27 Pages Posted: 26 Aug 2005 Last revised: 7 Nov 2013
Date Written: August 25, 2005
This Article compares and evaluates recent Congressional efforts to improve institutional "cultures" in the private and public sectors. The Sarbanes-Oxley Act of 2002 was designed to upgrade corporate culture by patching up the "walls" that separate corporate management from boards of directors, accountants, lawyers, and financial analysts. The Intelligence Reform Act of 2005 took a different tack, hammering away at walls that supposedly segmented the intelligence community. The logic was that the market failed because people did not observe sufficient formalities in their dealings with one another, while the intelligence community failed precisely because people kept their distance from one another and declined to share information. The way to improve their respective cultures, Congress determined, was to build up walls in the one case and to tear them down in the other.
This Article expresses some skepticism, however, about these solutions. Building walls in the private sector increases transaction costs, which may outweigh any benefits in detecting fraud. With respect to the intelligence community, compartmentalization of information diminishes risks associated with double agents; redundancy of tasks may provide a safety margin; and segmentation of government agencies may guard against civil liberties violations as well as provide additional spurs to action. Furthermore, thriving firms in the private sector forge successful, though likely idiosyncratic, cultures designed to exploit business opportunities. Because the market is largely self-correcting, regulatory efforts to dictate a particular reorganization or cultural shift are probably unnecessary and possibly harmful. By contrast, the CIA, FBI, NSA, and all other government agencies operate without fear of bankruptcy, which is to say in the absence of penalties for deficient cultures (or rewards for successful ones). Nonetheless, efforts to re-structure government bureaucracies, nominally to re-make their cultures, should be regarded with caution. First, such efforts will almost inevitably be undertaken by political actors, whose motivations are at a minimum suspect. Second, even assuming the best of intentions and the utmost of human wisdom, central planners cannot forecast the untold costs and benefits to a major governmental reorganization. The Intelligence Reform Act's overhaul of the intelligence community will have certain and substantial costs in the short-term, and very uncertain, if any, benefits in the long term.
Keywords: Intelligence Reform Act, Sarbanes-Oxley, culture
JEL Classification: K14, K20, K42
Suggested Citation: Suggested Citation
Lerner, Craig S., Calling a Truce in the Culture Wars: From Enron to the CIA (August 25, 2005). Stanford Law & Policy Review, Vol. 17, No. 2, pp. 277-302, 2006; George Mason Law & Economics Research Paper No. 05-24. Available at SSRN: https://ssrn.com/abstract=790804 or http://dx.doi.org/10.2139/ssrn.790804