Talk co-sponsored by the Department of Sociology and COR
Be Careful What You Regulate: Sarbanes-Oxley and Banks’ Growing Appetite for Risky Derivatives
Professor of Sociology
Friday, January 23, 2015
In the wake of the Enron, Worldcom, and Tyco scandals in the early years of the new millennium, Washington passed the Sarbanes-Oxley Act to restrain corporate malfeasance and excessive risk-taking. Many commercial banks responded by appointing Chief Risk Officers to monitor risk exposure. Institutionalists have found that professionals tasked with regulatory compliance over-comply, expanding their own corporate role by exaggerating likelihood of government sanction. We argue that Chief Risk Officers, trained to maximize risk-adjusted returns, took a different tack, touting their capacity to comply with the law, but meanwhile bringing their firms to the edge of the risk cliff so as to maximize shareholder value. They thus transformed themselves from compliance officers to central actors in the shareholder value revolution. Two groups proved capable of preventing CROs from over-investing in risky derivatives: CEOs who held substantial equity in the firm, and institutional investors who held large positions in the firm. We contribute to institutional theory by showing another path by which professions can use regulatory compliance to gain a foothold in the firm, and highlighting the importance of internal power relations in determining corporate strategy.