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.
Presentation on theme: "Legal, Regulatory, and Political Issues"—
Presentation transcript:
1  Legal, Regulatory, and Political Issues
CHAPTER 4Legal, Regulatory, and Political Issues

2  Chapter ObjectivesTo understand the rationale for government regulation of businessTo examine
the key legislation that structures the legal environment for businessTo analyze the role of regulatory
agencies in the enforcement of public policyTo compare the costs and benefits of regulationTo
examine how business participates in and influences public policyTo describe the government’s
approach for legal and ethical compliance

3  Government’s Influence on Business

Laws derived from the U.S. Constitution and Bill of Rights influence business.Laws are enforced
through the judicial system.Corporations have the same legal status as a person.

4  Major Laws Affecting Business

Sherman Antitrust ActClayton Antitrust ActFederal Trade Commission ActRobinson-Patman
ActLanham Act

5  Law Enforcement Agencies

Food & Drug Administration (1906)Federal Reserve Board (1913)Federal Trade Commission
(1914)Federal Communication Commission (1934)Securities & Exchange Commission
(1934)National Labor Relations Board (1935)

6  Law Enforcement Agencies (cont)

Equal Employment Opportunity Commission (1970)Environmental Protection Agency
(1970)Occupational Safety & Health Administration (1971)Consumer Product Safety Commission
(1972)Commodity Futures Trading Commission (1974)Federal Housing Finance Industry (2008)

7  Global Regulation Import barriers

Product quality, safety, distribution, sales, and advertising regulationNorth American Free Trade
Agreement (NAFTA)European Union (EU)

8  Costs of RegulationAdministrative spending patterns of federal regulatory agenciesStaffing levels

of federal regulatory agenciesBusiness expenditures in compliance with regulations

9  Benefits of Regulation
Greater equality in the workplaceSafer workplacesResources for disadvantaged societal
membersSafer productsMore information about productsGreater product varietyCleaner air and
waterPreservation of wildlife

10  Deregulation Removal of all regulatory authority

Belief that less government intervention allows business markets to work more effectivelyMany
industries have been deregulated.Critics of deregulation cite higher prices and poorer
service/quality.

11  Self-RegulationCompanies attempt to regulate themselves to demonstrate social responsibility

and preclude additional regulation.Firms may chose to join trade organizations with self-regulatory
programs.Best-known self-regulatory association is the Better Business Bureau.Benefits include
lower costs and more practicality and realism in programs.

12  The Contemporary Political Environment

Greater transparency in the congressional committee processLimiting campaign contributions from
individuals, political parties, and special interest groups (Federal Election Campaign Act)Many states
have shifted their electoral process from traditional party caucus to primary elections.

13  Special-Interest Groups
Seek to educate the public about significant social issues and to support legislation and regulation of
business conduct they deem irresponsible
14  Corporate Approaches to Influencing Government
LobbyingPolitical Action CommitteesCampaign Contributions

15  Federal Sentencing Guidelines for Organizations

Passed in 1991 to streamline the sentencing and punishment of organizational crimeProvides an
incentive for organizations to establish due diligence ethics and compliance programs

16  Seven Steps to Effective Compliance and Ethics Program

Establish a code of ethics.Appoint a high-level compliance manager, usually an ethics officer.Take
care in delegation of authority.Institute a training program and communication system.Monitor and
audit for misconduct.Enforce and discipline.Revise program as needed.

17  Sarbanes-Oxley ActLegislation to protect investors by improving accuracy and reliability of

corporate disclosuresMany benefits