Abstract

When financial institutions take excessive risks, their losses can harm the public. After the object lesson of the Global Financial Crisis, Congress turned to corporate governance as an instrument of financial regulation. Through the Dodd–Frank Act, Congress granted the Federal Reserve (“Fed”) authority to reform board risk committees at the largest Fed-regulated financial institutions. These Dodd–Frank risk committees are now the products of federal corporate governance regulation. But to what end? Has the Fed taken the opportunity provided by Congress to reorient risk committees toward prudential control of financial risk?

This Article answers that question through a critical evaluation of the Fed’s risk committee regulation and oversight. Drawing on rulemakings, guidance documents, supervisory materials, and corporate disclosures, the Article develops a detailed picture of the Fed’s implementation of the Dodd–Frank mandate across four aspects of risk committee design: functions, composition, member compensation, and exposure to liability. The analysis shows that despite being a prudential regulator, the Fed has not materially promoted a prudential orientation for regulated risk committees. Rather, the Fed has been reticent, forgoing many opportunities to orient Dodd–Frank risk committees away from shareholder value maximization and toward the public interest in financial risk control.

Despite the Fed’s missed opportunities, the Article contends that the Dodd–Frank risk committee mandate could be revived. To that end, the Article sketches reform options available to the Fed and the tradeoffs they may entail. These options include explicit mandates to alter committee charters and member compensation, along with internal standards favoring enforcement actions against individual board members when risk committees fail at their fundamental task. Taken together, these possibilities demonstrate the value of revisiting the corporate governance responsibilities allocated to the Fed by the Dodd–Frank Act. 

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