The Legal and Ethical Environment of Business :Chapter 1 The Legal and Ethical Environment of Business


The Invisible Hand :...every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. The Invisible Hand “In this passage, taken from his 1776 book ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ Adam Smith set out the mechanism by which he felt economic society operated. Each individual strives to become wealthy ‘intending only his own gain’ but to this end he must exchange what he owns or produces with others who sufficiently value what he has to offer; in this way, by division of labour and a free market, public interest is advanced.” Adam Smith and the invisible hand, by Helen Joyce. Copyright © 2009. University of Cambridge. http://plus.maths.org/issue14/features/smith/


Greed :Greed


Business, Law and Ethics :Business, Law and Ethics Key functions of legal systems Sources of law Classifications of law Ethics and business International perspective Chapter Issues


Slide 5:Improving social stability by influencing behavior - Limit actions detrimental to the “public interest” and encourage beneficial acts Different countries different laws different social norms Conflict resolution forum - Courts are one mechanism for resolving disputes – Alternative Dispute Resolution (ADR) Structured evolution of change in the social values and customs of a society - Exs: the changing status of gay marriages; workplace discrimination See “Chad: A Third-World Country Looks to Create a Legal System” p. 7 Legal Systems – Purpose, Function


Sources of Law :Sources of Law Constitution Legislatures and Statutes Administrative Agencies and Regulations The Judiciary and Common Law The Executive International Sources of Law


Constitution :Constitution Fundamental law of the land Establishes the limits and power of government Establishes legislative, executive and judicial branches of government Each state also has its own constitution


Legislatures/Statutes :Legislatures/Statutes Legislatures create statutory law Federal Laws State Laws Municipal Laws Judges interpret Laws must pass Constitutional muster Ex:1972 Congress enacted Clean Water Act, setting standards for national water quality, and giving EPA authority to adopt necessary regulations Ex: State statutes regulate insurance industry, usually giving authority to state insurance commissions to assist in regulation


Administrative Agencies and Regulations :Administrative Agencies and Regulations Congress creates a statute Statute names administrative agency Agency makes regulations Sometimes both Congress and states enact regulations in the same area of concern, such as environmental regulations


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 The Judiciary and Common Law


Davis v. Baugh Industrial Contractors :Glacier Northwest hired Baugh Industrial to build a facility, including underground pipe system. 3 years later, Glacier suspected a leak, assigned an employee, Davis, to find the leak; while Davis was in an access hole, a concrete wall collapsed, killing him. Expected life of pipes: 100 yrs; these were likely damaged in the installation; Davis’ daughter sued Baugh & others for negligence in father’s death. The trial court relied on precedent: when a contractor finishes work & owner accepts it, contractor (Baugh) is no longer liable; only property owner has liability, suit dismissed. Appealed to Supreme Court of State of Washington Davis v. Baugh Industrial Contractors


Davis v. Baugh Industrial Contractors :HELD: Reversed and remanded. HELD: Court rejected previous common law rule and accepted 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 highly scientific and complex. Landowners rely on a contractor’s expertise and non-expert landowners often don’t recognize poor performance by the contractor. Liability occurs when it is reasonably foreseeable that a 3rd party could be injured due to the contractor’s negligence. Davis v. Baugh Industrial Contractors


The Executive :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 to undertake


International Sources of the Law :International Sources of the Law Firms doing business in other countries are subject to host country’s 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 law that affects business practices. Multinational regional or global organizations affect businesses Ex: World Trade Organization See “Sources of Law in Japan” p.16


Classifications of Law :Classifications of Law Public and Private Public- legal relationships between members of society and the government influence behavior regulates social change Private- legal relationships among members of society resolves disputes primarily common law


Slide 16:Civil and 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 and Procedural Substantive Defines legal rights and regulates behavior Procedural How it is to be enforced (the “nuts and bolts”) Classifications of Law


Legal Obligations/Ethical Obligations? :What is a legal obligation vs. an ethical obligation? Employer describes a position, offers a job: Job is “character building” “Team working environment” At the interview, the supervisor is great and the office is nice. Q: Is there a basis for a lawsuit by the recruit? A: Not likely that legal obligations were violated by the employer. Ethical obligations? Legal Obligations/Ethical Obligations?


Ethics and Business :Ethics and Business Public perception of business leaders has fallen Enron and WorldCom cases have brought issues of illegality and unethical behavior to the forefront International business and corruption – duping investors and bribing government officials Campaign contributions to influence public officials Practical consequence are high jury awards against large corporations More and more focus is on ethics Not to be confused with rules of law


Cyber Law: “Online Ethics and Legal Compliance” :Cyber Law: “Online Ethics and 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? Do legal and ethics on-line training for employees have benefits?


From Codes to Compliance :From Codes to Compliance Organizations adopt compliance codes, combining ethics and legal requirements 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


Ethics and Morals :Morals/Ethics should not be confused with etiquette or good manners Morals/Ethics should not be confused with rules of law Good morals inspire and teach Good law governs Ethics and Morals Morals Generally accepted standards of right and wrong in a society Ethics Abstract concepts that might be studied in standards of right & wrong in philosophy and theology


United States v. Stanley (1987) :Stanley, in Army, volunteers to “test special clothing” Instead, Army gives him LSD Years later, Stanley finds out and sues Army under Federal Tort Claims Act Supreme Court says “No Go” – you were in the Army, so government not liable Held: Art. I, Sec. 8 of Constitution gives plenary control over rights of military personnel Dissenting Opinion: Re: Medical trials at Nuremberg--Sue the officers, not the gov’t. United States v. Stanley (1987)


International Perspective: “Does Regulation Improve Business Ethics?” :International Perspective: “Does Regulation Improve Business Ethics?” Financial scandals encourage expanded securities regulation Drug trade has resulted in increased control of money transfers Governments increase regulation to prevent future 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 include: Bolivia, Chad, Costa Rica, Guatemala, Mali, Mozambique, Paraguay, the Philippines and Venezuela Countries that regulate the least: Australia, Canada, Denmark, Hong Kong, Jamaica, the Netherlands, New Zealand, Singapore, Sweden and the United Kingdom Good regulation, well-enforced v. Corrupt regulation, corruptly enforced


Issue Spotter: “Putting Ethics Into Practice” :Issue Spotter: “Putting Ethics Into Practice” Large chain of stores gives employees a “Business Conduct Guide:” States that everyone should be “guided by the highest ethical and legal standards” Discusses antitrust issues briefly p. 18 Discusses disclosure of credit terms, fair credit reporting and equal credit opportunity p. 18 Employees are told to report violations Is this realistic?