ProfessorBainbridge.com

Venison Medallions in Port Sauce

Sometimes you pick the wine to go with the food you've chosen, but sometimes you pick a meal to go with a specific wine. Tonight's menu planning fell into the latter category. I had a well-aged Ridge zinfandel I was dying to try, so I went looking for a rich and silky meal that would match up with what I expected would be a well-rounded and soft wine. I settled on Venison Medallions in Port/Porcini sauce.

4 venison medallions (each about 3 ounces and 1/2-inch thick)
2 tablespoons butter
2 tablespoons olive oil
1.5 ounces dried porcini mushrooms (reconstituted in hot water for at least 30 minutes then chopped roughly)
2 garlic cloves, minced
3 green onions diced (separate the green and white parts)
1 cup chicken demi-glace
1/2 cup Tawny Port
3 teaspoons Worcestershire sauce
Italian herbs (dried) to taste
Salt and pepper, to taste

Season the venison with salt and pepper. Melt 1 tablespoon of the butter in a large saute pan over medium high heat. Add 1 tablespoon of olive oil. Don't let the butter brown! As soon as the butter foams, saute the venison medallions for about 3 minutes a side, which should be medium-rare. You don't want the venison done past medium. Remove the venison to a warm plate and tent loosely with foil. Sop up the remaining fat with a paper towel, but don't wipe up the sticky brown bits. Add the remaining butter and oil to the pan over medium heat. Again, as soon as the buitter foams, add the mushrooms, the garlic, and the white parts of the green onion. Season with salt, pepper, and herbs. After 5 minutes, deglaze with the port. Add the demi-glace and Worcestershire. Bring to the boil then reduce to a slow simmer. Reduce for about 15 minutes. (You want to end up with about 2/3 cup liquid.) With about 3 minutes to go, add the venison to warm through. A pat of butter at the very end to enrich the sauce wouldn't be remiss. Garnish with the green part of the onions.

I served it with wild mushroom risotto and puree of winter squash. Fabulous and a great match for the Geyserville.

Ovitz and Eisner

The burgeoning campaign by Disney shareholders to withhold votes from Michael Eisner in the upcoming board election will get a boost from the news reported today by the LA Times (R), which puts Eisner in a very bad light. As the story goes, Ovitz blew through over $6 million in dubious expenses reimbursed by Disney. (As I noted the other day, expense reimbursement is the new hot button executive compensation issue.) Worse yet, Eisner concluded 5 weeks after Ovitz was hired as Disney's President that Ovitz had to go, but let him hang around for months for fear Ovitz would commit suicide. Of course, Eisner then cut a deal that let Ovitz walk away with $140 million of Disney money!

The documents, filed in connection with a Delaware shareholder suit against Disney's board of directors, provide a particularly unflattering view of Ovitz, whose stratospheric spending was extravagant even by Hollywood standards. During the 15 months he worked at Disney, Ovitz burned through $6 million on personal expenses, according to the records.

But it's Eisner who stands to lose the most from the release of the documents.

Their emergence comes at a particularly inopportune time for the Disney chairman, who next week faces a challenge by some shareholders to force him from the board. In recent days, a number of state employee pension funds and two influential shareholder advisory firms have recommended against voting for Eisner's reelection as a director. On Friday, pension funds from Ohio and North Carolina joined the list.

Although Eisner's election is assured because he is running unopposed, a significant protest vote at the company's annual meeting on Wednesday could weaken him to the point where the board would feel compelled to push him aside. Company officials are privately predicting that Eisner may fail to win as much as 30% of the vote....

Ovitz, according to the study by an independent accountant, spent more than $2 million to remodel his office. At one point, he and his decorator proposed changes to the woodwork. The tab: $150,000.

It wasn't his only capital improvement. Disney also spent $48,305 on Ovitz's home screening room and $14,055 on his home office. To ensure that Ovitz motored in style, the company plunked down $99,135 to buy his BMW from his former employer.

Disney also spent nearly $80,000 on hundreds of gifts given by Ovitz to Hollywood players and others. Among the goodies: a $946 "firearm" for director Robert Zemeckis and a $200 cigar cutter for producer Al Ruddy.

The multimillionaire sought reimbursement for even small gifts: $53 in Disney baby apparel for actor Tom Cruise; $65 for Disney clothing and a pen for Oprah Winfrey; $85 in Disney items for Madonna; and $68 in videos for David Letterman's birthday.

A good many of Ovitz's expenses were compiled while he entertained at his home, according to the accountant's report. The bill was $348,445, with most of the charges exceeding company guidelines. Those charges included $179 for flowers for a breakfast with Variety Editor Peter Bart.

But Ovitz seemed to live large outside too. He billed Disney $97,868 for Los Angeles Laker basketball tickets and $33,172 at restaurants such as Matsuhisa and Chez Panisse with the likes of Cruise, Steven Spielberg and DreamWorks co-founder Jeffrey Katzenberg. At the time, Katzenberg was engaged in a legal fight with Disney over money he said he was owed.

Questions about Ovitz's emotional stability are a central point .... Eisner considered firing Ovitz after five weeks. But he didn't "because he believed being fired would be devastating emotionally to Mr. Ovitz. Instead, he decided he should wait twelve months before bringing Mr. Ovitz's employment to an end." ... "More specifically, Mr. Eisner believed that, if fired, Mr. Ovitz would commit suicide."

If I were a Disney shareholder, I'd be withholding my vote too.

Michael Oren, Six Days of War

As an Army brat who spent much of his formative years in the South, I have a natural interest in military history. In our post-9/11 world, moreover, understanding what's going on in the Middle East has become essential. The thesis of Michael Oren's Six Days of War is that the 1967 war shaped - and continues to shape - the central problem of our age. Unlike much military history, Oren's account focuses to a considerable extent on the diplomatic context. Events at the UN, in Washington and Moscow, as well as Tel Aviv and key Arab capitals, play a significant role. Indeed, the chapters and sections focusing on diplomacy are far easier to grasp than the battle sequences, which assume a knowledge of Middle East geography that many general readers will lack. (I found myself referring to the few maps constantly, but with frustration because many locations mentioned in the text appear on none of the maps.) Oren's ready acceptance of the Israeli version of the USS Liberty incident will also raise some hackles with many US readers. Having said that, however, I strongly recommend this important analysis of a key turning point in recent history.

Churchill must be spinning in his grave

As part of its official annual cigar festival, Cuba is sponsoring a dinner in honor of Winston Churchill:

The celebration of Winston Churchill's 130th birthday with the Floridita Churchill dinner is one of the most special moments in the capital’s annual cigars festival.

A Churchill descendant will honor the dinner with her presence, but Churchill himself must be spinning in his grave. Churchill despised dictatorships and socialism.

Martha: Paying for the Brand

Executive compensation long has been a target of shareholder activists. Recently, those activists have begun singling out for special attention the countless perks executives get - apartments, limos, drivers, private planes, etc.... I'm no fan of artificial limits on executive compensation, but I think the activists have a very solid point on the perk issue. As we've seen in Tyco and other recent scandals, these perks can be a very significant percentage of an executive's compensation. Yet, because they typically are treated as expense reimbursement, there is no disclosure of the perks. Indeed, precisely because they are viewed as a business expense to be reimbursed, even the board of directors often is unaware of the magnitude of the perks. All of which leads to a very interesting story in today's WSJ ($):

In late December 2001, the domestic entrepreneur and a friend checked into a $1,500-a-night suite at the Las Ventanas al Paraiso resort in Mexico. Included in the $17,000 bill was a $300 private kayak tour, a $300 hiking tour for three and seven charges at the Sea Grill. Ms. Stewart's business manager submitted the trip, which included a stop in Panama, to Martha Stewart Living Omnimedia as a business expense.

The company turned her down, but the business was used to receiving bills for what appeared to be personal items. According to testimony in federal court during Ms. Stewart's trial for conspiracy and obstruction of justice, she expensed some hair stylist appointments as well as the use of a driver to go antiques shopping on weekends. She also used a company employee to help manage her personal finances.

Is Martha run amok? Consider the following justification: Martha is a lifestyle doyen. Who is to say that Martha's kayak tour, say, wasn't research for a future TV show or magazine article? As for stylists:

Martha Stewart Living ... owns the exclusive license to her "name, likeness, image, voice and signature," according to Securities and Exchange Commission filings. It also owns the trademark that incorporates Martha Stewart's name and has the right to develop new products and services with her name even if she no longer controls the company.

Martha thus is the public face of the company. Isn't it to MSO's advantage that she make a good appearance? Interestingly, some shareholder activists are willing to give Martha a pass for precisely this reason:

"I never thought I'd be defending Martha Stewart," says Sarah Teslik, executive director of the Council of Institutional Investors in Washington, who has spoken out against executive perks. But "if you're Martha Stewart, your image is important and I would think hair and makeup are extremely important."

All of which also raises an issue about which I've blogged before; namely, whether MSO should - or even can - rebrand itself so as to lessen its dependence on Ms. Stewart.

Eisner opposition grows

According to the NYT:

As many as one of every three Disney shares are expected to be withheld from voting on Mr. Eisner in next week's annual board election, according to two people close to Disney who have talked to companies tallying the early votes. That is a much higher percentage than dissident shareholders can usually muster in such votes.

One would think that such a high negative vote would boost Comcast's chances, but with growing opposition to the bid on the part of Comcast's own shareholders, it may not have much impact. In any event, the really interesting point is that the dissidents are getting very close to the 35% percent trigger under the SEC's pending shareholder access rule. The SEC has tentatively indicated that this proxy season will count, assuming the rule is adopted, so if the dissidents get over the 35% hump next week, they could nominate a candidate next year.

The Times' indication that such a substantial percentage of withheld votes is rare implicates a question sent along a few days ago by a reader (and fellow corporate law professor):

Here with Disney we have one of the most visibly poorly-governed boards in the country fighting to entrench itself, and maybe it opponents will succeed in getting a level of 20% withheld votes. [Ed.: The email was sent before the latest surge in the opposition, back when it looked like they were going to come in around the 20% level.] What does this tell us about the frequency with which the nomination process will be triggered?

It is a fair question, of course. Using historical standards, few uncontested proxy soliciations result in 35%+ of the vote being withheld for a director. On the other hand, adoption of the rule would shift the dynamic and perhaps induce more investors - especially institutional investors - to withhold their votes. After all, at present, doing so has very little payoff. If the rule is adopted, however, doing so will have a very big payoff.

Hollinger's Conrad Black Blocked from Selling

In the continuing struggle between Hollinger International and its controlling shareholder, Lord Conrad Black, the firm won a big round today. Delaware Vice Chancellor Leo Strine has blocked Black from selling key assets:

[Strine] blocked Conrad M. Black's deal to sell his controlling stake in the newspaper company Hollinger International to the Barclay brothers of Britain, ruling that the independent directors should be allowed to try to sell the company's assets, which include The Daily Telegraph in London, The Jerusalem Post and The Chicago Sun-Times.

In his opinion, Strine explained:

Black [diverted] to himself a valuable opportunity presented to International — the possible sale of one of its flagship newspapers, the Daily Telegraph, or the company as a whole to the Barclays, English brothers who own newspapers, hotels and other businesses. Black accomplished this diversion in a cunning and calculated way, fully detailed in this opinion. During the course of his dealings, Black misrepresented facts to the International board, used confidential company information for his own purposes without permission, and made threats, as he would put it, of “multifaceted dimensions” towards International’s independent directors.

Like many of Strine's opinions, the decision here is quite long (over 130 pages), and I must confess I haven't gotten all the way through it. Yet, Strine is a good storyteller and the opinion reads well - it actually might make a decent movie. Hollinger International's press release has a link to the opinion.

Insider Trading and Class Action Reform

Picking up on the story about the curious trading profits earned by US Senators, about which I posted earlier, Kevin Drum opines:

Maybe somebody should bring a class action suit against the entire senate. And quickly, before they pass some kind of tort reform bill that makes it impossible....

I'm sure Kevin is just having a little fun with those of us who support tort and class action reform (in fact, my post on this story was just above a post on tort reform. Hmmm. I wonder....). Yet, who am I to miss an opportunity to plug one of my books?

In my Securities Law: Insider Trading, on which Oliver Stone based his movie Wall Street,^* I explained that "private party litigation against inside traders is rare—at least compared to other types of securities fraud—and is usually parasitic on SEC enforcement actions." Hence, class action reform would have little, if any, impact on insider trading enforcement.^** Why make a big deal out of this point, beisdes trying to grub up a few more book sales? Because opponents of class action and tort reform often tell us that the sky will fall if reform ever passes - doctors will start leaving more watches inside patients, companies will make less safe products, and so on. Yet, nobody seriously proposes entirely eliminating either tort or class action litigation, just reforming them. My point here, however, is that even if tort and class action litigation were eliminated, much enforcement activity would remain unaffected.

^*Not really.

^**I should note that while class actions against alleged inside traders are rare, one often sees references to insider trading activity in securities fraud class actions. In 1995, Congress adopted the Private Securities Litigation Reform Act (PSLRA) to curtail what Congress believed was a widespread problem of meritless securities fraud class actions. One of the PSLRA’s provisions established a new (and arguably higher) pleading standard with respect to the scienter element of Rule 10b-5, requiring that a complaint detail facts giving rise to a “strong inference” of scienter. Post-PSLRA, plaintiffs’ securities lawyers began routinely seeking to satisfy the scienter pleading standard by alleging that insiders sold shares in suspicious amounts and/or at suspicious times. Insider sales supposedly provide inferential evidence that senior management knew that earnings forecasts would not be met and sold to avoid the price drop that follows from announcements of lower than expected earnings. In addition, insider selling activity can be used as evidence that the nonpublic information in question was material. See Basic Inc. v. Levinson, 485 U.S. 224, 240 n.18 (1988) (stating that “trading and profit making by insiders can serve as an indication of materiality”).

John Edwards versus Jobs

John Edwards has been emphaszing jobs a lot lately, which sounds like a smart move. Skeptics, however, might ask what Edwards' profession - trial lawyer - has done for US jobs. The Manhattan Institute studied the effect of tort litigation on jobs in the asbestos industry and came up with some startling conclusions:

Companies bankrupted by asbestos have slashed an estimated 60,000 jobs, failed to create 128,000 new jobs, and forgone an estimated $10 billion in investment …. The damage will escalate—if current estimates of the eventual payout prove accurate—to $33 billion in forgone investment and 423,000 jobs not created.

Bruce Bartlett cites similar findings:

Increasingly, the only way companies can cope with rising asbestos liabilities is by declaring bankruptcy. Some 80 companies have already done so. These bankruptcies have cost at least 60,000 jobs, according to a new study by economists Joseph Stiglitz, Jonathan Orszag, and Peter Orszag. Each worker lost $25,000 to $50,000 in wages as the result of these asbestos-related job losses, plus another $8,300 in losses in their 401(k) plans.

Bartlett also cites a study by Tillinghast-Towers Perrin finding that: "At current levels, U.S. tort costs are equivalent to a 5% tax on wages." In contrast, Texas Governor Perry claims tort reform creates jobs: "Texas economist Ray Perryman estimated that our sweeping lawsuit reforms will create more than 240,000 permanent jobs and add $36 billion to the Texas economy."

If John Edwards wants to get serious about job creation, maybe he should get serious about tort reform. But don't hold your breath. As both EdwardsWatch and Overlawyered.com have documented, Edwards' record on tort reform is weak, at best, and he is raking in huge amounts of cash from his fellow trial lawyers.

Curious Senatorial Trading Profits

Skip Sauer of the Sports Economist blog sent me the link to this story:

US senators' personal stock portfolios outperformed the market by an average of 12 per cent a year in the five years to 1998, according to a new study. "The results clearly support the notion that members of the Senate trade with a substantial informational advantage over ordinary investors," says the author of the report, Professor Alan Ziobrowski of the Robinson College of Business at Georgia State University. ... "The results suggest that senators knew when to buy their common stocks and when to sell." First-time Senators did especially well, with their stocks outperforming by 20 per cent a year on average - a result that very few professional fund managers would be able to achieve. "It could be argued that the junior senators most recently came out of private industry, so may have better connections. Seniority was definitely a factor in returns," says Prof Ziobrowski. There was no difference in performance between Democrats and Republicans. ... The Ziobrowski study notes that the politicians' timing of transactions is uncanny. Most stocks bought by senators had shown little movement before the purchase. But after the stock was bought, it outperformed the market by 28.6 per cent on average in the following calender year.

One is reminded of Huey Long's admission that: "People say I steal. Well, all politicians steal." Anyway, remember this the next time some senator starts pontificating about corporate scandals.

Should Judge Cedarbaum Dismiss Count 9?

After the prosecution rested its case against Martha Stewart on Friday, Judge Cedarbaum began hearing defense motions to dismiss some or all of the indictment:

The judge appeared to be most concerned about a count of securities fraud that accuses Stewart of deceiving investors in her own company, Martha Stewart Living Omnimedia (MSO), by asserting her ImClone sale was based on the $60 order. Cedarbaum called that count "the most problematic" in the indictment, and urged lawyers to focus on whether or not Stewart had criminal intent — not just a motive — to lie to her investors.

The count to which the story refers is # 9. Long-time readers of this blog know that I regard Count 9 as having very little merit. For one thing, I find it extremely problematic that asserting your innocence could be deemed a material misrepresentation under the securities laws in any circumstances. For another, I simply don't believe the government can prove that Martha's denials were material - which they must do in order to prove securities fraud. (See also this post.) Finally, as the judge's comments suggest, I doubt whether the government can prove Martha acted with the requisite scienter (i.e., intent to defraud).

Nader announces

Ralph Nader's going to run again, but this time as an independent. Juan Non-Volokh opines that: "Whatever the effect of Nader's campaign on the 2004 election, if it invigorates efforts to improve ballot access for third parties, it will be a plus for the nation." Instapundit applauds Juan for having made the "best observation" on the Nader announcement. Why? Juan's claim is hardly self-evident, but neither Juan nor Glenn provide any justification for it.

In the United States, the Electoral College makes it almost impossible for a third party candidiate to win the Presidency. Countries in which that is not true are not demonstrably better off. Look at the last Presidential election in France: In the first round of voting, Chirac led - but got less than 20% of the vote. Worse yet, nationalist nut-job and perrenial fringe party candidate Jean-Marie Le Pen qualified for the run-off with a mere 17%. Do Juan and Glenn think this is a model we should emulate? Anyway, I doubt very much whether most Americans are dying for third party candidates to have ballot access. As Bruce Bartlett observed: "The recent California election is evidence that there is no real demand for third parties. Despite the fact that anyone with $3500 could be on the ballot for governor and with 135 people running, 95.5 percent of the final vote went to candidates openly identifying themselves as either Republicans or Democrats."

Update: James Joyner elaborates:

A winner-take-all system such as ours produces two moderate “catch-all” parties. Political scientists call this phenomenon "Duverger’s Law." Third parties, by their very definition, are those who can’t attract much popular support. ... The value of third party candidates aside, I also reject the premise that it’s particularly difficult for serious ones to get on the ballot. Ross Perot did it twice, Ralph Nader has done it several times, and all manner of fringe parties manage to do it every year.

Poliblog has links to info about Duverger’s Law.

Pryor Appointment

President Bush used his recess appointment power to put William Pryor on the 11th Circuit. Good for him. According to the LA Times (R), political analyst Larry Sabato believes that:

Pryor's appointment ... will be popular with conservatives because "Bush is sticking it to Senate Democrats — the group most hated by the GOP right."

Yep. In a contrarian spirit, however, the Washington Times cites leaders of the Evangelical Right who claim the Pryor nomination (among other things) will rile Bush's base:

Sadie Fields, a Bush supporter and Christian Coalition activist, says she's heard grumbles that Mr. Bush stood aside while the man he nominated for a federal appeals court appointment, Alabama Attorney General Bill Pryor, prosecuted that state's popular chief justice, Roy Moore. Mr. Moore was forced from office after defying a federal court order to remove a Ten Commandments monument from the rotunda of Alabama's State Judicial Building.

(The good folks at Southern Appeal are the go to resource for coverage of Pryor and Moore. There's also a very thoughtful post on Pryor, Moore, and the media from Beldar that is a must read.) Hugh Hewitt blasts the Times story:

Inside-the-Beltway, self-appointed spokesmen for evangelicals may say that evangelicals are upset with President Bush, but out here in the normal world, evangelicals love the President, in huge and very loyal numbers. ... The blogosphere is a much better place to test opinion among the faithful as well, and I don't see a lot of "Dump Bush" sentiment [there]. ... The folks in D.C. throwing stones at the president do good work on their issues, but they shouldn't presume to speak for me or the millions of evangelicals who haven't wavered and won't waver in their support for George W. Bush. It is false to assert there are large cracks in this part of the base.

Indeed, blogger Joe Carter of the Evangelical Outpost shreds the Times article with a long list of promises Bush made to the social right - and kept.

Anyway, back to Pryor. According to the LA Times article:

Sen. John F. Kerry of Massachusetts, the Democratic front-runner for the presidential nomination, assailed Bush for taking "yet another action to diminish his credibility with the American people" by bypassing the Senate confirmation process a second time. Kerry said in a statement that Pryor has "a history of partisanship and pursuing an ideological agenda that does not represent mainstream views."

As I've explained before, however, John Kerry is so far out of the mainstream that he can't even see it from where he is. So I don't find that argument very credible. The Times also reports that:

Sen. Edward M. Kennedy (D-Mass.), a senior member of the Senate Judiciary Committee, called the Pryor appointment a "flagrant abuse of presidential power." "What will the president try next — a recess appointment when the Senate is in recess for a weekend?" Kennedy asked.

Maybe. More likely, however, he might try something Howard Bashman suggests; namely, sequential recess appointments:

Thus, perhaps the more relevant question to ask is whether President Bush could give Judge Pryor a second recess appointment once the first expires toward the end of 2005. ... Presumably President Bush could keep Judge Pryor on the bench for up to six years through successive recess appointments assuming the President's reelection this fall.

Boy would that stick it to the Senate Democrats. Of course, if Bush really wanted to stick it to the Senate Democrats he would adopt Randy Barnett's proposal for mass recess appointments:

President Bush could threaten to line judicial openings with committed conservative and libertarian recess appointees, people who are too old, too young, too smart, too conservative, or too burned by previous failed nominations to ever be considered for ordinary judicial appointments. Unlike practitioners who cannot abandon their practice for a short stint on the bench, professors who can take a few semesters off and judges with no prospects of higher judicial office would be ideal. It would be like a judicial clerkship program for conservative and libertarian law professors that can continue as long as there is a Republican president.

I've said it before and I'll say it again: I would be happy to volunteer to take a two-year leave of absence from UCLA to serve as one of the mass appointees.

With nut-job friends like this...

Yesterday's testimony by long-time Martha Stewart friend Mariana Pasternak seemed truly damning. Fellow blawgger Tom Kirkendall, however, alerted me to today's stunning testimony by Pasternak:

At issue is testimony the friend offered in which she said Stewart boasted "Isn't it nice to have brokers who tell you those things" during a vacation in Mexico just after the trendsetter dumped her shares of ImClone Systems Inc. Stewart's attorney pressed the witness about that statement on Friday, asking whether that conversation had actually taken place or if it was all in her head. "I do not know if the statement was made by Martha or if it was thought in my mind," Pasternak said. She also said she previously told prosecutors that she was not sure about that recollection.

OMG. This trial is like a bad TV movie and it just keeps getting worse. First, the prosecution's FBI agents had to admit there were critical discrepancies between their handwritten notes, 302s (typed summaries of witness interviews), and their trial testimony. Now it turns out that their latest star witness is a nut job ... and that they knew she was a nut job.

SOX Pox

My latest TCS Daily column

After the Enron scandal erupted, when Congress was desperate to be seen as doing something -- anything -- about corporate governance, nobody bothered with very much in the way of serious cost-benefit analysis. That particular chicken is now coming home to roost -- and bringing the financial equivalent of bird flu with it. We are now beginning to see just how costly the post-Enron Sarbanes-Oxley Act (SOX) will prove.

According to the Wall Street Journal, publicly traded US corporations routinely report that their audit costs have gone up as much as 30%, or even more, due to the tougher audit and accounting standards imposed by SOX. Indeed, just paying the fees they are now required to fund the PCAOB -- the accounting oversight board created by SOX -- can run as much as $2 million a year for the largest firms.

Professional surveys of US corporations confirm the Journal's reportage. Foley & Lardner, for example, found that: "Senior management of public middle market companies expect costs directly associated with being public to increase by almost 100% as a result of corporate governance compliance and increased disclosure as a result of the Sarbanes-Oxley Act of 2002 (SOX), new SEC regulations and changes to exchange listing requirements."

As a particularized example, consider the havoc being wreaked by SOX § 404. Intended to buttress internal corporate controls, § 404 requires public corporations to include in their annual reports an acknowledgement of management's obligation to ensure adequate internal controls and procedures for financial disclosure. More substantively, the annual report also must contain an assessment by management of the adequacy and effectiveness of those internal controls and financial reporting procedures. Finally, § 404 mandates a report by the corporation's outside auditor attesting to the adequacy and effectiveness of the corporation's internal controls and financial reporting procedures.

The SEC initially estimated § 404 compliance would require only 383 staff hours. According to a Financial Executives International survey of 321 companies, however, firms with greater than $5 billion in revenues will spend an average of $4.7 million per year to comply with § 404. The survey projects expenditures of 35,000 staff hours -- almost 100 times the SEC's estimate. The survey also estimates that firms will spend $1.3 million on external consultants and software and an additional $1.5 million (a jump of 35 percent) in audit fees.

As an investor, I don't want my portfolio companies spending a dollar on "good corporate governance" unless doing so adds at least a buck to the bottom line. I don't have any voice in how much to spend on corporate governance, however. The board of directors and top management make that decision (as they should, of course). Unfortunately for the bottom line, however, directors and management have a strong incentive to over-invest in corporate governance consultants and so on.

Why? The answer lies in the incentive structures of the relevant players. Who pays the bill if a director is found liable for breaching his federal or state duties? The director. If the director has adequately processed decisions and consulted with advisors, will the director be held liable? Unlikely. Who pays the bill for hiring corporate governance consultants, lawyers, investment bankers, auditors, and so on to advise the board? The corporation and, ultimately, the shareholders.

Suppose you were faced with potentially catastrophic losses, for which somebody offered to sell you an insurance policy. Better still, you don't have to pay the premiums, someone else will do so. Buying the policy therefore doesn't cost you anything. Would not you buy it? Isn't that exactly the choice SOX gave directors and senior managers?

No doubt, there are some benefits to SOX -- renewed investor confidence and so on. No doubt, moreover, § 404 had laudatory goals. Faulty internal controls, after all, contributed to a number of recent corporate scandals. Given how badly Congress and the SEC underestimated compliance costs, however, serious questions are raised as to whether SOX would pass muster if a serious cost-benefit analysis were to be performed.

We live in an era that expects instantaneous responses. We have instant communication by phone, fax, and email, instant punditry in the blogosphere, and instant books on every scandal du jour. SOX was insta-legislation rushed into law so that angry investors would blame somebody -- anybody -- other than Congress for the Enron scandal. The costly aftermath should stand as a cautionary tale the next time Congress wants an instant response to some new scandal. Somehow, however, I'm not going to be holding my breath.