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The Legal and Ethical Environment of Business

v3.0 Terence Lau and Lisa Johnson
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1.5 How Law Affects Business Disciplines

Learning Objectives

  1. Identify the relevance of law to business disciplines.

  2. Understand the relevance of law to the study of business.

  3. Identify how the rule of law protects people from harmful business practices.

Besides the legal and ethical environment of business, undergraduate students in business schools generally take specific foundation courses, including accounting, finance, management, and marketing. An understanding of the legal environment of business is essential to functioning well within each of these disciplines. An understanding of the legal environment can help avoid liability or at least minimize risk. In business, it is not enough to comport yourself and your business ethically. You must also ensure that you understand the legal environment in which you are working. Therefore, it is important to you, to your employer, and to all the other people who may be relying on your business expertise—such as your employees and your family—to understand the legal environment. Such an understanding will not only help you avoid or lessen the likelihood of liability exposure, but it will also enable you to manage your business affairs successfully, unhampered by unmanaged legal liability risks. This section provides some examples of how law affects specific business disciplines.

Ethical Decision-Making

How can you analyze a situation to determine “right” from “wrong”? When faced with an ethical dilemma, you cannot always rely on “gut feeling” about what should be done. Here are several questions that can be used to analyze a situation to determine “right” from “wrong”:

  1. Is the decision that you made one that you would not mind others knowing about? Would you make this same decision even if your parents, your employer, or your neighbors were watching?

  2. How does the decision affect others? If it harms others, can the harm be minimized or avoided altogether by making a different decision?

  3. Which ethical theory is the standard against which your actions will be measured?

    1. If using a utilitarian standard, will this decision satisfy the requirement for the greatest good to the greatest number?

    2. If using a deontological standard, will this decision be consistent with the moral rule in question?

    3. If using virtue ethics, is this decision consistent with a virtuous character or character development?

  4. Is more than one alternative “right”?

  5. Does the decision conflict with the law? With your religious beliefs? With your philosophical or moral beliefs? If so, consider the standard against which your actions will be measured (see step 3).

Accounting Examples

During the last several years, accountants have been in the limelight due to culpable behavior of some members of the profession during well-known business scandals, such as Enron. Largely as a result of the fallout from the Enron case, Congress passed the Sarbanes-Oxley Act (SOX) of 2002, which imposed stringent oversight requirements on accounting and auditing firms. The requirements seek to ensure competence, compliance with security laws, and conduct consistent with generally accepted accounting principles.

Of course, the Enron scandal and SOX were both fairly dramatic examples of how law can affect accounting. Other ways in which law affects this discipline are through regulation. For example, the U.S. Securities and Exchange Commission’s (SEC) mission is to protect investors and to maintain a fair market, among other things. Accordingly, the SEC enforces accounting and auditing policies to allow investors to make decisions based on accurate information. The SEC pursues charges of accounting fraud and oversees private regulation of the accounting profession.

Finance Examples

The law also affects finance. Like accounting professionals, many who work in finance are also regulated by the SEC. The SEC is concerned that investors receive accurate information to make investment decisions. Moreover, the SEC enforces prohibitions against insider trading and pursues claims of other types of securities fraud, such as .

Similarly, several statutes protect consumers in financial transactions. For example, the requires lenders to accurately provide information concerning the costs involved in offers of credit. TILA and its corresponding are administered by federal banking agencies.

Management Examples

Law also affects those in management. For instance, knowledge of employment law is essential to those in human resources. prohibits discrimination related to protected characteristics in hiring and employment practices. Those in management also must be aware of the potential liability that demands on employees might create. For example, in Oregon, McDonald’s was found to be liable for injuries resulting when an off-duty, off-premises worker fell asleep while driving. The employee had worked three shifts during a twenty-four-hour period. The court held that employers have a duty to avoid conduct that creates a foreseeable risk of harm to others.

Marketing Examples

If your field is marketing, the law also relates to your work. Marketers must be particularly attuned to tort law, consumer protection law, and intellectual property law. For example, to avoid charges of libel, those in advertising need to take care not to defame another person, business, or product. It might be tempting to do so, especially if you were engaged in serious competition with another company that sold a similar product. Likewise, marketers must take great care not to engage in deceptive advertising practices, lest their employer run afoul of the policies or the FTC Act. Additionally, marketers must be aware of other people’s intellectual property to avoid copyright or trademark infringement in their own work product.

Practical Ethical Action: What Would You Do?

Jaime, a recent college graduate, works at a large financial services institution in Ohio. Her employer provides a number of financial products to consumers, including private label credit cards, retail banking, prepaid credit cards, auto loans, and home mortgages. Jaime, who received her degree in Finance and Marketing, finds the work interesting and fun and enjoys her job very much. In the wake of the credit crisis of 2008, the industry experienced a severe contraction and many people lost their jobs as financial institutions grew cautious about taking on more risk or violating new regulations on the industry. Now, with the economy improving again, Jaime is starting to get busy at work as her employer seeks new ways to increase revenue.

One day Jaime’s supervisor asks her to conduct research into a potential new area to make money—auto title lending. There is a lot of activity in this area and potential profit is high. The supervisor would like Jaime’s recommendation on whether this is a business the company should enter.

Jaime’s research reveals the following. In Ohio, there has been a great deal of public attention and backlash against a practice known as payday lending. In payday lending, someone who is in urgent need of cash would go to a payday lender and ask for an advance on their next paycheck in return for a fee. The fees were exorbitantly high (the equivalent of up to 391 percent) and many of these companies targeted members of the military and their families around Ohio’s numerous bases. In 2008, Ohio voters voted through referendum to limit payday lending, limiting these loans to an annual percentage rate of 28 percent and a maximum of $500 per loan, with a maximum of four loans per person per year. Additionally, the military has taken steps to protect its members from the practices of the payday lending industry by implementing a policy that essentially limits the power that payday loan contracts have over members of the military through the Military Lending Act. Undeterred, payday lenders found ways to operate under other laws, such as the Ohio Small Loan Act and Mortgage Loan Act. Under these laws, a lender could issue a loan in the form of its own check or money order and charge a cashing fee to access the money, with fees rising to the equivalent of 600 percent. Another law, the Credit Service Organization law, was meant to apply to organizations that help consumers improve their credit record by providing credit counseling and information. Some lenders operate under this law but instead charge fees on brokering fees and loans, again circumventing the 2008 voter referendum. You have also observed that payday lending is common throughout the states, as demonstrated in this map: http://www.pewtrusts.org/en/multimedia/data-visualizations/2014/state-payday-loan-regulation-and-usage-rates.

The latest product offered by the industry is the auto title loan. A borrower brings in identification, a paystub, and his or her paid-off auto title. The automobile must be able to start and move a few feet forward and backwards. The lender then offers a loan for 30 days, with the loan amount dependent on the condition of the car. In return for the loan, the lender charges interest and keeps the title to the car. On a $500 loan, a customer would have to pay back $650 after 30 days. These fees and interest rates are the equivalent of 300 to 400 percent. If the borrower can’t repay after 30 days, they can pay the interest alone of $150 to extend the loan for another month, at which time another $650 is due. The original $500 principal isn’t repaid until all the interest and fees are paid. Many lenders allow borrowers to repeat this cycle over and over again, collecting fees while the borrower makes no progress in paying off the loan. If the borrower doesn’t make at least the monthly payment in fees and interest, the lender will repossess the car, because the loan is secured by the car, which is the collateral.

The number of auto title loan lenders has exploded, as more companies are attracted to the lucrative returns on these products. The industry says it is merely providing a legal financial product for which there is obviously great market demand. Consumer advocacy organizations say these loans violate the spirit of the 2008 voter-approved law limiting payday loans and that these loans are predatory and unethical.

Jaime is not sure about how to advise her supervisor. If you were Jaime, what would you recommend?

These are a few examples of how the law relates to specific business disciplines. Of course, this is just a taste. It is incumbent on each business professional to become familiar with the legal environment in his or her profession. Employers may provide training regarding legal environment issues, such as anti–sexual harassment training or anti–insider trading training, but ultimately, becoming familiar with the legal environment is each person’s individual responsibility. Remember that a defense of “I didn’t know the law!” is no defense at all.

Key Takeaway

The law is relevant to every business discipline. Minimizing liability exposure is a primary concern of business, and an understanding of the legal environment relevant to each disciplinary perspective helps business practitioners minimize their risk of incurring liability to themselves or to their employers.

Exercises

  1. Which business discipline is your favorite? Find a newspaper article that illustrates a legal problem pertaining to that discipline that could have been avoided with a better understanding of the legal environment of business.

  2. In January 2010, Haiti, the poorest country in the Western Hemisphere, was struck by a massive earthquake that killed tens—perhaps even hundreds—of thousands of people. In the days following the earthquake thousands of people were in a state of misery, wandering the streets without food or shelter, among violence and looting that naturally occur in such circumstances. In the meantime, Royal Caribbean operated a cruise line that made a regular stop at Haiti, at a private beach where it had previously spent millions of dollars in improvements to ensure that the vacationers on its cruise ships would enjoy themselves during their overnight stops. Within a week of the disaster, Royal Caribbean was seeking to assure its customers that the stop in Haiti was not unethical. It pointed out that bringing tourist dollars to Haiti was actually an ethical thing to do, despite the thousands of dying and injured just a short distance away. Check out a video of Royal Caribbean’s CEO discussing his company’s involvement in bringing emergency supplies to Haiti, as well as the potential for using ships as hotels or hospitals in the interim: http://cnn.com/video/?/video/world/2010/01/18/ct.anderson.haiti.cruise.cnn. If you were scheduled to begin a vacation on a Royal Caribbean cruise ship that docked at its private beach during the week following the earthquake, would you go? If you decided to go, how would your friends and family react to your choice? If Royal Caribbean was not legally required to issue refunds for nonrefundable tickets, should it be willing to issue refunds anyhow?

  3. How can employers use knowledge of the legal environment of business to minimize liability exposure? Identify three concrete ideas.

  4. How can employers stay current with the legal environment of business? For example, how would other employers in Oregon find out about the case of the off-duty, off-premises worker mentioned in this section? If you were an employer in Oregon, how might this case change your business practices?

  5. Do you think that if employers train their employees how to behave on the job, those employers should be absolved from legal liability resulting from employees’ actions? For example, imagine that an employer provides training to its employees regarding how to avoid sexual harassment in the workplace, but an employee ignores the training and sexually harasses a colleague. Should the employer bear liability in that situation? Why or why not?