Introducing The Modern Environment of Business

Law and Ethics

Chapter 1

The Modern Environment of Business

• Key functions of the Legal Systems

• Sources of Law• Classifications of

Law• Ethics and Business• International

Perspective

Chapter Issues

Legal Obligations/Ethical Obligations?

• What is a legal obligation vs. an ethical obligation?Ethical business conduct calls for all companies and their

personnel to assume responsibility for safeguarding and preserving that company's assets and resources in the fulfillment of that company's charter, mission or objective.

Legal obligation in business calls for all companies and their

personnel to be responsible for adhering to the legal ethics that are laid out by the companies or the government.

Key functions of the Legal Systems• Improving Social Stability by Influencing Behavior -

Limit actions detrimental to the “public interest” and encourage beneficial acts (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 the social values and customs of a society (Ex: the changing status of gay marriages & controversies involved)

- Effective way to change what is “acceptable” behavior (Laws reflect social changes about discrimination in the workplace)

Sources of Law• Constitution – eg: العربية بالمملكة للحكم األساسي النظام-an-Naẓāmu l-ʾAsāsiyyu li-l-Ḥakami bi-l ,السعوديةMamlakati l-ʿArabiyyati s-Saʿūdīyyah

• Legislatures and Statutes - is a formal written enactment of a legislative authority that governs a state,city or country.

• Administrative Agencies and Regulations• The Judiciary and Common Law• The Executive• International Sources of Law

Administrative Agency

• Administrative agencies are lawmaking bodies with limited powers delegated by Congress. Administrative agencies specialize in specific issues that require expertise.  Administrative agencies are established by Article 1 Section1 of the federal constitution which reads: “[a]ll legislative Powers herein granted shall be vested in a Congress of the United States.”  The “necessary-and-proper” clause in the eighth section of the Article 1 states that the Congress shall have power “[t]o make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers … in any Department or Officer thereof.” The agencies help in  the speedy disposal of cases, both minor and complex and thus are a big aid to US courts.

Judiciary and Common Law• Common law (also known as case law or precedent) is law

 developed by judges through decisions of courts and similar tribunals that decide individual cases, as opposed tostatutes adopted through the legislative process or regulations issued by the executive branch.[1]

• A "common law system" is a legal system that gives great precedential weight to common law,[2] so that consistent principles applied to similar facts yield similar outcomes.[3] The body of past common law binds judges that make future decisions, just as any other law does, to ensure consistent treatment. In cases where the parties disagree on what the law is, a common law court looks to past precedential decisions of relevant courts. If a similar dispute has been resolved in the past, the court is usually bound to follow the reasoning used in the prior decision (this principle is known as stare decisis).

Constitution

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

government• U.S. Constitution, the oldest written

constitution in force in the world• Establishes legislative, executive and

judicial branches of government• .

Saudi Law• The Basic Law of Saudi Arabia (Arabic:

العربية بالمملكة للحكم األساسي النظام-an-Naẓāmu l-ʾAsāsiyyu li-l ,السعوديةḤakami bi-l-Mamlakati l-ʿArabiyyati s-Saʿūdīyyah) (Basic System of Governance) is a constitution-like charter divided into nine chapters, consisting of 83 articles. It is in accordance with the Salafi understanding of Sharia and does not override Islamic laws.

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• Provides stability but allows change

Legislatures & Statutes

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

• Judges interpret• Laws must pass Constitutional muster

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 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

Davis 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.

• Appealed to Supreme Court of Washington

Davis 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.

• Appealed to Supreme Court of Washington

Davis v. Baugh Industrial Contractors: Changing the Common Law

• 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.

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 law that affects business practices.

• Multinational regional or global organizations affect businesses

– Ex: World Trade Organization

• See “Sources of Law in Japan”

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 Law• Civil and Criminal

– Criminal• The guilty can be fined, imprisoned or both• Legal requirement for guilt: “beyond a

reasonable doubt”– Civil

• Wrongdoer pays money, but no jail time!• Legal requirement for liability: “preponderance

of the evidence”(enough evidence to show what the other party is saying is not true)

• Substantive and Procedural– Substantive

• Defines legal rights and regulates behavior– Procedural

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

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 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 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

• 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

• World’s most ethical company- 2013 – Acccenture

• The Foreign Corrupt Practices Act (FCPA) marked the early beginnings of compliance programs in the United States. In the mid-1970s, United States Securities and Exchange Commission (SEC) investigations discovered that a significant number of American companies participated in bribery overseas. “Over 400 U.S. Companies admitted to making questionable or illegal payments to foreign government officials, politicians and political parties.” (United States Department of Justice 2006) One of the most infamous cases of its time was the admission by a Lockheed executive, to the Multinational Corporations Subcommittee of the Senate Foreign Relations Committee, that Lockheed had paid bribes in the amount of $22 million to Japanese government officials in the course of trying to sell its aircraft. This revelation came on the heels of the U.S. Government providing Lockheed with a $250 million emergency loan guarantee (Hishikawa 2003).

What is Compliance Program ?• The internal programs and policy decisions

made by a company in order to meet the standards set by government laws and regulations is called compliance.

• A company will often have a compliance team that examines the rules set forth by government bodies.

• The compliance team then creates a compliance program that assures the company is following the rules.

Ethics and Morals(Ethics are not rules of law –

although they overlap)• 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

• 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.”

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– Discusses disclosure of credit terms, fair credit

reporting and equal credit opportunity– Employees are told to report violations– Is this realistic?