CHAPTER

1. 6 CHAPTER Govt. Regulation of Business and Ethics

2. Govt. Regulation and Ethics • Much of the legal environment is based on govt. agencies, e.g., EPA, EEOC and so on • There are few constraints on the subject matter of the fed. govt. regulation • Just about everything “affects” interstate commerce • Still self-regulation is a potent force that is important in many professions • The extent of govt. regulation of cyberspace probably depends how responsible or irresponsible participants are • Certainly there have been a number cyberspace statutes passed already

3. Administrative Law • Enabling statutes create and define administrative agencies • Regulations issued by administrative agencies first appear in the Federal Register • And are later codified in the Code of Federal Regulations • Total regulations at the fed. level are massive—19 feet of shelf space

4. Admin. Agencies • The Occupational Safety and Health Administration is one of many govt. agencies • Obviously OSHA is directed towards achieving greater worker safety • In order to promulgate new substantive regulations, admin. agencies have to comply with the Administrative Procedures Act (APA) • The APA requires advance notice of proposed new regulations appear in the Federal Register • The APA also requires that the agency must provide an opportunity for interested parties to make their views known

5. New Regulations • For new regulations that are not substantive, but rather interpretative or procedural • The agency does not have to provide notice in the Fed. Register and provide for hearing to receive comments • Interpretative regulations refer to how the agency interprets the laws it enforces • Procedural regulations relate to the requirements parties have to follow to complain about or appeal decisions of the agency

6. Independent Admin. Agencies • The heads of most agencies serve at the pleasure of the president and can be removed for any or no reason • The heads of “independent” agencies have fixed terms and cannot be removed before the expiration of their terms unless there is a showing of malfeasance • All agencies do various things to carry out their responsibilities • Investigations—they must determine if the laws they are supposed to enforce are being violated • Issue subpoenas—agencies are entitled to subpoena records from businesses • Must be relevant to their authority

7. Admin. Agencies • These agencies have a lot discretion • It is best for businesses to cooperate with govt. regulators when possible • In some cases litigation will take place but in other instances compromises can be worked out • If an agency decides to take action against a business they can take a number of sanctions • Fines or penalties, • Denial or revocation of licenses • Seizure of property • Lawsuits against the company in federal courts

8. Admin. Agencies • When agencies first take actions against a business they take the business before Admin. Law Judges (ALJs) • ALJs are employees of the agency and they make factual findings • Either the agency or the business can appeal decisions of the ALJs • Ultimately the business an appeal the fed. courts if the disagree with agency actions

9. Admin. Agencies • Often agencies have to decide whether to prosecute individual businesses for violations of law or • Promulgate a regulation if the problem is sufficiently broad • The FTC sometimes prosecutes a business for unfair and deceptive trade practices but it also writes industry wide regulations such as Guides for Advertising Allowances--what a business can and cannot do in this regard

10. Judicial Review • Part of the checks and balances is the ability of fed. judges to review and reverse decisions of admin. agencies • There are several grounds for reversing decisions of admin. Agencies • The action of the agency was arbitrary and capricious • There was no scientific or technical basis for the actions of the agency • The agency exceeded its authority under the enabling statute(s) • The agency violated a constitutional protection • Generally contained in the Bill of Rights

11. Judicial Review • In many cases advocacy groups are looking for a hook to get into court to challenge actions of admin. agencies • E.g., environmental groups regularly sue the EPA for not being tough enough on polluters or • not enacting regulations that are strict enough • In order to get into court the advocacy group must show • that it has standing to sue, • that it has exhausted all internal appeals within the agency and • that the dispute is ripe for resolution

12. Power of Information • Information is power in today’s economy • Federal agencies keep lots of files, which are threatening to many people • Also fed. agencies have sought to squelch public access • Recognizing these problems, Congress has passed reform legislation • Many of the Congressional reform statutes have numerous exceptions

13. Power of Information • Freedom of Information Act (FOIA) • In general, citizens have a right to access to information about their govt. • Among the exceptions to the FOIA are: • Records that relate to national defense, personnel files, records that are required to be kept secret, trade secrets that are in possession of a govt. agency, law enforcement records, and internal memoranda that reveals decision making. • Govt. in Sunshine Act requires public notice of meetings by an agency along with the agenda • Again there is a lengthy list of exceptions that enable govt. officials to hold meetings that are not announced and are closed to the public

14. Information and Privacy • The Federal Privacy Act of 1974 • Relates only to actions of fed. Agencies • Essentially the Privacy Act makes illegal non-consensual secondary use of information disclosed to an agency • For example, medical records obtained by the VA hospital should not be shared with the FBI unless there is permission by the patient • There are numerous exceptions the Act, so the protection offered is leaky at best

15. Other Controls on the Fed. Bureaucracy • Congress and the President can reduce or eliminate an agency’s budget • Sunset legislation has occasionally been effective • The bill that creates the agency calls for its demise after a fixed period, unless Congress reauthorizes the agency • Requirements by Congress that an agency justify new regulations with cost-benefit analysis has slowed creation of new regulations by some agencies

16. Ethics in Business • Ethics is the study of right and wrong • Some cynical or anti-business types believe that business ethics are a sham • Many claim that the Enron debacle took place in part because of lack of ethical training by high level executives • Of course ethics has attracted some of the best minds and they do not agree

17. Kantian Ethics • Immanuel Kant—18th Century German philosopher • Categorical Imperative • Rules of conduct should be universal and reversible • People should never be used as a means to an end • Origin of the notion of inalienable rights—there are some rights that should not be accessible by government

18. Utilitarianism • Utilitarianism is the major competing ethical system to the Kantian system • In essence, policies that result in the greatest good for the greatest number of people are judged as good and ethical under utilitarian way of thinking • Utilitarians could justify testing AIDS drugs even though they know that more of the control group will die if they do not receive treatment • Kantians say never use people as means to an end

19. Utilitarianism • Is the fundamental tool used by economists to do cost-benefit analysis • Although it is possible to imagine situations in which Kantian ethics yields different prescriptions that those of utilitarianism, in most cases it is possible both systems yield the same answer • Modern discussions of business ethics usually revolve around corporate obligations to various stakeholders • Customers, employees, the neighborhood, shareholders,

20. Business Ethics • Most people would agree that the following are ethical: • Protecting the environment—businesses can use recycled paper • Preventing fraud as much as possible—certainly it would be unethical to profit based on deceiving people—people are being used • Increasing tolerance for diversity—although homosexuals are not legally protected, they could be protected by a company’s code of ethics

21. Ethical Business Actions • Providing a Social Safety Net • Occasionally the rules need to be made less rigid so that some people do not fall through the cracks of a social safety net • Companies should be concerned about their customers • Especially if there is evidence some are misusing the products • Some of the legitimate wine makers also put out highly sugared rot gut wines favored by winos

22. Ethical Business Actions • Shareholder Interests— • There have been conflicts between SH’ers and top level corporate officers • Two unethical practices • Insider trading—in the Enron scandal top corporate officers sold their shares of Enron before the news of the inflated revenues was made public • The Anderson accounting firm, which audited the books of Enron, also made millions in consulting fees • Community Interests— • Some claim relocating production overseas is unethical, even though companies save money

23. Ethics and Govt. Regulation • In industries where ethics are much in evidence, sometimes there is less govt. regulation • Industries that will not clean up their acts are inviting govt. regulation • When free rider problems are severe, such as with air pollution, ethics is very unlikely to substitute for govt. regulation • The firms that do not pollute will incur higher costs and their contribution to cleanup is minuscule.

24. Business Ethics and Combating Fraud • There are many examples of self-regulation that combats fraud • Individual firms will take measures to combat consumer frustration as long as they receive recognition • Trade associations use collective trademarks to signify quality • Also third parties such as Underwriters Laboratories (UL) license their TMs to firms that meet their quality standards • Licenses are used in a number of industries to weed out fraudulent practitioners

25. Business Ethics and Govt. Regulation • Typically govt. regulation takes two forms • Full disclosure requirements—cuts down on fraud, and • SEC, FTC type regulation where agency staff are constantly searching and prosecuting fraud • In many cases, govt. regulation is a factor that harms small business more than large businesses

26. Third World • Many actions that are illegal in this country are legal in the Third World • Because minimum wages, worker safety and environmental standards are much lower in the Third World, it often makes economic sense for companies to relocate production there • Some claim it is unethical for a company to relocate for these reasons or that a company should do something in the country to raise wages, working conditions or public infrastructure

27. Product Liability • Are companies always required to make products as safe as possible? • Safer products may cost more and may be priced out of the market • Do consumers have any responsibility to be responsible for their own actions?—to be careful?

28. Internet Ethics • There are a number of ethical challenges that are unique to the Internet • Among the ethical challenges that arise in cyberspace are: • Acquisition of information from users and customers, with and without their consent • Acquisition of information from children • Combining online and off-line databases • It seems clear that if web sites do not organize themselves better, more govt. regulation will take place • P3P seems to be an interesting experiment in self-regulation