Business Law Question

28UNIT I FOUNDATIONS OF THE LEGAL AND REGULATORY ENVIRONMENT
more than a cost, a constraint, or a charitable deed-it
can be a source of opportunity, innovation, and competi-
tive advantage.”71
According to Porter and Kramer, rather than trying
to take on all the ills of the world, companies should
focus on social issues that intersect with their particular
business and value proposition. Managers should first
eliminate as many negative value-chain impacts, such
as emissions and waste and depletion of scarce natural
resources, as possible. Then, they should identify areas
of the social context where they can create “shared value”
for the firm and society through a small number of
initiatives that both generate competitive advantage for
the firm and benefit society.” One example is Toyota’s
Prius, a hybrid gasoline-electric vehicle that both
reduced emissions and gave Toyota a distinct position
with customers. Another is Whole Foods Market’s ability
to charge premium prices for healthful food products
that are (1) sourced from local farmers, (2) sold in stores
that are constructed with a minimum of virgin raw mate-
rials and use electricity offset by renewable wind energy
credits, and (3) increasingly delivered in trucks powered
by biofuels.73
Third-generation Timberland CEO Jeffrey Swartz
explained that “corporate responsibility isn’t an option-
it’s part of our company’s DNA, as well as a competitive
advantage.” He continued:
Today, we embrace corporate responsibility consciously and
deliberately. We believe in our ability and responsibility to
make socially and environmentally-responsible decisions
that benefit our business, the outdoors and our communities.
These are not commitments we make altruistically. On the
contrary, our strategic sustainability programs help build a
stronger company-improving our bottom line as well as our
ability to improve our physical and social environment. We
call this our Earthkeepers philosophy, and it drives every-
thing we do.74
This is not to suggest that ethics always pay. Sometimes,
good guys do come in last and crime pays.
2-3f Approaches to Resolving the Tension
Between Short-Term Results and Long-
Term Value
Managers can take affirmative steps to help resolve the
tension between short-term economic results and long-
term value creation and capture.
71. Id.
72. Id. at 88.
73. Id. at 88-91.
74. Timberland Company, Executive Commitment, available at http://
responsibility.timberland.com/wp-content/uploads/2012/03/csr-executive-
commitment-july-2011.pdf (last visited June 26, 2013).
Soften the Edges
To avoid or reduce layoffs, many companies soften the
edges of difficult economic times by cutting personnel
costs through other means. Less draconian measures
include hiring freezes, shortening the workweek, reducing
pay and bonuses, eliminating bonuses altogether, reducing
salary increases, reassigning employees, and offering buyout
packages to employees who might be considering leaving
anyway,75
When declining demand for its goods caused Levi
Strauss & Co. to close eleven U.S. plants, lay off 5,900
employees, and move more of its manufacturing offshore,
the company committed to providing a $245 million
employee package. Levi gave employees eight months’
notice, as much as three weeks of severance pay for every
year of service, up to eighteen months of medical coverage,
an enhanced early retirement program, and a flexible allow-
ance of up to $6,000 for training and start-up expenses.76
Lobby for Changes in the Law or the
Enactment of Codes of Conduct
In many instances, corporations or coalitions of corpora-
tions have the economic and political power to lobby for
changes in applicable law. By encouraging the passage and
enforcement of laws prohibiting unethical conduct, such
as the dumping of hazardous waste or the use of child
labor, managers can ensure that they compete on a level
playing field.
After the United States enacted the Foreign Corrupt
Practices Act of 1977, which prohibits U.S. companies from
paying bribes to government officials, General Electric
and other U.S. firms successfully lobbied for tougher
international standards. (This act is discussed in detail
in Chapter 24.) In 1999, the Organization of Economic
Co-operation and Development (OECD) adopted a con-
vention criminalizing bribes to government officials and
recommended a prohibition on the tax deductibility of
bribes.” The OECD comprises 34 member countries
from North and South America, Europe, Asia-Pacific,
and the Middle East, representing more than half of the
goods and services produced worldwide.
Bribery remains a serious international problem in spite
of the OECD convention. Transparency International’s
2011 Bribe Payers Index ranks 28 leading economies by
their companies’ inclination to bribe abroad. Companies
based in Mexico (26th), China (27th), and Russia (28th)
were among the most likely to pay bribes even though
75. Karen F. Lehr, Smart Companies Use Alternatives Instead of Layoffs, WASH.
Bus. J., Nov. 12. 2001.
76. Miles Socha, Bad Day at Levi’s: 11 Plants to Close, Costing 5,900 Jobs,
WOMEN’S WEAR DAILY, Feb. 23, 1999, at 1.
77. G. Pascal Zachary, Industrialized Countries Agree to Adopt Rules to Curb
Bribery, WALL ST. J., Feb. 16, 1999, at A18.
78. Transparency International Bribe Payers Index Report 2011, available at
http://www.transparency.org/bpi2011/results (last visited Dec. 3, 2013).
CHAPTER 2
ETHICS AND THE LAW
29
these countries ratified the United Nations Convention
Against Corruption,” which requires its sovereign parties
to legislate against bribing and influence peddling. In
Transparency International’s 2013 Corruption Perceptions
Index of 177 countries, Denmark, New Zealand, and
Norway tied for the least corrupt; the United States
ranked 21st, behind Singapore (7th), Canada (11th),
Germany (15th), and Hong Kong (16th). 80 Transparency
action and protect those who report unethical conduct.85
In fact, the more elements an organization’s ethics program
has, the more likely employees are to report misconduct. 86
The reasons employees most often cite for not reporting
misconduct are a lack of confidence that corrective action
will be taken and a lack of trust that the report will be kept
confidential.87 Perhaps most important, employees who
work for organizations with more comprehensive ethics
more satisfied with their organizations thanction
teps
ting
OW-
Ood
2
CHAPTER
ETHICS AND THE LAW
Sful
INTRODUCTION
ETHICS MATTER
When asked which qualities were most important for success-
ful leaders, legendary investor Warren Buffett responded,
“Integrity, intelligence and energy. Without the first, the other
two will kill you.”
Compliance with the law is just the baseline for effec-
tive and responsible managerial action. If managers confuse
what’s “allowed” with what’s “right,” they risk cutting their
ethical discussions short and missing opportunities both for
the encouragement of morality by law and for the reform of
law in the light of society’s expectations.
Legally astute managers consider not only what the
firm can do but also what it should do.2 Greatness in the
global marketplace requires attention to ethics and social
responsibility as well as to the financial return to sharehold-
ers.3 Conversely, failure to meet the firm’s responsibilities
to employees, customers, the community, and the environ-
ment “puts at risk the company’s ability to operate, grow,
and deliver future value to shareholders.”
Good ethics are simply good business. As the Business
Roundtable, the leading association of CEOS in the United
States, proclaimed, “[Long-term] shareholder value is enhanced
when a corporation… treats its employees well, serves its cus-
tomers well, fosters good relationships with suppliers, maintains
an effective compliance program and strong corporate gover-
nance practices, and has a reputation for civic responsibility.”5
1. Ibolya Balog, Ethics on Their Shoulders: Boards Bear the Burden, ACCT.
TODAY, Nov. 27, 2006, available at http://www.accountingtoday.com
/ato issues/2006_21/22603-1.html (last visited June 26, 2013).
2. C. ROLAND CHRISTENSEN ET AL., Business Policy: Text and Cases 121 (6th ed.
1987). On legal astuteness, see Constance E. Bagley, Winning Legally: The
Value of Legal Astuteness, 33 ACAD. MGMT. REV. 378 (2008).
3. LYNN SHARP PAINE, VALUE SHIFT: WHY COMPANIES MUST MERGE SOCIAL
AND FINANCIAL IMPERATIVES TO ACHIEVE SUPERIOR PERFORMANCE
(2003). See also Constance E. Bagley & Karen L. Page, The Devil Made
Me Do It: Replacing Corporate Director’s Veil of Secrecy with the Mantle of
Stewardship, 36 SAN DIEGO L. REV. 897 (1999).
4. ROBERT S. KAPLAN & DAVID P. NORTON, STRATEGY MAPS: CONVERTING
INTANGIBLE ASSETS INTO TANGIBLE OUTCOMES 165 (2004).
5. Principles of Corporate Governance, 2010, BUS. ROUNDTABLE, Mar. 31,
2010, at 32, available at http://businessroundtable.org/studies-and-reports
/2010-principles-of-corporate-governance (last visited June 26, 2013).
Maintaining a reputation for integrity and honesty is
more important than ever as customers vote with their feet
and boycott clothing made in sweatshops or gasoline made
from oil transported in pipelines built with slave labor. As
General Electric learned after its protracted and ultimately
unsuccessful battle with the Environmental Protection
Agency about cleaning up the PCBs it had (at the time, law-
fully) dumped into the Hudson River, “governments are cus-
tomers too.” They not only purchase goods and services but
also directly affect the firm’s regulatory environment. For
example, Rupert Murdoch’s News Corporation was forced
to abandon its $12 billion bid to acquire full control of British
Sky Broadcasting, Britain’s largest pay-television broad-
caster, after word leaked that News Corporation reporters
had illegally hacked into phones in the United Kingdom and
elsewhere. The UK parliamentary committee handling the
review of the phone-hacking scandal subsequently declared
that Rupert Murdoch was “not fit” to “exercise the steward-
ship of a major international company.”
Current and prospective employees also care. When
evaluating a potential employer, job hunters use postings
on social network sites, questions in job interviews, and con-
tacts with present and past employees to search for clues to
a firm’s ethical values. The mere existence of a code of con-
duct or a toothless ethics program is not enough to attract
individuals who are not just looking for employment, but also
want to protect their personal integrity, retirement savings,
and future employability by working only for upstanding
organizations. The ethical reputation of an employer makes
a difference to its current employees as well. In 2013, the
6. Constance E. Bagley et al., General Electric Ecomagination: An
Examination of GE’s Corporate Environmental Strategy (Yale Sch. of
Mgmt. Case No. 08-041, 2008).
7. Jeremy W. Peters & John F. Burns, Father and Son Split on Tactics in
Murdoch Family Drama, N.Y. TIMES, July 13, 2011.
8. Ben Fenton, Salamander Davoudi & Andrew Edgecliffe-Johnson,
Murdoch “Not Fit” to Run Global Company, FIN. TIMES, May 1, 2012.28
UNIT I FOUNDATIONS OF THE LEGAL AND REGULATORY ENVIRONMENT
more than a cost, a constraint, or a charitable deed-it
can be a source of opportunity, innovation, and competi-
tive advantage.”71
According to Porter and Kramer, rather than trying
to take on all the ills of the world, companies should
focus on social issues that intersect with their particular
business and value proposition. Managers should first
eliminate as many negative value-chain impacts, such
as emissions and waste and depletion of scarce natural
resources, as possible. Then, they should identify areas
of the social context where they can create “shared value”
for the firm and society through a small number of
initiatives that both generate competitive advantage for
the firm and benefit society.” One example is Toyota’s
Prius, a hybrid gasoline-electric vehicle that both
reduced emissions and gave Toyota a distinct position
with customers. Another is Whole Foods Market’s ability
to charge premium prices for healthful food products
that are (1) sourced from local farmers, (2) sold in stores
that are constructed with a minimum of virgin raw mate-
rials and use electricity offset by renewable wind energy
credits, and (3) increasingly delivered in trucks powered
by biofuels.73
Third-generation Timberland CEO Jeffrey Swartz
explained that “corporate responsibility isn’t an option-
it’s part of our company’s DNA, as well as a competitive
advantage.” He continued:
Today, we embrace corporate responsibility consciously and
deliberately. We believe in our ability and responsibility to
make socially and environmentally-responsible decisions
that benefit our business, the outdoors and our communities.
These are not commitments we make altruistically. On the
contrary, our strategic sustainability programs help build a
stronger company-improving our bottom line as well as our
ability to improve our physical and social environment. We
call this our Earthkeepers philosophy, and it drives every-
thing we do.74
This is not to suggest that ethics always pay. Sometimes,
good guys do come in last and crime pays.
2-3f Approaches to Resolving the Tension
Between Short-Term Results and Long-
Term Value
Managers can take affirmative steps to help resolve the
tension between short-term economic results and long-
term value creation and capture.
71. Id.
72. Id. at 88.
73. Id. at 88-91.
74. Timberland Company, Executive Commitment, available at http://
responsibility.timberland.com/wp-content/uploads/2012/03/csr-executive-
commitment-july-2011.pdf (last visited June 26, 2013).
Soften the Edges
To avoid or reduce layoffs, many companies soften the
edges of difficult economic times by cutting personnel
costs through other means. Less draconian measures
include hiring freezes, shortening the workweek, reducing
pay and bonuses, eliminating bonuses altogether, reducing
salary increases, reassigning employees, and offering buyout
packages to employees who might be considering leaving
anyway,75
When declining demand for its goods caused Levi
Strauss & Co. to close eleven U.S. plants, lay off 5,900
employees, and move more of its manufacturing offshore,
the company committed to providing a $245 million
employee package. Levi gave employees eight months’
notice, as much as three weeks of severance pay for every
year of service, up to eighteen months of medical coverage,
an enhanced early retirement program, and a flexible allow-
ance of up to $6,000 for training and start-up expenses.76
Lobby for Changes in the Law or the
Enactment of Codes of Conduct
In many instances, corporations or coalitions of corpora-
tions have the economic and political power to lobby for
changes in applicable law. By encouraging the passage and
enforcement of laws prohibiting unethical conduct, such
as the dumping of hazardous waste or the use of child
labor, managers can ensure that they compete on a level
playing field.
After the United States enacted the Foreign Corrupt
Practices Act of 1977, which prohibits U.S. companies from
paying bribes to government officials, General Electric
and other U.S. firms successfully lobbied for tougher
international standards. (This act is discussed in detail
in Chapter 24.) In 1999, the Organization of Economic
Co-operation and Development (OECD) adopted a con-
vention criminalizing bribes to government officials and
recommended a prohibition on the tax deductibility of
bribes.” The OECD comprises 34 member countries
from North and South America, Europe, Asia-Pacific,
and the Middle East, representing more than half of the
goods and services produced worldwide.
Bribery remains a serious international problem in spite
of the OECD convention. Transparency International’s
2011 Bribe Payers Index ranks 28 leading economies by
their companies’ inclination to bribe abroad. Companies
based in Mexico (26th), China (27th), and Russia (28th)
were among the most likely to pay bribes even though
75. Karen F. Lehr, Smart Companies Use Alternatives Instead of Layoffs, WASH.
Bus. J., Nov. 12. 2001.
76. Miles Socha, Bad Day at Levi’s: 11 Plants to Close, Costing 5,900 Jobs,
WOMEN’S WEAR DAILY, Feb. 23, 1999, at 1.
77. G. Pascal Zachary, Industrialized Countries Agree to Adopt Rules to Curb
Bribery, WALL ST. J., Feb. 16, 1999, at A18.
78. Transparency International Bribe Payers Index Report 2011, available at
http://www.transparency.org/bpi2011/results (last visited Dec. 3, 2013).
CHAPTER 2
ETHICS AND THE LAW
29
these countries ratified the United Nations Convention
Against Corruption,” which requires its sovereign parties
to legislate against bribing and influence peddling. In
Transparency International’s 2013 Corruption Perceptions
Index of 177 countries, Denmark, New Zealand, and
Norway tied for the least corrupt; the United States
ranked 21st, behind Singapore (7th), Canada (11th),
Germany (15th), and Hong Kong (16th). 80 Transparency
action and protect those who report unethical conduct.85
In fact, the more elements an organization’s ethics program
has, the more likely employees are to report misconduct. 86
The reasons employees most often cite for not reporting
misconduct are a lack of confidence that corrective action
will be taken and a lack of trust that the report will be kept
confidential.87 Perhaps most important, employees who
work for organizations with more comprehensive ethics
more satisfied with their organizations thanInstructions:
LAW AND ETHICS
Business Ethics Exercise
After reading the business ethics chapter in our textbook, please select a recent article
(within the past 12 months) that exemplifies a business ethics dilemma. Please attach to a
copy of the article a written summary of the business ethics debacle including the
historical background on how the situation developed as well as how it was revealed and
handled by the business involved. Also include your reaction to this ethical dilemma
with suggestions on how it could have been avoided, detected sooner, and/or punished.
Please indicate the stakeholders involved and the impact of the debacle on each of them.
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