Professor David Skeel's cogent study analyzes three factors that he believes have undermined the effectiveness of U.S. corporate oversight and contributed to the recurrence of major business failures since the mid-nineteenth century. The first of the triumvirate of evils was the inability of corporate governance practices to prevent unscrupulous top managers from pursuing strategies that involved excessive or fraudulent risk taking. Like Icarus of the ancient fable who perished when flying high, imprudent drives for corporate transcendence initiated by overly aggressive executives have also often ended tragically. The author, an eminent legal scholar, looks to history for guidance about the possible direction for contemporary reform initiatives. Beginning with the failure of Jay Cooke & Company and running through the more recent misadventures of Enron and World Com, his sparkling narrative details the institutional factors that have kept the Icaran spirit alive in some corporate boardrooms.

Competition is the second factor that activates the “Icaran Effect.” It provides a powerful rationale for business leaders to undertake risky projects. The decay of once-flourishing markets because of the encroachment of new competitors compels top managements to search for new opportunities for assuring the profitable deployment of enterprise resources. Moreover, the ability of U.S. businesses to stabilize profits through market dominance has not represented a viable strategic option since the late nineteenth century because of the operation of antitrust laws. Although these circumstances benefit society by pressuring corporate leaders to innovate and to increase productivity, they also have a dark side. They can function as strong motivators for the unscrupulous to undertake excessive or fraudulent risk to stabilize firm economics and, thus, preserve their perquisites.

The third driver of Icaran behavior is embedded in the conditions of corporate size and complexity that reduces transparency and weakens the monitoring capabilities of stakeholders and fiduciary agents. Such media as annual reports and financial statements do not completely eliminate the informational asymmetries that place corporate insiders at significant advantage over external stakeholders. The evaluation of business developments through these documents becomes difficult because of the consolidation of a plethora of relatively stale information about corporate performance in diverse markets and international economies. Although the scope of informative disclosure has steadily increased, the interpretation of its significance remains elusive to the many who lack sufficient understanding of accounting standards. Moreover, the effectiveness of key fiduciary agents such as auditors and financial analysts, prior to advent of recent reforms, has been suspect because of conflict of interests that arose when their firms earned large incomes from providing lucrative complementary services such as consulting and underwriting.

Nor is Professor Skeel sanguine about the changes introduced in the Sarbanes-Oxley Act of 2002—reforms that relate primarily to only the first of the three Icaran drivers. For example, mandates that require management to make positive assertions about the adequacy of internal control Skeel worries may devolve into a mere formality with little probative value. Although the act increases the authority and responsibilities of independent board members, corporations still maintain significant influence over the oversight process by selecting auditors and paying for their services. In this latter instance the author argues that the power to appoint auditors and even financial analysts should be transferred to more independent agencies such as the stock exchanges. He also believes that shareholders should exercise greater power in nominating candidates in corporate board elections. Moreover, he favors an accounting rule requiring the expensing of options, a standard since adopted by the Financial Accounting Standards Board (FASB), which among other objectives presumably reduces the incentive for assuming excessive risks as a means for bolstering equity prices. He also worries about the vulnerability of middle-class investors to losses from unbridled corporate risk taking through the stock portfolios of their retirement funds and other savings vehicles.

Professor Skeel enumerates other reforms for curtailing Icaran proclivities that thrive in a corporate environment characterized by extensive competition and unit complexity and size. In his view these circumstances have not received sufficient attention in public policy debates during recent decades because of widespread deregulation and tepid antitrust enforcement. To forewarn investors of the potential economic dislocations (such as those reflected in the recent experience of telecommunications and natural gas) that may result from the freeing up of markets, he believes that companies in deregulating industries should prepare business impact studies that identify likely future risks. To protect retirees he thinks that government should mandate portfolio diversification rules and establish insurance programs against catastrophic investment loss. To curb the opportunities for incurring excessive risk, he favors the imposition of reserve requirements, similar to those imposed in banking, for companies employing strategies that rely heavily on derivatives and other highly leveraged contracts. To reduce complexity he believes that the transparency and governance of derivative market activity should be increased. In a similar vein he calls also for the clearer accounting rules (subsequently addressed in FASB Interpretation 46) and legal restrictions on special purpose entities, which have been used abusively to hide corporate indebtedness.

Not all of the recommendations for reform, however, seem entirely persuasive. The stock market investment insurance proposal, for example, seems inequitable and also raises a question whether it might be counterproductive by actually inducing Icaran behavior. It is not clear why society should be called upon to bear the costs of insuring retirement portfolios that in recent years have increasingly been made up of relatively volatile stock investments when an alternative mode of financing through low-risk, fixed-income instruments has been the norm for centuries. Moreover, investors may reduce at low cost the risks inherent in their portfolios through diversification, hedging strategies, and derivatives. Retirement portfolio insurance may also create a potential moral hazard by encouraging management to engage in more risky business behavior because of the perceived protection it affords investors against catastrophic losses.

The study emphasizes outcomes and reforms but says little about process. What remains opaque is the nature of the interplay between political, economic, professional, and other environmental factors that placed constraints on the evolution of corporate governance institutions. The role of these contextual elements in explaining why effective oversight historically has proved so elusive might have been clarified had the study made use of such well-known analytical constructs as Louis Galambos's “triocracy” or Hugh Heclo's “issue networks.”

Many of the proposed reforms seem to run counter to the risk taking that Schumpeter and others have long argued is the essence of capitalist endeavor. From the Schumpeterian perspective the quest for higher output and greater efficiency responded to a process of “creative destruction.” The redeployment of the resources from failed business to more promising ventures contributed to economic progress and uplift. The danger of regulatory extension involved the adverse effects it might have on efficiency. It could stultify entrepreneurial pursuits by imposing higher transaction costs and slowing market adjustment processes. Whereas the analysis addresses this trade off in a general qualitative way, its usefulness as guide for policy is diminished by not specifying precisely the likely costs and benefits.

What also remains unexplored is the influence of globalization of business and finance on regulation. The analysis is largely U.S. centric. But financial capital and the attendant problems of business oversight remain unconstrained by national boundaries. International financial markets compete aggressively to attract the custom of multinational enterprises by reducing transaction costs and regulatory burdens. Such competition creates opportunities for the Icaran manager to arbitrage between global corporate governance regimes. The effective implementation of the type of reforms that Professor Steed favors would also require a high degree of global regulatory cooperation and convergence.