end Vol.1(1985) In turn, the modern public corporation has turned out to REGULATION SPRING 2003 31rations have an effective voice in corporate affairs.” In other words, state regulation not only protects shareholders, but also protects investor and entrepreneurial confidence in the fairness and effectiveness of the state corporation law. According tothe Supreme Court’s CTSdecision, the country as a whole benefits from state regulation in this area. As Justice Powell explained, the markets that facilitate national and inter￾national participation in ownership of corporations are essen￾tial for providing capital not only for new enterprises but also for established companies that need to expand their businesses. This beneficial free market system depends at its core upon the fact that corporations generally are organized under, and governed by, the law of the state of their incorporation. That is so in large part because ousting the states from their traditional role as the primary regulators of corporate governance would eliminate a valuable opportunity for experimentation with alternative solu￾tions to the many difficult regulatory problems that arise in cor￾porate law. As Justice Brandeis famously pointed out in his dis￾senting opinion to New York Ice Co. v. Liebman, “It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory and try novel social and economic experiments without risk to the rest of the country.” So long as state legislation is limited to regulation of firms incorporated within the state, as it generally is, there is no risk of conflicting rules applying to the same corporation. Exper￾imentation thus does not result in confusion, but instead may lead to more efficient corporate law rules. In contrast, the uniformity imposed by Sarbanes-Oxley will preclude experimentation with differing modes of regulation. As such, there will be no opportunity for new and better reg￾ulatory ideas to be developed — no “laboratory” of federalism. Instead, we will be stuck with rules that may well be wrong from the outset and, in any case, may quickly become obsolete. The point is not merely to restate the race to the top argu￾ment. Competitive federalism promotes liberty as well as share￾holder wealth. When firms may freely select among multiple competing regulators, oppressive regulation becomes imprac￾tical. If one regulator overreaches, firms will exit its jurisdiction and move to one that is more laissez-faire. In contrast, when there is but a single regulator, exit is no longer an option and an essential check on excessive regulation is lost. In other words, by promoting the economic freedom to pur￾sue wealth, competitive federalism does more than just expand the economic pie. A legal system that pursues wealth maxi￾mization necessarily must allow individuals freedom to pursue the accumulation of wealth. Economic liberty, in turn, is a nec￾essary concomitant of personal liberty — the two have almost always marched hand in hand. The pursuit of wealth has been a major factor in destroying arbitrary class distinctions, more￾over, by enhancing personal and social mobility. At the same time, the manifest failure of socialist systems to deliver reason￾able standards of living has undermined their viability as an alter￾native to democratic capitalist societies in which wealth maxi￾mization is a paramount societal goal. Accordingly, it seems fair to argue that the economic liberty to pursue wealth is an effec￾tive means for achieving a variety of moral ends. In turn, the modern public corporation has turned out to be a powerful engine for focusing the efforts of individuals to maintain the requisite sphere of economic liberty. Those whose livelihoods depend on corporate enterprise cannot be neutral about political systems. Only democratic capitalist societies permit voluntary formation of private corporations and allot them a sphere of economic liberty within which to function, which gives those who value such enterprises a pow￾erful incentive to resist both statism and socialism. As Michael Novak observed in Toward a Theology of the Corporation, private property and freedom of contract were “indispensable if pri￾vate business corporations were to come into existence.” In turn, the corporation gives “liberty economic substance over and against the state.” CONCLUSION What then is to be done? In the first place, Congress should back off. Edmund Burke famously echoed Plato in his assertion that prudence was the chief virtue of true statesmen. Prudence demands that the law of unintended consequences be given its due. The prudent legislator is hesitant to promulgate purported reforms that may give rise to new and unforeseen abuses worse than the evil to be cured. Sarbanes-Oxley’s many so-called reforms likely to do just that. At the very least, prudence demands that Congress allow Sarbanes-Oxley to shake out and reveal its flaws before attempting further tinkering. Second, in implementing Sarbanes-Oxley, the secand other regulators must pay due respect to the principles of federalism that have governed corporation law since the New Deal. As a general rule of thumb, federal law appropriately is concerned mainly with disclosure obligations, as well as procedural and antifraud rules designed to make disclosure more effective. In contrast, regulating the substance of corporate governance stan￾dards is appropriately left to the states. Sarbanes-Oxley disrupted that balance. The sec now should set about restoring it. REGULATION SPRING 2003 31 READINGS •“A Critique of the nyse’s Director Independence Listing Standards,” by Stephen M. Bainbridge. Securities Regulation Law Journal, Vol. 30 (2002). •“Does Delaware Law Improve Firm Values?” by Robert Daines. Journal of Financial Economics, Vol. 62 (2001). •“Federalism and Corporate Law: The Race to Protect Managers from Takeovers,” by Lucian Ayre Bebchuk and Allen Ferrell. Columbia Law Review, Vol. 99 (1999). •“Law as a Product: Some Pieces of the Incorporation Puzzle,” by Roberta Romano. Journal of Legal Economics and Organization, Vol. 1 (1985). R Bainbridge.Final 3/13/03 2:34 PM Page 31