Kristin N. Johnson

Addressing Gaps in the Dodd-Frank Act: Directors' Risk Management Oversight Obligations

In the years leading to the recent financial crisis, finance theorists introduced innovative methods, including quantitative financial models and derivative instruments, to measure and mitigate risk exposure. During the financial crisis, financial institutions facing insolvency revealed pervasive misunderstandings, misapplications, and mistaken assumptions regarding these complex risk management methods. As losses in financial markets escalated and caused liquidity and solvency crises, commentators sharply criticized directors and executives at large financial institutions for their risk management decisions. By adopting the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress directly and indirectly addresses certain risk management oversight concerns at large, complex financial institutions. To improve risk management oversight at these institutions, Congress imposed several structural reforms altering the composition and obligations of financial institutions’ boards of directors. Unfortunately, even after the adoption of the Dodd-Frank Act reforms, financial institutions remain vulnerable to the same critical errors in enterprise risk management oversight that engendered systemic risk concerns during the recent financial crisis. While the Dodd-Frank Act may enhance a board’s risk management oversight capabilities, significant concerns persist regarding reliance on board committees. Organizational literature suggests that cognitive biases and structural limitations that influence group decision making will continue to plague boards’ efforts to effectively manage risk. This Article argues that better-tailored reforms are necessary to address weaknesses in enterprise risk management regulation and to reduce the threat of systemic risk. “Too many…acted recklessly, taking on too much risk…Like Icarus, they never feared flying ever closer to the sun.” “All the incentives-profits, compensation, glory, even job security-went in the direction of taking more and more risk, even if you half suspected it would end badly.”

Banking on Diversity: Does Gender Diversity Improve Financial Firms' Risk Oversight?

This Article surveys empirical studies examining the narrow question of whether the inclusion of greater numbers of women in senior leadership positions and on boards of directors may reduce excessive risk taking in financial institutions. While there is a significant literature exploring the impact of gender and racial diversity on better corporate governance and improved corporate performance, only a handful of studies have examined the potential influence of senior executive and board gender diversity on risk management in financial services firms. Employing the results from these studies, this Article surveys a growing literature examining the narrow question of whether including greater numbers of women in senior leadership positions and on boards of directors enhances the performance of financial services firms. Only a handful of studies have examined the impact of senior women and female board members on financial services firms. Based on the conclusions presented by the studies, this Article is among the earliest contributions in the literature to examine whether increasing the representation of women in leadership positions in the financial services industry may enhance risk management in financial markets. While research examining the impact of diversity on firms’ financial performance presents varying results, the early evidence on the impact of diversity on risk management oversight for financial institutions offers significant promise. After surveying the empirical literature exploring gender diversity and risk management, this Article explains that there may be other important reasons to encourage board diversity among financial services firms.