1. In what ways is knowing and understanding the law important to businesspersons?

2. What are the major sources of law in our legal system? Explain each.

3. What is common law and how does it work?

4. How can businesspersons discourage unethical behavior? What tools/mechanisms can they use?

5. Compare and contrast duty-based ethics and utilitarian ethics.

6. What are some ethical problems in the global context?

BUSINESS LAW II - WEEK ONE LECTURE Chapter 1: Introduction to the Law and Our Legal System Persons entering the world of business today will find themselves subject to numerous laws and government regulations. Therefore, it is important to understand these laws to have a successful career in business. What is Law? Throughout history there have been many different definitions of what law is, but they are all based on the following general observation concerning the nature of law: law consists of enforceable rules governing relationships among individuals and between individuals and their society. Business Activities and the Legal Environment In today's world, businessperson's are expected to make decisions that are ethical as well as legally sound. Many Different Laws May Affect a Single Business Transaction Many different laws may apply to just one transaction and businesspersons should be aware of this and understand enough about the law to know when to hire an expert for advice. Sources of American Law To understand the law, you need to have some understanding of its origins. One major source is the common law tradition that originated in medieval England. Another is constitutional law, which includes the U.S. Constitution and the constitutions of the states. The U.S. Constitution is the supreme law of the land. Within each state, the state constitution is supreme, so long as it does not conflict with the U.S. Constitution. Statutes (the laws enacted by Congress and the state legislatures) comprise an additional source of American law, generally referred to as statutory law. Another source of American law is administrative law, which consists of the numerous regulations created by administrative agencies (such as the U.S. Food and Drug Adminsitration). The Common Law Tradition Because of our colonial heritage, much of American law is based on the English legal system. In 1066 in England, the king's courts sought to establish a uniform set of customs for the whole country and the body of rules that evolved from these courts was the beginning of the common law - a body of general rules that prescribed social conduct and was applied throughout the entire English realm. Courts developed the common law rules from the principles behind the decisions in actual legal disputes and judges attempted to be consistent. When possible, judges based their decisions on the principles suggested by earlier cases. Each decision/interpretation of the law became a part of the law on the subject and served as a legal precedent (a guide for future decisions). Therefore, later cases that involved similar legal principles or facts could be decided with reference to that precedent. In fact, the practice of deciding new cases with reference to former decisions or precedents eventually became a cornerstone of the English and American judicial systems. It forms a doctrine called stare decisis which means to \"stand on decided cases.\" Under the doctrine of stare decisis, judges are obligated to follow the precedents established within their jurisdictions. This doctrine is beneficial because it sets guidelines and creates predictability in the law. Note, however, that sometimes precedents are overturned; it may happen because of social or technological changes that render the precedent inapplicable. When there is no precedent on which to base a decision, or there are conflicting precedents, courts may consider a number of factors including legal principles and policies underlying previous court decisions, existing statutes, fairness, social values and customs, public policy, and data and concepts drawn from the social sciences. A person brings a case to a court of law seeking a remedy or relief from a wrong. Usually that remedy is damages- the payment of money (to make up for harm suffered). However, sometimes money is not enough to make the situation right, and that is where equity comes to play. Equity is the branch of law, founded in justice and fair dealing that seeks to supply a fairer and more adequate remedy than monetary damages. In English law, the courts of chancery emerged to deal with those cases in which the individuals did not actually have a cause of action; these courts became known as court of equity, granting remedies in equity. Thus, in England there were two separate court systems: courts of law and courts of equity. Note that even though the court of law can only grant damages as a remedy, a court of equity could order a party to perform as was promised or to doot do a particular act. Today, in most states, the courts of law and equity are merged, which means that a court may now grant both legal and equitable remedies in the same case, but to request the proper remedy one must know what remedies are available for separate kinds of harms suffered. Common law today consists of the rules of law announced in court decisions, including court interpretations of constitutional provisions, of statutes enacted by legislatures, and of regulations created by administrative agencies. Although the body of statutory law has expanded greatly since the founding of the nation, common law remains a significant source of legal authority. Even when legislation has been substituted for the common law principles, courts often rely on the common law as a guide to interpreting the legislation. Constitutional Law The federal government and the states have separate constitutions that set forth the general organization, powers, and limits of their governments. The U.S. Constitution is the supreme law of the land, which means that a law in violation of the U.S. Constitution will be declared unconstitutional and will not be enforced. Under the Tenth Amendment of the U.S. Constitution, all powers not granted to the federal government are reserved to the states. Unless they conflict with the U.S. Constitution, state constitutions are supreme within their respective borders. Statutory Law Statutory law is comprised of laws made by Congress and the various state legislatures as well as the ordinances passed by cities and counties. No two states in the U.S. have identical statutes, constitutions, and case law. Still, a group of legal scholars and lawyers formed the National Conference of Commissioners on Uniform State Laws (NCCUSL) in 1892 to draft uniform statutes for adoption by the states. Adoption of a uniform law is a state matter; a state may reject all or part of the statute or rewrite it as the state legislature wished. That means that even though a few states may adopt a uniform law, the laws in those states are not necessarily \"uniform.\" The Uniform Commercial Code is a sample of a uniform law, which has been adopted in forty nine states, DC, and the Virgin Islands to facilitate commerce among the states by providing a uniform, yet flexible set of rules governing commercial transactions. Administrative Law Administrative law consists of rules, orders, and decisions of administrative agencies (government bodies such as departments, commissions, and boards charged by Congress or a state legislature with carrying out the terms of particular laws). Civil Law versus Criminal Law It is important to know the difference between civil law and criminal law. Civil law spells out the duties that exist either between persons or between citizens and their governments (excluding the duty not to commit crimes). In a civil case it is a plaintiff suing a defendant in order to obtain a remedy, usually money damages, for failure to abide by a certain duty. Criminal law has to do with a wrong committed against the public as a whole. In a criminal case it is the government (the United States government, or the government of a particular state) that seeks to impose a penalty (a monetary penalty and/or imprisonment) on an allegedly guilty person. Law around the World Countries that were once colonies of Great Britain retained their English common law heritage after they achieved their independence. Today common law systems exist in England, the United States, Australia, Canada, India, Ireland, and New Zealand. However, most European nations base their legal systems on Roman civil law or \"code law.\" In a code law system, the primary source of law is a statutory code. Judges in this type of system are not bound by precedent as they are in a common law system. Most of the world today has a civil law system including African, Asian, and Latin American countries that were once colonies of the continental European nations. International Law International law can be defined as a body of written and unwritten laws observed by independent nations and governing the acts of individuals as well as governments. International customs and treatises are generally considered to be two of the most important sources of international law. If a nation violates an international law, the most that other countries or international organizations can do (if persuasive tactics fail) is resort to coercive actions against the violating nation. Coercive actions range from severance of diplomatic relations and boycotts to, as a last resort, war. Chapter 2: Ethics in Business The scope and scale of corporate unethical behavior, especially in the financial sector has skyrocketed in the last several years with enormous repercussions worldwide, which proves that business ethics cannot be taken lightly. Business Ethics Ethics consists of moral principles and values applied to social behavior; it can be defined as the study of what constitutes right or wrong behavior. What is Business Ethics? Business ethics focuses on what constitutes right or wrong behavior in the business world and on how moral and ethical principles are applied by businesspersons to situations that arise in their daily activities in the workplace. Why is Business Ethics Important? A keen and in-depth understanding of business ethics is important to the long-run viability of a corporation and the well-being of the individual officers and directors of the corporation. Setting the Right Ethical Tone Sometimes unethical business decisions are made just because they can be made, and perhaps one of the most difficult challenges for business leaders today is to create the right \"ethical tone\" in their workplaces so as to deter unethical conduct. The Importance of Ethical Leadership Management must set standards and must apply those standards to themselves and to employees in the company. Management is very important when it comes to maintaining ethical behavior in the workplace because employees take their cue from management. If a firm's managers do not violate obvious ethical norms in their business dealings, employees will be likely to follow the example. Creating Ethical Codes of Conduct One of the most effective ways of setting the tone of ethical behavior within an organization is to create an ethical code of conduct. A well written code of ethics explicitly states a company's ethical priorities. It is important for employees to understand the ethical provisions, some companies hold training seminars to verbally explain those policies, while others prefer to do regular seminars every so often to drill these policies into the employees. Corporate Compliance Programs In large corporations, ethical codes of conduct are usually just one part of a comprehensive corporate compliance program. Other components of these programs include a corporation's ethics committee, ethical training programs, and internal audits to monitor compliance with applicable laws and the company's standards of ethical conduct. One such applicable law is the Sarbanes-Oxley Act, which requires certain companies to set up confidential systems so that employees and others can \"raise red flags\" about suspected illegal or unethical auditing and accounting practices. Note that to be effective, especially in large corporations, a compliance program must be integrated throughout the firm. Conflicts and Trade-offs Firms have implied ethical (and legal) duties to a number of groups, including shareholders and employees. Since these duties may at times conflict, management is constantly faced with ethical trade-offs. For instance, when a company decides to reduce costs by downsizing and restructuring, it may benefit shareholders, but it will harm employees who are laid off or fired. There is an obvious conflict in that situation. Ethical Transgressions in Financial Institutions Corporate Stock Buybacks In 2008 and 2009, many well-known financial companies in the U.S. either went bankrupt, were taken over by the federal government, or were bailed out by the U.S. taxpayers. Those same corporations were using their own cash funds to prop up the value of their stock in the years just before the economic crisis started in 2008. A stock buyback is a company's purchase of shares of its own stock on the open market; the reason behind it is generally that management of a corporation believes that the market price of its shares is below their fair value. The main individual beneficiaries from buybacks are corporate executives who have been given stock options, which enable them to buy shares of the corporation's stock at a set price because when the market price rises above that level, the executives can profit by selling their shares. Executive Bonuses Executives and others in the financial industry are often paid bonuses, a percentage of their firms' profits, no matter how risky their investment actions have been. When investment banks and commercial banks began to fail or had to be bailed out or taken over by the federal government, executive bonuses became an important issue. The Sarbanes-Oxley Act Congress enacted the Sarbanes-Oxley Act in 2002 to help reduce corporate fraud and unethical management decisions. Among other things, the act calls for a greater degree of government oversight over public accounting practices and prohibits the destruction or falsification of records with the intent to obstruct or influence a federal investigation or in relation to bankruptcy proceedings. Business Ethics and the Law Today, legal compliance is regarded as a moral minimum- the minimum acceptable standard for ethical business behavior. One of the major challenges that businesspersons face is that the legality of a particular action is not always clear. One reason is because there are a lot of law regulating business and it is possible to violate one without realizing it, but the most important reason is that there are a lot of \"gray areas,\" which makes it difficult to predict with certainty how a court may apply a given law to a particular action. It is advisable to always error on the side of caution, because if it seems really close to crossing the legal line, it probably is. Laws Regulating Business Today's business firms are subject to extensive government regulation. The rules and regulations change frequently. Determining whether a planned action is legal requires that decision makers keep abreast of the law. Ignorance of the law is not an excuse. It is important to seek legal advice before making important business decisions because one violation of a regulatory rule may prove costly. \"Gray Areas\" in the Law In many situations, business firms can predict with a fair amount of certainty whether a given action would be legal. However, there are several situations in which the consequences of a particular action are less clear. Business decision makers need to proceed with caution and evaluate an action and its consequences from an ethical perspective. Approaches to Ethical Reasoning Ethical reasoning is a reasoning process in which the individual links his or her moral convictions or ethical standards to the particular situation at hand. Ethical reasoning relating to business traditionally has been characterized by two fundamental approaches: (1) Duty-Based Ethics and (2) Outcome-Based Ethics. Duty-Based Ethics Duty-based ethical standards often are derived from revealed truths, such as religious precepts. They can also be derived through philosophical reasoning. In the Judeo-Christian tradition, the Ten Commandments of the Old Testament establish fundamental rules for moral action. Other religions have their own sources of revealed truth. Religious rules generally are absolute with respect to the behavior of their adherents. Ethical standards based on religious teachings involve an element of compassion. Duty-based ethical standards may also be derived solely from philosophical reasoning. Immanuel Kant believed that individuals should evaluate their actions in light of the consequences that would follow if everyone in society acted in the same way. Duty-based ethical standards imply that human beings have basic rights, because a duty cannot exist without a corresponding right. The principles that human beings have certain fundamental rights, such as the rights to life, freedom , and the pursuit of happiness, is deeply embedded in Western culture. Those who adhere to this principle of rights, or \"rights theory,\" believe that a key factor in determining whether a business decision is ethical is how that decision affects the rights of others. Outcome-Based Ethics Utilitarianism is a philosophical theory developed by Jeremy Bentham and then advanced with some modifications by John Stuart Mill. Utilitarianism is outcome oriented; it focuses on the consequences of an action, not on the nature of the action itself or on a set of moral values or religious beliefs. Those who apply utilitarian ethics believe that an action is morally correct or \"right\" when, among the people it affects, it produces the greatest amount of good for the greatest number. When an action affects the majority adversely, it is morally wrong. Applying the utilitarian theory requires three steps: (1) a determination of which individuals will be affected by the action in question; (2) a cost-benefit analysis (an assessment of the negative and positive effects of alternative actions on these individuals); (3) a choice among alternative actions that will produce the greatest positive benefits for the greatest number of individuals. Corporate Social Responsibility Corporate social responsibility is the idea that those who run corporations can and should act ethically and be accountable to society for their actions. One view of corporate social responsibility is the stakeholder approach, which stresses that corporations have a duty not just to shareholders but also to other groups affected by corporate decisions (stakeholders) including employees, customers, creditors, suppliers, and the community. Another theory of social responsibility, the corporate citizenship theory, argues that corporations should promote goals that society deems worthwhile and take positive steps towards solving social problems. Corporate social responsibility attains its maximum effectiveness if it is treated as a way of doing business rather than as a special program. Business Ethics on a Global Level Frequent conflicts in ethics arise between foreign and U.S. businesspersons because of the difference in cultures and religions. For instance, drinking is prohibited in some countries for religious reasons, which would make it thoughtless and imprudent for a U.S. businessperson to invite the businessperson from that country out for a drink to discuss the issues. Also, women are not seen as equals in some countries, which presents some problems with U.S. businesswomen who go to other countries to do business. Monitoring the Practices of Foreign Suppliers Many U.S. companies now contract with companies in developing countries to produce goods because the wage rate in those countries is significantly lower. Some problems such as exploitation of children may arise from these dealings and given today's global communications network, it is unwise to assume that a company's conduct in other nations will go unnoticed by \"corporate watch\" groups that discover and publicize unethical corporate behavior. That is why today's companies usually take steps to avoid adverse publicity that include either altogether refusing to deal with certain suppliers or making arrangements to monitor their suppliers' workplaces. The Foreign Corrupt Practices Act Side payments to government officials in other countries present another ethical problem. There are many countries where it is not the private companies (like in the U.S.) that make business decisions, but it is actually government officials because of extensive government regulation and control over trade and industry. In those countries it is not considered unethical to make side payments to government officials, but the Foreign Corrupt Practices Act (FCPA) prohibits U.S. business persons from bribing foreign officials to secure advantages contracts. The first part of the FCPA prohibits the bribery of most officials of foreign governments if the purpose of the payment is to act in his or her official capacity to provide business opportunities. This part applies to all U.S. companies and their directors, officers, shareholders, employees, and agents. Note that it does not prohibit payments to minor officials for the purpose of speeding up the process, or to private foreign companies or other third parties unless the U.S. firm knows that the payments will be passed on to a foreign government in violation of the FCPA. The second part of the FCPA is directed towards accountants, because in the past bribes were often concealed in corporate financial records. The FCPA prohibits any person from making false statements to accountants or false entries in any record or account. Business firms that violate the act may be fined up to $2 million, while individual officers or directors may be personally fined up to $100,000 and may be imprisoned for up to five years