Vol. 15 No.5 (May 2005), pp.415-419

ICARUS IN THE BOARDROOM: THE FUNDAMENTAL FLAWS IN CORPORATE AMERICA AND WHERE THEY CAME FROM, by David Skeel. Oxford University Press, 2005. 272pp. Hardback.  $25.00 / £15.50. ISBN 0-19-517471-2.

Reviewed by David T. Johnson, Department of Sociology, University of Hawaii. Email: davidjoh@hawaii.edu .

In the year 2000, Fortune magazine chose Enron as America’s best-managed and most innovative corporation. In March 2001, Enron announced that its 2000 revenues had doubled, to $100 billion. In October of that year, Enron paid its normal quarterly dividend and said earnings were up 26 percent and the company was “on track” to meet its year-end target. Six weeks later Enron filed for bankruptcy. Soon it was revealed that almost all of the $100 billion in “revenue” had been the result of fraud and deception. When Enron collapsed, tens of thousands of employees lost their jobs. Many were so invested in company stock that their retirement savings also evaporated (Eichenwald 2005).

David Skeel’s lucidly written book aims to explain why corporations crash and what can be done to prevent them from failing. His core causal claim is that three factors – excessive risk-taking, competition, and the increasing size and complexity of corporations – interact to produce the “devastating crises that have punctuated American corporate and financial life for the past hundred and fifty years” (p.6). Corporate breakdowns that fit this pattern are called “Icarus Effect failures” (p.7).

The first cause – excessive risk-taking – also appears in the book’s title. As Skeel summarizes, in ancient Greek mythology, Icarus was given wings in order to escape a labyrinth that housed a ferocious monster. The feathers of the wings were attached to its frame by wax. Ignoring warnings to be careful, Icarus “thought less and less about risk, and more and more about the majesty of his powers” (p.4). When he flew too close to the sun, the wax melted, the feathers gave way, and he crashed into the ocean. The lesson? Corporate executives who take intemperate risks jeopardize themselves and the financial well-being of employees, investors, and suppliers.

According to Skeel, the second causal factor, competition, increases the odds of major corporate failure because in a competitive marketplace, success attracts competitors, who eventually cut into profits. Some innovators respond by taking inappropriately large risks in an effort to replicate their early successes.

The final factor – the growing size and complexity of the corporation – not only increases the risk-taking stakes, it multiplies opportunities for mischief. Complicated corporate structures can be used (as they were at Enron) to obscure financial problems. When investors learn of the “false doors and hidden rooms” that have obscured the corporation’s true condition, the results can be catastrophic. [*416]

Skeel illustrates this model with several case studies: the nineteenth century collapse of Jay Cooke’s Northern Pacific Railroad (Chapter 1); the crisis of competition that occurred in the Gilded Age when business titans such as John D. Rockefeller tried to “rationalize” American business by taming competition among small and medium-sized corporations (Chapter 2); the 1932 crash of Samuel Insull’s Chicago-based utilities empire (Chapter 3); the takeover boom and bust pioneered by Michael Milken’s junk-bond operation in the 1980s (Chapter 4); and the Enron and WorldCom collapses in 2001-02 (Chapter 5). Although these cases do suggest that the Icaran factors are important, it is impossible to assess the theory’s general validity because of the seemingly ad hoc way in which the cases were selected.

Still, Skeel is a fine storyteller, and his historical analysis reveals that recent corporate scandals share at least two things in common with their predecessors from previous decades. First, failing to control the Icaran factors raises the risk of corporate collapse. Second, by galvanizing public opinion in favor of reform, Icarus Effect failures frequently generate regulation aimed at controlling corporate misconduct.

Reform and regulation are the subjects of Skeel’s final two chapters. Chapter 6 examines the Sarbanes-Oxley Act that was passed after Enron fell to earth. Though some analysts have called the Act “the most sweeping changes to the securities law in a generation” (p.177), Skeel is less sanguine. While acknowledging the new law’s benefits, especially the “cognitive disruption” it caused among corporate executives who were forced to rethink their standard operating procedures (p.182), Skeel stresses its defects. Stock options still are not treated as an expense in financial statements. Corporations do not need to rotate their auditors on a regular basis, and the company itself gets to decide who the watcher will be. As Skeel observes, when auditors consider a company their client, they are significantly more likely to find that it has complied with the law – even when it has not (p.188).

Because the Sarbanes-Oxley Act leaves the Icaran tendencies largely untouched, “nearly all of the conditions” that produced the recent scandals remain in place today (p.202). What is more, for the first time in history, more than half of all Americans now own stock, much of which represent retirement and other savings, not money intentionally put at risk (p.209). The next corporate crashes may therefore be devastating for ordinary Americans. Though the risk to investors has increased, their passion for reform has waned (Glater 2005).

In the concluding chapter, Skeel asks what else can be done to control Icaran excesses. He argues that the “shareholder democracy” movement has limited potential to rein in risk-taking because “most shareholders are concerned solely about the corporation’s bottom line” (p.203). Thus, instead of stressing more shareholder activism, as many reformers have done, Skeel insists that each of the Icaran problems be addressed directly.

The first task, cooling off risk-taking in the executive suite, is “most difficult” because taking risks is not only imperative in a system of capitalist [*417] competition, it is “central to the American imagination” (p.205). However, Skeel believes that risk-taking might be tamed by curbing executive compensation and by rethinking the function of new financial instruments such as derivatives. Second, the problems of competition may be mitigated by more consistent antitrust enforcement and by using “funding mandates” to assess the effects of deregulation and, where appropriate, to finance new regulatory efforts. These reforms are “obvious but devilishly difficult to implement” (p.207). Third, the misuse of corporate size and complexity through the multiplication of special purpose entities (SPEs) can be discouraged if “SPEs that are not truly separate from the overall company are denied separate treatment for accounting purposes” (p.208). Finally, Skeel believes that “the extraordinary risk of the new Icaran tendencies for ordinary [stockholding] Americans” can be countered in two additional ways: by ensuring that Americans’ pension investments are properly diversified, and by instituting a system of investor insurance analogous to the federal deposit insurance that New Deal reformers enacted 70 years ago (p.212).

On the penultimate page, Skeel asks if there is “any hope for genuine reform” of the nation’s corporate and financial landscape. Although he acknowledges that “it is hard to be optimistic,” he does see “a hint of hope for change” in the possibility that “Americans will seriously rethink the way that corporations are now regulated and demand a more complete response to the developments that have transformed the Icaran tendencies in American corporate and financial life” (p.215). A hint of hope it is. Considering Skeel’s concerns about the feasibility of his own proposals, one gets the impression that more Icarus Effect failures are all but inevitable. In this respect, Skeel joins a growing army of analysts who emphasize how hard it is to make corporations and their agents act responsibly (Bearle and Means 1932; Clinard and Yeager 1980; Mokhiber 1988; Yeager 1991; Beatty 2001; Korten 2001; Mitchell 2001; Beatty 2001; Braithwaite 2002; Bakan 2004). Thirty years ago Christopher Stone (1975: xiii) observed that corporations are “society’s most troublesome participant.” Three decades of corporate growth and legal lethargy have not made the job of controlling the world’s dominant institution any easier.

This fine book has at least four faults. First, it promises to expose “the fundamental flaws in corporate America and where they came from,” but in both of these regards – description and explanation – Skeel’s analysis is less “fundamental” than other works that have taken on similar tasks. For example, Joel Bakan (2004) and Lawrence Mitchell (2001) both root the problem of corporate irresponsibility in a legal structure that compels executives to maximize stockholder profit. They argue that the legal mandate of the American corporation is to pursue relentlessly its own short-term economic interest. By compelling executives to prioritize the short-term interests of their companies and shareholders, the law “forbids them from being socially responsible – at least genuinely so” (Bakan 2004: 35). Skeel elides the importance of the corporation’s legal mandate and its cultural underpinnings. As a result, his claims about the causes [*418] and prevention of corporate malfunction are less fundamental than it first appears.

The second problem is that in explaining why corporate scandals occur, this book fails to recognize that behavior is not scandalous until it is labeled as such. “Deviance” is not a quality of the acts a company commits; it is a consequence of the application by others of rules and sanctions to the corporate “offender” (Becker 1963). By neglecting the legal, media, and public responses to corporate action, Skeel obscures the fact that corporate scandals are constructed and mediated through the reactions of other actors (Thompson 2000). Those reactions – and the “labelers” who have power to define acts and actors as “deviant” – are too often marginalized in this account (Ermann and Lundman 2002).

Third, the Icaran theory of corporate breakdown has comparative implications that do not seem to be realized in the real world. Skeel recognizes that “corporate scandals are not unique to America” (p.9). He believes, however, that “the scandals in other countries have tended to take different forms”(p.9). According to Skeel, scandals in Japan typically involve misconduct by mid-level insiders, while in America “spectacular failures usually start at the top” (p.9). The contrast is dubious. More fundamentally, the Icaran factors may not explain corporate breakdowns in other societies. As mentioned above, excessive risk-taking in America is rooted in the short-termism of corporate law and culture (Mitchell 2001). In Japan and Korea, by contrast, corporations tend to take a longer view, yet scandals and breakdowns have been plentiful.

Finally, this book ignores studies that suggest corporate misconduct can be tamed through control efforts that combine the principles of restorative justice with the strategies of responsive regulation (Braithwaite 2002). It is an important omission.

The “fundamental flaws in corporate America” will be fixed if, and only if, there is concerted social action to challenge the corporations that now govern our lives – an imperative Skeel acknowledges obliquely in the book’s final pages (Tsuk 2005; Yeager 2004; Perkins 2004; Braithwaite 2002; Coleman 2002; Korten 2001). In the bulk of the text, however, the author’s preference for incremental reform limits the power of his proposals to change the things that matter most (Bakan 2004). My own hunch is that even if all of Skeel’s recommendations were enacted, controlling the corporation would remain our most formidable challenge.

Notwithstanding these problems, this good book does much to illuminate the causes of corporate collapse and the challenge of controlling corporations’ behavior in a world where they influence every aspect of our lives. It deserves a wide readership – and it is an excellent read.

REFERENCES:

Bakan, Joel. 2004. THE CORPORATION: THE PATHOLOGICAL PURSUIT OF PROFIT AND POWER. New York: Free Press.

Bearle, Adolf A., Jr., and Gardiner C. Means. 1932. THE MODERN CORPORATION AND PRIVATE PROPERTY. New York: Macmillan. [*419]

Beatty, Jack (ed). 2001. COLOSSUS: HOW THE CORPORATION CHANGED AMERICA. New York: Broadway Books.

Becker, Howard. 1963. OUTSIDERS: STUDIES IN THE SOCIOLOGY OF DEVIANCE. New York: Free Press.

Braithwaite, John. 2002. RESTORATIVE JUSTICE AND RESPONSIVE REGULATION. New York: Oxford University Press.

Clinard, Marshall B., and Peter C. Yeager. 1980. CORPORATE CRIME. New York: Free Press.

Coleman, James William. 2002. THE CRIMINAL ELITE: UNDERSTANDING WHITE-COLLAR CRIME. New York: Worth Publishers.

Eichenwald, Kurt. 2005. CONSPIRACY OF FOOLS: A TRUE STORY. New York: Broadway Books.

Ermann, M. David, and Richard J. Lundman (eds). 2002. CORPORATE AND GOVERNMENTAL DEVIANCE: PROBLEMS OF ORGANIZATIONAL BEHAVIOR IN CONTEMPORARY SOCIETY (6th ed). New York: Oxford University Press.

Glater, Jonathan D. 2005. “Here It Comes: The Sarbanes-Oxley Backlash.” THE NEW YORK TIMES. April 17.

Korten, David C.  2001. WHEN CORPORATIONS RULE THE WORLD. San Francisco: Berrett-Koehler Publishers, Inc.

Mitchell, Lawrence E. 2001. CORPORATE IRRESPONSIBILITY: AMERICA’S NEWEST EXPORT. New Haven: Yale University Press.

Mokhiber, Russell. 1988. CORPORATE CRIME AND VIOLENCE: BIG BUSINESS POWER AND THE ABUSE OF THE PUBLIC TRUST. San Francisco: Sierra Club Books.

Perkins, John. 2004. CONFESSIONS OF AN ECONOMIC HITMAN. San Francisco: Berrett-Koehler Publishers, Inc.

Stone, Christopher D. 1975. WHERE THE LAW ENDS: THE SOCIAL CONTROL OF CORPORATE BEHAVIOR. Prospect Heights, IL: Waveland Press.

Thompson, John B. 2000. POLITICAL SCANDAL: POWER AND VISIBILITY IN THE MEDIA AGE. Cambridge: Polity Press.

Tsuk, Dalia. 2005. “From Pluralism to Individualism: Berle and Means and 20th-Century American Legal Thought.” 30 LAW & SOCIAL INQUIRY 179-225.

Yeager, Peter Cleary. 2004. “Law versus Justice: From Adversarialism to Communitarianism.” 29 LAW & SOCIAL INQUIRY 891-915.

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© Copyright 2005 by the author, David T. Johnson.