Today’s Business Environment: Law and Ethics

1. Today’s Business Environment: Law and Ethics Chapter 1 Meiners, Ringleb & Edwards The Legal Environment of Business, 12thEdition

2. The Modern Environment of Business Chapter Issues • Law & the Key Functions of the Legal Systems • Sources of Law in the U.S. • Classifications of Law • Public Image of Big Business – Business Ethics & Social Responsibility

3. Key Functions of the Legal System • No Generally Accepted Definition of Law • Law: May be viewed as a collection of rules or principles that limit and direct human behavior • Improving Social Stability by Influencing Behavior – The legal system defines social behavior; limits actions detrimental to the “public interest”; restricts business practices that are outside of the ethical norms; and encourages furtherance of social and political goals • Laws in different jurisdictions may reflect social norms

4. Key Functions of the Legal System • Conflict Resolution – • Courts are one mechanism for resolving disputes • Businesses turning to formal private settlement techniques – alternative dispute resolution systems outside the court • Social Stability and Change – Reflect the social values and customs of a society, which over time may change • Ex: the changing status of same-sex marriages & controversies involved • Effective way to change what is “acceptable” behavior • Ex: Laws reflect social changes about discrimination in the workplace

5. International Perspective“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 and legal system. Businessmen interviewed after the earthquake said that doing business in Haiti was nearly impossible. The demands for bribes are endless. Transparency International ranks Haiti 168 most corrupt in the world By comparison, Dominican Republic ranked 99th Only 9 countries were worse

6. Sources of Law in the United States • Constitutions • U.S. Constitution & State Constitutions • Federal & State Legislatures and Statutes • Administrative Agencies and Regulations • The Judiciary and Common Law • The Executive • International Sources of Law

7. 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”

8. 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

9. Legislatures and 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

10. 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

11. 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” • Cases published in books called case reporters • 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 • See Davis v. Baugh Industrial Contractors, Inc.

12. CaseDavis v. Baugh Industrial Contractors, Inc. • Glacier Northwest hired Baugh Industrial Contractors 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 concrete 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 at trial court. (Continued)

13. CaseDavis v. Baugh Industrial Contractors, Inc. • Appealed to Supreme Court of Washington • 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.

14. The Executive • President can create law through “Executive Orders” • Example: Can order preference to buying recycled products or restrict financial transactions by suspected terrorist organizations • 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

15. International Sources of 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. • Ex: NAFTA (North American Free Trade Agreement) • Multinational regional or global organizations affect businesses • Ex: World Trade Organization • See “Civil Law Systems”

16. International Perspective“CIVIL LAW SYSTEMS” • Civil law systems are dominant in most countries • Europe • Central & South America • Parts of Asia and Africa • Civil law roots are in the Roman Empire • 3 major characteristics differentiate a civil law system from common law • Civil law systems are inquisitorial rather than adversarial • Civil law is code-based rather than case-based • Civil law is influenced more by academic experts than by practicing lawyers

17. 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

18. Classifications of Law • Civil and Criminal • Criminal • Most criminal statutes also have lesser civil charges resulting in fines • 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”

19. Classifications of Law • Substantive and Procedural • Substantive • Defines legal rights and regulates behavior; including criminal, civil and common law. • Procedural • How substantive lawis processed through the court or other systems & how it is to be enforced (the “nuts and bolts”)

20. Business Ethics and Social Responsibility • Public perception of business leaders has fallen (i.e. big banks and Wall Street) • Ethics: Rules or standards governing conduct of members of a profession • Integrity: Living by a moral code & standards of ethics • International business and corruption – duping investors and bribing government officials • Morality: Conformity to rules of correct conduct within the context of a society, religion or other institutional belief • Campaign contributions to influence public officials • Practical consequence are high jury awards against large corporations who cross ethical lines into illegality

21. Business Ethics:Lockheed and Bribes • 1970’s: Lockheed was in a struggle for survival • To obtain a large order from All Nippon Airways, company had to bribe 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 said: “No, a bribe is a bribe.” Once you cross the line, ethics are lost. • Others would say, “ethical dilemma” if it’s not illegal in Japan • Still others would say bribes are illegal and unethical • See “OK to Grease Palms?”

22. Ethics Codes and Compliance Programs • Organizations adopt compliance codes, combining ethics and legal requirements • Survey of 3,000 workers: more than 2/3 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 these programs in prosecution or recommendation of leniency: • Whether compliance program is designed to prevent/detect violations • Whether a company enforces its compliance program

23. Cyber Law “ONLINE ETHICSAND 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 employees? • Does legal and ethics on-line training for employees have benefits?

24. 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 • The wrong kind of regulation, especially with corrupt bureaucracy • Stifles business • Reduces economic opportunities for ordinary people (Continued)

25. International Perspective “DOES REGULATION IMPROVE BUSINESS ETHICS?” • World Bank Report • The more regulation a country has: • the more corruption is likely and • the lower is the standard of living • In United Arab Emirates: To enforce a contract requires 49 procedures—takes 1 ½ years & 20% of value of the claim • In India, documents to export goods requires 9 steps – takes 2x as long as in developed countries • 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

26. Issue Spotter“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 • 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 employees • See Lamson v. Crater Lake Motors

27. Ethics and Corporate Social Responsibility • Corporate leader is to ensure corporate mission is fulfilled • Commitment to a code of ethics goes beyond legal obligations • Google’s Rule in its Code of Conduct: “Don’t Be Evil” • Spells out application in operations, serving customers, personnel policy & privacy issues • China stated Google was breaking Chinese law by refusing to follow the country’s censorship rules • Google agreed to follow China’s rules – has been criticized • Says it is working to reduce censorship

28. Case Lamson v. Crater Lake Motors • For 15 years, Kevin Lamson was sales manager for car dealership. • Good employee – valued his job – liked the company’s motto “customers come first”. Good reputation for high standard of ethics and integrity. • Sales were lagging. Company hired outside sales firm, Real Performance Marketing (RPM), to run a company 5-day sales promotion. • Lamson observed a number of “unethical or unlawful” activities. • RPM video said “all vehicles “ cut in price – only video vehicles 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 the 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 only $100.) (Continued)

29. Case Lamson v. Crater Lake Motors • 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. • Lamsongave company owner a complaint letter re: RPM – said it violated sales ethics – need to rethink “profit at any cost mentality.” • Owner said company was ethical. Said no RPM illegality or misrepresentations • 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. (Continued)

30. Case Lamson v. Crater Lake Motors • HELD: Reversed. Lamson lost. • No wrongful discharge. • Under At-Will-Employment: Employees can be fired for any reason. • Here, Lamson not directed to participate in unlawful activities. • Internal complaints (not external) 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.