Introducing The Modern
Environment of Business
Law and Ethics
Chapter 1
The Modern Environment of
Business
Chapter Issues
• Key functions of the
Legal Systems
• Sources of Law
• Classifications of
Law
• Ethics and Business
• International
Perspective
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: ‫ النظام األساسي للحكم بالمملكة العربية السعودية‬,
an-Naẓāmu l-ʾAsāsiyyu li-l-Ḥakami bi-l-Mamlakati lʿArabiyyati 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:
‫ النظام األساسي للحكم بالمملكة العربية السعودية‬,anNaẓāmu l-ʾAsāsiyyu li-l-Ḥakami bi-lMamlakati 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
• Treaties and Trade
Agreements among
• Firms doing business in
countries define the law
other countries are
that affects business
subject to countries’
laws.
practices.
• Code Law: Many
• Multinational regional or
countries use codes and
global organizations
do not have common law
affect businesses
– Courts interpret the
– Ex: World Trade
codes and their
Organization
application to cases
• 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 Ethics
and 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 mid1970s, 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?