Today’s Business Environment: Law and Ethics

1. Today’s Business Environment: Law and Ethics Chapter 1

2. 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 & controversies involved • Ex: Laws reflect social changes about discrimination in the workplace

3. Sources of Law in the United States • Constitutions • Legislatures and Statutes • Administrative Agencies and Regulations • The Judiciary and Common Law • The Executive • International Sources of Law

4. U.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”

5. 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

6. 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 Legislatures & Statutes

7. 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 • Ex: environmental regulations • Agencies and Regulations – very important effect on the legal environment of business

8. 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 • SeeDavis v. Baugh Industrial Contractors, Inc.

9. 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)

10. 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.

11. 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

12. 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

13. Classifications of Law Civil & 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”)

14. 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

15. 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 “Test Yourself”, p. 16

16. 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

17. 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)

18. 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.