The rash of spectacular corporate scandals has already yielded a big shelf of books, many of them focused on the story of a single corporation run amok. David Skeel's Icarus in the Boardroom differs from most of the products of this genre. First, it is a very interesting and well-told history of corporate failures in the United States, and the role of those failures in evolving the legislative and regulatory environment for business in the U.S. today. In this respect, the book could not be more timely—but not because this is the white-hot issue it was at the time of the downfall of Enron and WorldCom and the passage of Sarbanes-Oxley. Rather, Skeel speaks to us at a time when business regulation is still a compelling issue—as the Enron trial makes clear—but the noise level has decreased enough for us to be more reflective in our thinking. Icarus in the Boardroom provides an excellent and easily accessible education for the reader who has not previously delved deeply into the topic.

Skeel's ambitions extend beyond the strictly historical. The second major facet of the book develops a theory explaining why large-scale business failures occur: what Skeel calls "The Icarus Effect." The Icarus Effect comes into play when a rare individual, a leader who has exceptional business skills but also is marred by a significant character flaw, flourishes unchecked in a permissive business environment, with disastrous results. Finally, Skeel outlines his ideas for further strengthening the regulation of corporations and for better securing the nest eggs of individual investors.

The historical account of corporate America is by far the greatest strength of the book. It is literate and has a strong narrative drive. It is also very instructive. Skeel weaves social, legal, and regulatory perspectives together in a very effective way, telling the stories of some remarkable people who shaped our economy and society, for better or worse, all the while imparting a deeper understanding of the ways in which our economy and our legal system evolved in response to the failed flights of these Icaruses.

The stories of Samuel Insull and Michael Milken are particularly well told. Milken is familiar to many as the "junk bond king" who took Drexel Burnham on a high flight only to have it melt down. Insull's name survives among cognoscenti of Chicago history, who refer to the chair-shaped Civic Opera House he built in the Windy City as "Insull's Throne."

Milken commanded a network of wealthy investors and corporations eager to place billions of dollars at his disposal, in order to share in the extraordinary profits generated in the "junk bond" market he perfected. One of Milken's innovations was the "highly confident letter," an instrument that allowed a corporate raider—with virtually no real financing—to threaten a takeover of a major institution. This was a mechanism that Carl Icahn, a member of Milken's network, used to successfully threaten Phillips Petroleum into a buyout of Icahn's interest. Icahn subsequently used those funds for a takeover of TWA. As it happened, Milken kept his network together in part through violating securities disclosure rules for the benefit of his insiders. When stock trader Ivan Boesky pled guilty to insider training, he "sang" to federal investigators about Milken's disclosure violations. Milken ended up in jail and Drexel in bankruptcy.

For his part, Insull applied the principles of mass production to the business of the generation of electricity long before Henry Ford discovered them in the context of discrete manufacturing. In the financial arena, Insull pioneered the use of debt-leveraged minority interests in corporations, pyramided in a way that allowed him to control a vast network of utilities representing a significant portion of the overall industry in the United States at the time—a network that ultimately fell under the weight of its debt with catastrophic consequences.

It is fascinating to consider the stories of Insull and Milken alongside those of contemporary Icaruses such as Ken Lay and Bernie Ebbers, who are also covered in the book. Bernie and Ken seem like pikers beside Michael and Samuel in terms of the power they wielded. Part of the fun of the book lies in being able to draw comparisons and make your own judgments about how these important characters have impacted our history.

When Skeel shifts from his historical narrative to his explanatory theory of corporate failure, he is less sure-footed. The Icarus Effect as laid out by Skeel has three components: 1) Excessive and sometimes fraudulent risks; 2) Competition; 3) The increasing size and complexity of the corporation. Alluding to the mythological character who attempted to fly to the sun with wax wings, Skeel views his protagonists as tragic figures, people of high potential undone by their own ambitions. From this perspective, what might be seen as outright theft instead becomes "taking excessive and fraudulent risks." Skeel observes, correctly in this author's opinion, that some of this risk-taking is driven by conditions that force companies to mimic each others' business practices in order to remain competitive. Skeel also asserts that the increasing size of organizations and the ever-growing complexity of the business environment, combined with regulatory and oversight gaps, provides his Icaruses with the rope required to hang themselves.

At the risk of mixing mythological traditions, one is tempted to interpret Skeel's theory as some type of modern-day "Ring Curse" out of a Wagnerian opera. Skeel seems to imply that his Icaruses were drawn to their downfall by forces larger than themselves. It would be romantic, in a way, if the theory were valid. Alas, the people that Skeel describes were crooks, plain and simple. There was nothing particularly elegant about their fall from grace, even if there was often elegance in their business schemes. When you read this book—and you should, if you find the topic even remotely interesting—just write the word "crook" in the margin every time a crime is described. You will no doubt write the word "crook" well over a hundred times if you have the stamina.

While Skeel's explanatory theory is flawed, the real Achilles' heel of Icarus in the Boardroom is to be found elsewhere, in the concluding recommendations for reforming financial regulation. Skeel's ideas fall into three broad categories: 1) Strengthening the role of the private sector (auditors, investment analysts, etc.) in monitoring corporate misbehavior; 2) Re-regulating industries that Skeel believes have high potential for abuse by executives (e.g., telecommunications); 3) Implementing insurance programs for retirement savings placed in equities.

The suggestions are radical in many respects. They are without question well-intentioned, but a number of the basic premises are quite questionable. In particular, because Skeel doesn't distinguish between reasonably controllable executive misbehavior and out-and-out criminal activities, he tries to allocate responsibility for controlling his Icaruses' actions to the private sector rather than to the public sector, where control of this type of criminal behavior would traditionally reside.

In addition, surprisingly, Skeel appears to reject the concept of "enlightened self-interest" on the part of investors. Instead, he regards investors as innocent lambs being led to the slaughter, with no particular responsibility for protecting their own interests. This turns the tradition of personal responsibility on the part of investors on its head. Given that investors are not held accountable for their decisions, Skeel then turns back to government as a necessary "big brother" to regulate industries and protect investors. His vision for aggressive industry regulation would take the government's role back decades.

Skeel seems not to understand the dynamics between the risk characteristics of investment instruments and the nature of investor behavior. He advocates for investor "insurance" without considering what the impact of such insurance would be on investment returns and on investor behavior. Ultimately, Skeel would like risk-based returns available to investors without the risk! Nor does he consider how the impact of reducing risk in one investment segment might lead to assumption of greater risk elsewhere in investors' portfolios. In addition, Skeel doesn't consider existing, private-sector alternatives for achieving the "insured" status he is seeking for retirement investments. Finally, he doesn't address to any degree the role of investor education in managing investment risk.

None of these flaws, however, negate the value of Skeel's historical narrative, which provides much-needed context for current corporate scandals in a delightfully readable form.

Kenneth Porrello is a senior management consultant based in Chicago.

Copyright © 2006 by the author or Christianity Today/Books & Culture magazine.
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