Today’s Business Environment: Law and

Ethics

Chapter 13Chapter 13

The Modern Environment of Business

• Law & the Key functions of the Legal Systems

• Sources of Law in the U.S.• Classifications of Law• Business Ethics & Social

Responsibility

Chapter IssuesChapter Issues

Key functions of the Legal Systems• No Precise Definition of Law

– In Legal Environment: Refers to rules, standards and principles that define the behavioral boundaries for business activities.

• Improving Social Stability by Influencing Behavior - Limit actions detrimental to the “public interest”; restricts business practices outside the ethical norms; & encourages furtherance of social and political goals

• Laws in different countries may reflect countries’ social norms• Conflict Resolution – • Courts are one mechanism for resolving disputes • Businesses moving more to resolution outside the courts

• Social Stability and Change - Reflect social values and customs– Ex: the changing status of gay marriages– Ex: changes about acceptability of discrimination in the workplace

• See Emerging Nations and the Law”

“Emerging Nations and the Law”

•After the tragedy of the 2010 earthquake in Haiti, the world was shocked by of the poverty and notorious corruption of Haiti’s government & legal system. •Businessmen interviewed said doing business in Haiti was nearly impossible—before or after the quake.•The demands for bribes are endless•Transparency International ranks Haiti: 168 most corrupt in the world. Only 9 countries were worse.•How do you reform a deeply corrupt system?

Sources of Law in the United Sources of Law in the United StatesStates

• Constitutions• Legislatures and

Statutes• Administrative

Agencies and Regulations

• The Judiciary and Common Law

• The Executive• International Sources

of Law

U.S. ConstitutionU.S. Constitution

• Fundamental law of the land• Establishes the limits and power of

government• U.S. Constitution is the oldest written

constitution in force in the world• Establishes Legislative, Executive and

Judicial Branches of government– Creates the “Separation of Powers”

State Constitutions

• Like U.S. Constitution, create Legislative, Judicial and Executive Branches of state governments

• Often very long and detailed

• Amending a state constitution is often much easier than amending the U.S. Constitution

Legislatures & Statutes

• Legislatures create statutory law– Federal Laws– State Laws– Municipal Laws

• Judges interpret• Laws must pass

Constitutional “muster”

• Example: 1972 Congress enacted Clean Water Act, setting standards for national water quality, and giving EPA authority to adopt necessary regulations

• Example: States’ statutes regulate insurance industry, usually giving authority to state insurance commissions to assist in regulation

Administrative Agencies and Administrative Agencies and RegulationsRegulations

• Congress creates a statute• Statute names

administrative agency• Agency makes regulations• Sometimes both Congress and

states enact regulations in the same area of concern– Ex: environmental regulations

• Agencies and Regulations – very important effect on the legal environment of business

The Judiciary and Common Law

• Came from old English system• Judge usually followed earlier decisions that resolved

similar disputes • Legal principle from cases is called “precedent”• Use of this precedent is Stare Decisis• New issue? Judge makes new common law• Common law varies by state; but there is consistency• Provides stability but allows change• SeeSee Davis v. Baugh Industrial

Contractors, Inc.

Davis v. Baugh Industrial Contractors, Inc.

• Glacier hired Baugh to build a processing facility, including underground pipe system.

• 3 years later, Glacier suspected a pipe leak. Assigned an employee, Davis, to uncover the leak. While Davis was in the hole to get to the pipes, a wall collapsed, killing him.

• Pipes should last 100 yrs. These were likely damaged in the installation, which caused the leak. Davis’ daughter sued Baugh & others for negligence in father’s death.

• The trial court used the precedent that when a contractor finishes work & owner accepts it, the contractor (Baugh) is no longer liable; only the property owner has liability. Suit dismissed.

• Appealed to Supreme Court of Washington(Continued)

Davis v. Baugh Industrial Contractors: Changing the Common Law

• HELD: Reversed and remanded.• HELD: Court rejected old common law rule and

adopted a more modern approach:– The contractor is liable for injury to 3rd parties as a

result of negligent work, EVEN IF the work was accepted by the property owner.

– Construction has become complex. Landowners rely on a contractor’s expertise and often don’t recognize poor performance by a contractor.

– Liability occurs when it is reasonably foreseeable that a 3rd party could be injured due to the contractor’s negligence.

The Executive

• President can create law through “Executive Orders”

• Can require federal agencies to do things within the President’s scope of authority

• President has influence on administrative agencies – i.e. what duties they undertake

International Sources International Sources of the Lawof the Law

• Firms doing business in other countries are subject to countries’ laws.

• Code Law: Many countries use codes and do not have common law – Courts interpret the

codes and their application to cases

• Treaties and Trade Agreements among countries define the laws that affect business practices.– NAFTA (North American Free

Trade Agreement)

• Multinational regional or global organizations affect businesses– Ex: World Trade

OrganizationSee International Perspective “Civil Law

Systems”

Classifications of Law

• Public and Private– Public – Legal relationships between

members of society and the government• influence behavior • bring about social change

– Private – Legal relationships among members of society

• resolves disputes • primarily common law

Classifications of LawCivil & Criminal

– Criminal• The guilty can be fined,

imprisoned or both• Creates either a felony or a

misdemeanor• Legal requirement for guilt:

“beyond a reasonable doubt”– Civil

• Wrongdoer pays money, but no jail time!

• Legal requirement for liability: “preponderance of the evidence”

Substantive & Procedural

– Substantive• Defines legal rights

and regulates behavior– Procedural

• How it is to be enforced (the “nuts and bolts”)

Business Ethics and Social Responsibility

• Public perception of business leaders has fallen.

• Ethics: Rules or standards governing conduct of members a profession

• Integrity: Living by a moral code & standards of ethics

• Morality: Conformity to rules of correct conduct within the context of society, religion or other institutional belief

• Practical consequence are high jury awards against large corporations who cross ethical lines into illegality

Business EthicsLockheed and Bribes

• 1970’s: Lockheed was in a struggle for survival

• To obtain a large order from All Nippon Airways, company bribed members of Japanese government

• Bribe did not get more money for Lockheed executives

• It did save thousands of jobs at Lockheed

• Bribery discovered – top Lockheed executives ousted

• Question: Was bribe ethical, because it saved jobs?

• Peter Drucker: “No, a bribe is a bribe.” Once you cross the line, ethics are lost.

• Others would say, what “ethical dilemma”? If it’s not illegal in Japan, why should we say it is?

• Still others would say bribes are illegal and unethical

• See “OK to Grease Palms?”See “Test Yourself”, p. 16

Enron’s 1998 Annual Report

Our ValuesRespect: We treat others as we would

like to be treated ourselves. We do not tolerate abusive or disrespectful treatment. Ruthlessness, callousness, and arrogance don’t belong here.

Integrity: We work with customers and prospects openly, honestly, and sincerely. When we say we will do something, we will do it; when we say we cannot or will not do something, then we don’t.

Cyber Law: “Online EthicsCyber Law: “Online Ethicsand Legal Complianceand Legal Compliance””

• The evolution of computer and the Internet in relation to the law have created ethical challenges for businesses

• Invasion of privacy is an issue in ethical discussions by employers and employees

• Sexual harassment and obscene e-mails are problems in companies

• How do businesses choose to monitor the company computers?

• Does legal and ethics on-line training for employees have benefits?

From Codes to Compliance

• Organizations adopt compliance codes, combining ethics and legal requirements

• Survey of 3,000 workers: 69% had received ethics training

• Dept. of Justice (DOJ) has emphasized importance of corporate “compliance programs”

• Good compliance programs can result in civil rather than criminal prosecution of offenders

• DOJ factors in prosecution or recommendation of leniency:– Whether compliance program is designed to

prevent/detect violations– Whether a company enforces its compliance program

International Perspective:“Does Regulation Improve Business

Ethics?”• Financial scandals led to expanded securities regulation• Drug trade has led to increased control of money transfers• Governments increase regulation to prevent problems• World Bank Report (www.doingbusiness.com): The more

regulation a country has: 1) the more corruption is likely and 2) the lower is the standard of living– In United Arab Emirates: collection for non-payment by a customer

takes 27 procedures and 2 years– In India, bankruptcy takes an average of 10 years– Countries that regulate the most are relatively poor: Bolivia, Chad,

Costa Rica, Guatemala, Mali, Mozambique, Paraguay, the Philippines and Venezuela

– Countries that regulate the least are relatively rich: Australia, Canada, Denmark, Hong Kong, Jamaica, the Netherlands, New Zealand, Singapore, Sweden and the United Kingdom

“Putting Ethics Into Practice”

• Large chain of stores gives employees a “Business Conduct Guide” Employees told to report violation to supervisor or to Chief Financial Officer. Realistic?

• Google’s “Don’t be evil” rule” in Google Code of Conduct

• Ethical misconduct can cause bad press for the company

• Can also create bad morale for employeesSee “Lamson v. Crater Lake Motors”

See also “Test Yourself” p. 22

–

Lamson v. Crater Lake Motors• Kevin Lamson was sales manager for car dealership. Good employee liked the company’s motto

“customers come first.” Good reputation for ethics. • Sales were lagging. Company hired sales firm, Real Performance Marketing (RPM) to run a 5-day sales

promotion.• Lamson observed a number of “unethical or unlawful” activities.• RPM video said “all vehicles” cut in price – but only cars in video were on sale.• RPM tried to “pack the payments” – providing life ins., service contracts in purchase agreements

WITHOUT customers’ knowledge.• Lamson complained to General Manager (GM) was told “go home”.• After sale, relations worsened between Lamson & GM.• GM told Lamson that another sales manager was making $600 profit per sales. (Lied: Lamson found out

it was $100.) • GM hired RPM to run another sale; GM & Lamson argued.• Lamson told GM he thought GM wanted him out; GM said, “You’re right”. Told Lamson to cooperate

with RPM.• Lamson gave company owner a complaint letter re: RPM – said it violated sales ethics – need to rethink

“profit at any cost mentality.” (Continued)

Lamson v. Crater Lake Motors, cont.• Owner said company was ethical. Said no misrepresentations or

illegality. Lamson did not cooperate with RPM. Was fired.

• Lamson sued for wrongful discharge because he complained about illegality and violation of company’s code of ethics.

• Jury holds for Lamson.

• Company appealed.

• HELD: Reversed. Lamson lost.

• No wrongful discharge. Under At-Will-Employment: Employees can be fired for any reason.

• Lamson not directed to participate in unlawful activities. Internal complaints of unlawful sales practices are not a societal duty protected at law.

• Lamson not discharged for fulfilling a public duty protected at law. No evidence that company tried to “silence” Lamson to conceal illegal activities. Lamson’s concerns re: RPM’s sales tactics were laudable.

• HOWEVER, wrongful discharge is narrowly defined – this discharge was not unlawful.