Chapter 4 – Legal, Regulatory, and Political Issues – Summary
In a pluralistic society, many diverse stakeholder groups attempt to influence the public
officials who legislate, interpret laws, and regulate business. Companies that adopt a
strategic approach to the legal and regulatory system develop proactive organizational
values and compliance programs that identify areas of risks and include formal
communication, training, and continuous improvement of responses to the legal and
regulatory environment.
Economic reasons for regulation often relate to efforts to level the playing field on
which businesses operate. These efforts include regulating trusts, which are generally
established to gain control of a product market or industry by eliminating competition
and eliminating monopolies, which occur when just one business provides a good or
service in a given market. Another rationale for regulation is society’s desire to restrict
destructive or unfair competition. Social reasons for regulation address imperfections in
the market that result in undesirable consequences and the protection of natural and social
resources. Other regulations are created in response to social demands for safety and
equality in the workplace, safer products, and privacy issues.
The Sherman Antitrust Act is the principal tool used to prevent businesses from
restraining trade and monopolizing markets. The Clayton Antitrust Act limits mergers
and acquisitions that could stifle competition and prohibits specific activities that could
substantially lessen competition or tend to create a monopoly. The Federal Trade
Commission Act prohibits unfair methods of competition and created the Federal Trade
Commission (FTC). Legal and regulatory policy is also enforced through lawsuits by
private citizens, competitors, and special-interest groups.
A company that engages in commerce beyond its own country must contend with
the complex relationship among the laws of its own nation, international laws, and the
laws of the nation in which it will be trading. There is considerable variation and focus
among different nations’ laws, but many countries’ antitrust laws are quite similar to
those of the United States.
Regulation creates numerous costs for businesses, consumers, and society at
large. Some measures of these costs include administrative spending patterns, staffing
levels of federal regulatory agencies, and costs businesses incur in complying with
regulations. The cost of regulation is passed on to consumers in the form of higher prices
and may stifle product innovation and investments in new facilities and equipment.
Regulation also provides many benefits, including greater equality in the workplace, safer
workplaces, resources for disadvantaged members of society, safer products, more
information about and greater choices among products, cleaner air and water, and the
preservation of wildlife habitats. Antitrust laws and regulations strengthen competition
and spur companies to invest in research and development. Many businesses and
individuals believe that the costs of regulation outweigh its benefits. Some people desire
complete deregulation, or removal of regulatory authority.
Because government is a stakeholder of business (and vice versa), businesses and
government can work together as both legitimately participate in the political process.
Business participation can be a positive or negative force in society’s interest, depending
not only on the outcome but also on the perspective of various stakeholders.
Changes over the last forty years have shaped the political environment in which
businesses operate. Among the most significant of these changes were amendments to the
Legislative Reorganization Act and the Federal Election Campaign Act, which had the
effect of reducing the importance of political parties. Many candidates for elected offices
turned to increasingly powerful special-interest groups to raise funds to campaign for
elected office.
Some organizations view regulatory and legal forces as beyond their control and
simply react to conditions arising from those forces; other firms seek to influence the
political process to achieve their goals. One way they can do so is through lobbying, the
process of working to persuade public and/or government officials to favor a particular
position in decision making. Companies can also influence the political process through
political action committees, which are organizations that solicit donations from
individuals and then contribute these funds to candidates running for political office.
Corporate funds may also be channeled into candidates’ campaign coffers as corporate
executives’ or stockholders’ personal contributions, although such donations can violate
the spirit of corporate campaign laws. Although laws limit corporate contributions to
specific candidates, it is acceptable for businesses and other organizations to make
donations to political parties.
More companies are establishing organizational compliance programs to ensure
that they operate legally and responsibly as well as to generate a competitive advantage
based on a reputation for good citizenship. Under the Federal Sentencing Guidelines for
Organizations (FSGO), a company that wants to avoid or limit fines and other penalties
as a result of an employee’s crime must be able to demonstrate that it has implemented a
reasonable program for deterring and preventing misconduct. To implement an effective
compliance program, an organization should develop a code of conduct that
communicates expected standards, assign oversight of the program to high-ranking
personnel who abide by legal and ethical standards, communicate standards through
training and other mechanisms, monitor and audit to detect wrongdoing, punish
individuals responsible for misconduct, and take steps to continuously improve the
program. A strong compliance program acts as a buffer to keep employees from
committing crimes and to protect a company’s reputation should wrongdoing occur
despite its best efforts.
Enacted after many corporate financial fraud scandals, the Sarbanes-Oxley Act
created the Public Company Accounting Oversight Board to provide oversight and set
standards for the accounting firms that audit public companies. The board has
investigatory and disciplinary power over accounting firm auditors and securities
analysts. The act requires corporations to take responsibility to provide principles-based
ethical leadership and holds CEOs and CFOs personally accountable for the credibility
and accuracy of their company’s financial statements. Ideally, the act will provide for a
new standard of ethical behavior for U.S. business, especially for top management and
boards of directors responsible for company oversight.