Icarus in the Boardroom: The Fundamental Flaws in Corporate America and Where They Came From (Law and Current Events Masters) [Paperback]

David Skeel (Author)

Book Description

Series: Law and Current Events Masters | Publication Date: April 20, 2006

Americans have always loved risktakers. Like the Icarus of ancient Greek lore, however, even the most talented entrepreneurs can overstep their bounds. All too often, the very qualities that make Icaran executives special-- self-confidence, visionary insight, and extreme competitiveness--spur them to take misguided and even illegal chances. The Icaran failure of an ordinary entrepreneur isn't headline news. But put Icarus in the corporate boardroom and, as David Skeel vividly demonstrates, the ripple effects can be profound.

Ever since the first large-scale corporations emerged in the nineteenth century, their ability to tap huge amounts of capital and the sheer number of lives they affect has meant that their executives play for far greater stakes. Excessive and sometimes fraudulent risks, competition, and the increasing size and complexity of organizations: these three factors have been at the heart of every corporate breakdown from 1873, when financial genius Jay Cooke collapsed, to the corporate scandals of the early 21st century. Compounding the scandals is an ongoing cat-and-mouse game between regulators' efforts to police the three factors that lead to Icarus Effect failures and efforts by corporate America to evade this regulation in the name of efficiency and flexibility.

These efforts to side-step oversight can rapidly spiral out of control, setting the stage for the devastating corporate failures that punctuate American business history. But there is also a silver lining to the stunning failures: the outrage they provoke galvanizes public opinion in favor of corporate reform. The most important American business regulation has always been enacted in response to a major breakdown in corporate America.

Today's business environment poses unprecedented perils for the average American as for the first time ever, more than half of Americans now own stock. Identifying the problems of the past, Skeel offers a strikingly new diagnosis of the fundamental flaws in corporate America today, and of what can be done to fix them.

Editorial Reviews

Review

"An excellent historical analysis of four episodes of scandal that have roiled American business. It also provides a superb illustration of the political use to which such events have been put. The thread unifying these episodes is the Icaran executive--the consummate risk-taker and overconfident survivor of successive probationary crucibles, for whom risk-taking tends easily to transform into fraud. According to Skeel's account, the Icaran executive is the personification of the fundamental flaws of corporate America. And it is a convincing story. --Michigan Law Review

"In his important new book, University of Pennsylvania law professor David Skeel shows that huge corporate failures go far back in American history."--The Weekly Standard

"...[an] accessible history of bad behavior in big business and what Americans have tried to do about it."--The Philadelphia Inquirer

"Convincingly highlights deep problems yet to be resolved with the current system of investor protection."--The Washington Post

"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."--The Law and Politics Book Review

"In this important and highly readable book, David Skeel combines historical analysis with straight-out-of-the-headlines events to show that Enron and its ilk are part of an age-old pattern: fly to the heavens, fall to Earth, and start over. Understanding the preconditions for corporate crisis, simply and brilliantly laid out here by Skeel, is the first step toward fixing what's wrong with Corporate America."--Mark D. West, Nippon Life Professor of Law, University of Michigan

"David Skeel has done a masterful job of putting the recent corporate scandals in context. His lively, accessible, and perceptive book brings an understanding of business, law, history, culture, and systems analysis and has important insights for investors, executives, policy-makers, and scholars."--Nell Minow, Editor, The Corporate Library

"David Skeel has found a fresh and incisive perspective on our recent corporate scandals. Historically, American corporate finance and law has been shaped, he argues, by the failures of bold, visionary speculators whose reckless gambles invariably attempted a bridge too far and inflicted great damage on others when they collapsed. In turn, their debacles spurred the reforms of the Progressive Era, the New Deal and now the Sarbanes-Oxley Act. More than a capsule history of financial fraud, his brief study raises disturbing policy questions and suggests provocative answers, because he finds our contemporary system of corporate governance, even after Sarbanes-Oxley, to be more vulnerable to spectacular mega-failures than at any time in the past."--John C. Coffee, Adolf A. Berle Professor of Law, Columbia University

"Icarus in the Boardroom is both an insightful look at the causes and cures of American corporate scandals and a lively collection of stories of American business. Skeel's provocative book puts Enron in perspective and asks all the right questions about regulating the corporation."--Larry E. Ribstein, Richard W. and Marie L. Corman Professor of Law, University of Illinois

About the Author

David Skeel is the S. Samuel Arsht Professor of Corporate Law at the University of Pennsylvania. The author of Debt's Dominion: A History of Bankruptcy Law in America, he is a frequent commentator on corporate legal affairs and his op-eds have appeared in the Financial Times, Los Angeles Times, New York Times, American Lawyer, and Philadelphia Inquirer.

Product Details

• Paperback: 264 pages
• Publisher: Oxford University Press, USA (April 20, 2006)
• Language: English
• ISBN-10: 0195310179
• ISBN-13: 978-0195310177
• Product Dimensions: 7.7 x 5 x 0.7 inches
• Shipping Weight: 11.2 ounces (View shipping rates and policies)
• Average Customer Review: 5.0 out of 5 stars  See all reviews (5 customer reviews)
• Amazon Best Sellers Rank: #1,109,861 in Books (See Top 100 in Books)

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Most Helpful Customer Reviews

10 of 10 people found the following review helpful:

5.0 out of 5 stars Fascinating analysis of the causes behind corporate failures, January 31, 2005

By 

Kendall Whitehouse - See all my reviews
(REAL NAME)   

This review is from: Icarus in the Boardroom: The Fundamental Flaws in Corporate America and Where They Came From (Law and Current Affairs Master) (Hardcover)

University of Pennsylvania law professor David Skeel's "Icarus in the Boardroom: The Fundamental Flaws in Corporate America and Where They Came From" presents an analysis of corporate scandals and catastrophic failures from the rise of the modern corporation through the present day.

Skeel begins by analyzing the underlying causes of what he terms "Icarus Effect" failures, named for the mythological Greek Icarus whose hubris in flying too close to the sun caused his downfall.

In Skeel's analysis, Icarus Effect failures occur as a result of three factors -- corporate executives willing to take excessive or fraudulent risks, the pressures of corporate competition, and the increasing size and complexity of the corporation. While not all corporate failures fit this definition, Skeel finds that the Icarus Effect underlies many of the most catastrophic and damaging failures in American business history.

Skeel's investigation of corporate malfeasance and business failure covers a wide historical scope, from the birth of the corporation during the 17th century voyages of trade through the exploits of recent figures such as Ken Lay, Bernie Ebbers, and Dennis Kozlowski. Along the way, we meet a number colorful historical characters such as Jay Cooke -- the Philadelphia banker whose scheme for selling government debt helped to finance the Civil War and fuel the growth of the U.S. railroads until his increasing risk-taking caused the collapse of this financial empire in 1873 -- and Samuel Insull -- who established a utilities empire with a complex web of corporate ownership until his overextended, debt-laden empire was brought down during the Depression.

The most fascinating aspects of Skeel's historical analysis are the frequent parallels between the catastrophic failures of the past and those in recent headlines. Jay Cooke's dinners with President Grant are reminiscent of the friendly relationship between President Bush and Enron's Ken Lay. And Samuel Insull's elaborate corporate structuring of his utilities holdings in the first decades of the 20th century are eerily echoed in the complex "off balance sheet" holdings of Enron in the final decade of the century.

In the closing sections of "Icarus in the Boardroom," Skeel provides a critique of recent attempts to curb corporate misbehavior such as Sarbannes-Oxley, and finds little that he believes is likely to retard the ongoing cat-and-mouse game between legal curbs on corporate behavior and clever techniques for evading them. In the final chapter, Skeel offers a number of his own recommendations for how America can strengthen oversight of corporate behavior.

"Icarus in the Boardroom" is fascinating for both its historical perspective on corporate malfeasance and its analysis of recent headline events.

4 of 4 people found the following review helpful:

5.0 out of 5 stars Three Growing Risks and How to Address Them, August 21, 2005

By 

James Mcritchie "Publisher" (Elk Grove, CA USA) - See all my reviews
(VINE VOICE)    (REAL NAME)   

This review is from: Icarus in the Boardroom: The Fundamental Flaws in Corporate America and Where They Came From (Law and Current Affairs Master) (Hardcover)

America loves risk-taking CEOs, but when such behavior crosses over to boardrooms it could have massive consequences because of the growing scale of businesses and society's greater dependence on equity markets. Icarus in the Boardroom: The Fundamental Flaws in Corporate America and Where They Came From, by David Skeel draws on Greek mythology to present a candid warning aimed at corporate directors and anyone concerned with our economic future.

Trapped in a labyrinth of his on construction, Dedalus made wings for himself and his son Icarus. He warned Icarus not to fly to close to the sun but Icarus got carried away, failed to heed the warning, and plunged to his death after the sun melted the wax that held his wings together. Similarly, the corporation is a powerful human innovation, but is dangerous if not used properly.

But this book isn't about businesses being "socially responsible," in the normal sense of health, peace, or global warming. Instead, Skeel is concerned with the impact that corporate failures can have on the economy as a whole. From that standpoint, Icarus in the Boardroom offers excellent advice on creating a sustainable business climate, getting to the source of problems instead of the symptoms.

He attributes several recessions and the Great Depressions to an "Icarus Effect," brought on by three factors:

Excessive and sometimes fraudulent risks
Competition (or, rather, tendencies toward monopoly)
Increasing size and complexity

The bulk of the book is devoted to a short history of the corporation followed by an excellent treatment of these three thematic factors and corporate failures though US history. He explains how government has responded to Icarus effects and how corporations have worked to first adapt, then often to circumvent or unravel government's attempt to save us from corporate excesses.

In general, "the lobbying might of corporate managers, and the power of their political contributions, is too great for even relatively minor reform to succeed," he notes. However, the wake of financial scandals provides an opportunity to "change the political calculus." We witnessed such changes after the 1929 crash when reforms like creating the Securities and Exchange Commission stopped short of federalizing corporate law.

More recently we enacted Sarbanes-Oxley to address the scandals of Enron, WorldCom and Tyco. Where did we stop short this time? Skeel advises that we partially addressed fraudulent risk but left the other Icarun factors largely untouched. Among Skeel's many recommendations:

Conflicts of interest. Having auditors selected by a committee made up of "independent" board members does little; they'll still be reluctant to choose an auditor who will rock the boat. Stock exchanges should assign and police auditors.
Securities analysts. "If exchanges were required to assign a securities analyst to every listed company - and pay the analysts from companies' listing fees - investors would know that there was at least one (unbiased) analyst covering every listed company."

SEC's proxy access proposal, which wasn't dead when Skeel wrote the book. Skeel favors it but warns that shareholder activism "often won't curb problematic behavior if the behavior in question is profitable to the corporation." As an example, he cites the fact that Tyco shareholders overwhelmingly rejected a proposal to move its domicile back to the US from Bermuda. Shareholders wanted to keep saving on taxes regardless of the negative impact on the larger society.

Special purpose entities (SPEs). Instead of treating them under "enterprise liability," as advocated by Adolph Berle in the post-New Deal era, Skeel takes a middle approach. Auditors and regulators should "focus on whether the spirit of the SPE status is being violated. SPEs that are not truly separate from the overall company should be denied separate treatment for accounting purposed."

"Ordinary Americans no longer see corporations as 'other,'" because more than half now own stock (directly or indirectly). As defined benefit plans dwindle and 401(k) participation increases, Americans have come to see their own stakes, however small, as tied to those of corporations. Skeel cites an important study by Dallas Federal Reserve Economists John Duca and Jason Saving that found "a direct correlation between stock ownership and the Republican vote in recent Congressional elections. As stock ownership goes up, so does the Republicans' share of the Congressional vote." It's no wonder President Bush keep pushing privatization of Social Security.

"The increasing identification between ordinary Americans and corporate America is perfectly understandable, but beneath it lurks a terrible irony: at the same time as our passion for real reform has declined, the risks have radically increased," writes Skeel. In the past, investing in stocks was an activity largely limited to the rich who could afford to speculate. Now stocks have become the investment of choice for "life" savings and retirement.

With so many of us now dependent on corporate performance, let's hope it doesn't take another Great Depression before American's wake up to the need for reforms of the type outlined by David Skeel.

2 of 2 people found the following review helpful:

5.0 out of 5 stars Minor Masterpiece, April 3, 2005

By 

Reader (Arlington, Virginia) - See all my reviews
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This review is from: Icarus in the Boardroom: The Fundamental Flaws in Corporate America and Where They Came From (Law and Current Affairs Master) (Hardcover)

This book is a minor masterpiece of legal/business history. In slightly more than 200 pages, David Skeel tells the story of CEOs who took huge gambles with corporate assets in order to boost profits and share prices. Although the media and public idolize larger-than-life CEOs, Skeel shows how throwing the dice can often result in ruin for corporations and their employees and shareholders. His book ranges from 19th century railroad bankruptcies to the rise and fall of Enron, tying together economic history, financial theory, business law, and the politics of regulation. It's sophisticated but breezily written. I'd give it six stars if I could.