Today’s Business
Environment: Law and
Ethics
Chapter 1
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
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
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”
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
Legislatures & Statutes
• Example: 1972 Congress
• Legislatures create
enacted Clean Water Act,
setting standards for national
statutory law
water quality, and giving EPA
– Federal Laws
authority to adopt necessary
– State Laws
regulations
– Municipal Laws
• Example: States’ statutes
regulate insurance industry,
• Judges interpret
usually giving authority to
• Laws must pass
state insurance commissions
to assist in regulation
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
– Ex: environmental regulations
• Agencies and Regulations –
very important effect on the
legal environment of business
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
• See Davis v. Baugh Industrial
Contractors, Inc.
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)
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.
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
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 & 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”)
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
Business Ethics
Lockheed 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
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
Lamson v. Crater Lake Motors
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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)
Lamson v. Crater Lake Motors, cont.
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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.