Google was down over $50 in after-hours trading. Net income was up over last year, but not as much as analysts had expected. The excuse? Taxes:

Google squarely blamed its tax rate. "Compared to the [financial] models that people have out for Google, the big difference was a different tax computation -- but the revenue and profit growth were all very strong and at or above the models," said Chief Executive Eric Schmidt in an interview. The company said its effective tax rate during the fourth quarter was 41.8%, bringing its 2005 effective tax rate to 31.6%. In October, it had said it expected its effective tax rate to be around 30% for the year.

The higher tax rate applied, Google said, because the company allocated more expenses than expected to its international operations, resulting in its paying taxes on a greater percentage of profits in the U.S., where tax rates are generally higher. "These estimates are complex," said Chief Financial Officer Georges Reyes, forecasting a 30% effective tax rate for 2006. Keeping with its practice, Google didn't provide other detailed financial forecasts.

Google is still optimistic about its future, of course, citing international markets and brokering radio commercials as growth areas. In the end, however, it's still just advertising all the way down.

UPDATE: Business Week tentatively suggests that "a new era of Google scrutiny may be dawning."

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As I listen to talk surrounding the President’s upcoming State of the Union address tonight I wonder if the President will make any reference to Enron and corporate governance issues more generally.

I did a bit of checking and discovered that the State of the Union addresses in 2002 and 2003 both included a reference (albeit limited) to the corporate governance scandals. The reference in 2003 was both more prominent and more strident, referring to a need to insist on integrity within the business community and to hold “corporate criminals” accountable. However, since then such issues have received little, if any, attention in the State of the Union address. In fact, the President only dedicated a couple of words to the issues in his 2005 State of the Union address. So I was interested to know, as we all debate the impact of the Enron trial on corporate governance and the issue of corporate accountability, will the President feel obliged to acknowledge both the issue and the trial?

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I love the Academy Awards, so I could not let today go by without commenting on the slate of nominees.  Here are some preliminary thoughts:

1.  Best Picture.  I've seen three out the five, which is about average for me A.K. ("After Kids"):  Brokeback Mountain, Capote, and Crash.  I actually blogged about all three here, here and here.  I personally would vote for Crash, but I can see Brokeback Mountain getting the prize.  Both have a political message and both were very daring.  Crash, however, actually had a story that was interesting and not just a premise.

2.  Best Male Actor/Female Actor.  I've heard before that the winner in the male actor category will be the person who portrayed the weakest, or most flawed, character.  The winner in the female actor category will be the person who portrayed the strongest character.  (Last year's winners were Jamie Foxx, for portraying a musician who was blind, and Hillary Swank, for portraying a female boxer.)  For the female actor category, that rule of thumb would result in Felicity Huffman winning for Transamerica, just as it did for Hillary Swank in Boys Don't Cry.  I have not yet seen Walk the Line yet due to its short duration here in Milwaukee, but I have liked Reese Witherspoon in other things, so I would like to see her win here for playing a strong female character as well. 

For the male actor category, that rule of thumb just poses more questions.  Who is more flawed, an out-of-the closet gay man who is in love with a death row inmate, a closeted gay man who lives a life of quiet desperation in Wyoming, or a brilliant musician with a substance abuse problem?  I would have nominated Matt Dillon as the racist policeman in Crash.  Or at least his eyebrows.

3.  Best Animated Feature Film.  The category that was created for Disney includes no Disney films this year.  I liked the Wallace & Gromit movie.

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With the jury seated yesterday, opening statements in the Enron trial are happening right now as I type.  (As Tom Kirkendall writes, the jury was seated in one day "to the surprise of no one who has ever tried a case before U.S. District Judge Sim Lake.")  Last Fall, guest blogger David Zaring asked if opening statements follow the formula of "This trial is about X," then what should the X be?  My response:

"Ladies and Gentlemen, this is a story about numbers and a story about trust. My client, Ken Lay, has spent his life thinking about numbers. He believed in numbers. And he trusted the men that showed him the numbers."

According to the WSJ, prosecutors began opening arguments this morning by saying that this trial "is about lies, not numbers." Nice pre-emptive strike.

Also note Nathan Koppel's character sketch of Judge Sim Lake in today's WSJ.  Nathan (law school classmate of mine) did his time at Fulbright & Jaworksi, Judge Lake's old stomping grounds as well, so he has some inside scoop.

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First, thank you to Gordon, Christine, and Vic for inviting me to serve as a guest and for extending to me such a warm welcome. It is a pleasure to join such a robust discussion group.

I hesitate to divert the discussion on the first day of the Enron trial, but my attention was captured by an article in the Sunday edition of the Washington Post regarding Target Corp.’s involvement in assisting local, state and government agencies in their crime control efforts. According to the article, Target increasingly has worked with law enforcement agencies in this area. On the one hand, I must say I found it slightly ironic that some major corporations are providing assistance in ferreting out wrongdoing in society, when Enron and other corporate governance scandals suggest that such companies have been less than successful in uncovering such wrongdoing within their own ranks. On the other hand, the article highlights some interesting issues related to corporate philanthropy.

Recently, I have been researching whether corporate rhetoric on social responsibility has any normative or behavioral repercussions for corporations. You may remember that in January of 2005 The Economist featured several articles on the issue of corporate social responsibility. One of the articles proclaimed that the prevalence of social responsibility rhetoric in the corporate documents of many major corporations revealed that “corporate social responsibility has won the battle of ideas.” However, the article suggested that the rhetorical victory was relatively insignificant, particularly because corporate rhetoric is often inconsistent with corporate behavior. My research has sought to measure the extent of social responsibility rhetoric within corporate documents and determine its relationship, if any, to corporate behavior.

This brings me to Target. Target has taken an active role in helping law enforcement agencies. Target has built a forensic lab in Minnesota, has helped investigators set up and operating criminal surveillance systems, and has contributed money to help with the prosecution of repeat criminal offenders. The Washington Post describes Target’s efforts as “part of a trend in corporate donations directed at solving societal problems,” and compares Targets efforts to those by other corporations that build hospitals or schools. Certainly Target’s corporate website and annual report tout its involvement in the community and its charitable donations to a variety of worthy endeavors. Viewed as a component of its corporate philanthropic efforts, Target’s programs helping law enforcement appear consistent with Target’s corporate rhetoric on social responsibility. These programs, however, raise some interesting issues.

First, they appear to be a subtle form of privatization. The Washington Post begins by pointing out that arson investigators in Houston needed help restoring a damaged surveillance tape and turned to Target for help because other local experts and NASA apparently could provide no assistance. This fact suggests that our law enforcement agencies lack necessary resources. No surprise. From this perspective, Target brings important, and potentially life-saving, resources to the table. However, the provision of important services by for-profit entities poses important issues, both ethical and otherwise. For example, one may be concerned that those agencies benefiting from Target’s assistance may feel beholden to Target. Also, because Target’s provision comes in the form of a charitable donation, there is apparently no oversight over its arrangements with various agencies. Thus, while Target’s efforts in this area are laudable, there is a need to be vigilant about these kinds of endeavors.

Second, I wonder if we should be concerned about the implications of this kind of charitable giving on support for other causes and programs. Corporations have a limited pool of resources to allocate among various charitable endeavors. While many corporations, like Target, allocate their resources to a variety of different causes, others do not. Does it matter if corporations follow Targets lead and devote some or most of their corporate philanthropic resources to crime control as opposed to building schools, hospitals and playgrounds?

Third, Target’s actions illustrate the difficulties with measuring whether and to what extent corporations are engaged in socially responsible behavior. Indeed, in my research I have found that corporations include many programs under the rubric of “corporate social responsibility.” In other words, the fact that corporations tend to define corporate social responsibility in different ways makes it difficult to draw conclusions about the extent of corporate social responsibility among major corporations. It also potentially dilutes the meaning of corporate social responsibility.

In the end, I am ambivalent about Target’s actions. While I find them commendable on a personal level, I worry about the unintended negative implications of those actions, particularly when they are characterized as corporate giving.

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OK, that title is a little over the top.  Neither Lay nor Skilling have put Jesus on their witness list.  However, Lay has two pastors of megachurches on his character witness list.  Lay attends First United Methodist Church and his pastor will vouch for him, but Lay will also call Dr. Ed Young to the stand.  No one else in Houston would come as close to matching the impact that Jesus or any biblical figure would have as a character witness.  Dr. Young is the pastor of Second Baptist Church, the single largest adult ministry in the United States, and fairly loved in Houston.  I think the calling of men of the cloth as character witnesses here is fascinating, and I look forward to seeing what effect it has on the jury (if we ever know).  Of course, Lay may get a new trial if Judge Lake has to strike all jurors that attend Second Baptist, which could be all of them.

(And yes, I am coming close to liveblogging the livebloggers.  That's seems kind of pathetic, I guess.)

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Thanks to Gordon, Christine and Vic for the opportunity to guest blog on the world's best business, law, economics & society blog.  Reading it is always a pleasure and having a chance to contribute is a  privilege.  Cheers!

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Why haven't our readers honored us with a t-shirt?

BL explains the origins of the flattering tee.

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Gordon predicts a full acquittal for both Lay and Skilling.  I predict a full acquittal for one and a conviction on a lesser, second-order crime for the other (probably Skilling). 

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The big story this morning is the voir dire in the Enron trial, which began approximately five minutes ago.  (In Texas, voir dire rhymes with "war mire.")  Judge Sim Lake seems to be running the show and wants the jury picked by high noon tomorrow.  (NYT article here.  The Houston Chronicle is liveblogging here.)  The press seems to be siding with defense attorneys that both the timeline and the charge of picking an impartial jury are impossible goals.  (The anchors on CNN this morning were actually laughing at the thought that a fair jury could be picked today.)  As Gordon notes below, the defense lawyers are up in arms at the jury questionnaires.

So, are Houstonians "biased and prejudiced" against Lay and Skilling?  I say no, and I say that Lay and Skilling are much better off in Houston than they would be in any of the proposed cities such as Denver or Atlanta. 

1.  Houstonians are very good with recognizing substance over form.  Houston is very much a city of substance, where people are valued not by who their parents were but by what they do now.  (This is in comparison to Dallas, which is a city of form of substance.)  I think the jury will be very good at peeling away the rhetoric and the hype to see what is there and what is not. 

2.  Houstonians don't have a lot of love for the federal government.  Houstonians would rather live with less law, not more, and with less federal interference than more. 

3.  Houstonians love flawed people.  People there don't expect others to be perfect, just to be honest.  If the defendants can come across as flawed, but honest, they will win. 

4.  The jurors will not all be from downtown Houston.  The federal venire panel will come from a large circumference of Houston, so many will not be as jaded by the swift rise and fall of the two Enron towers crossing Smith Street. 

5.  The jurors will not all be from the 401(k) side of the street.  The fall of Enron was a middle-class tragedy.  Not everyone that will be on that jury relies on an employer for their retirement.  Probably not everyone believes that a person should rely on an employer for retirement.  And, probably most people that end up on the jury will not have had stock portfolios that sank in 2001 with built-up resentment for whatever unknown figure caused that to happen.  (Photo by Mayra Beltran of the Chronicle.)

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If you like Flikr, you'll love Fastr.

Unless you are susceptible to internet addictions, in which case you might want to steer clear.

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That is the question.

The answer: not this week. Maybe next.

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The NYT has posted some interesting interviews with Kurt Eichenwald, author of Conspiracy of Fools, and Joseph Nocera, author of The Smartest Guys in the Room.

In the first interview, they are asked to reconcile the titles of their books. Eichenwald claims that the Enron executives were "smart, but not wise," but Nocera admits the tension and uses the question to highlight what he sees as the most important issue in the trial: whether the jury views Andy Fastow as a "tool of management" or "renegade."

Watch all three.

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We are pleased to welcome Lisa Fairfax to our stable of guest bloggers. Lisa is a prolific corporate law scholar from the University of Maryland, where she teaches courses in Business Associations, Securities Regulation, Unincorporated Business Entities and Contracts. Lisa is one of our favorite people to see at conferences, and we are grateful that she will be spending the next two weeks with us here. Welcome, Lisa!

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Have corporate governance scandals and reforms changed behavior? Well, this is not very solid evidence one way or the other, but the W$J is asking its readers whether corporate executives are more honest with investors now than they were five years ago. The results as of Sunday evening:

UPDATE: I probably should note here that I don't think corporate executives as a whole were particularly dishonest with investors five years ago, and I don't think that has changed. To be sure, frauds will always be with us, but to suggest that Enron and Worldcom are representative of corporate behavior is its own form of fraud.

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