Social Responsibility and Business

Legal, Regulatory, and Political Issues

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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.
 Settles disputes and punishes criminals

Corporations have the same legal status as a person.

 Can sue
 Can be sued
 Can be held liable for debt

The facts above move 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.

Global Regulation

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.

Examples of Global Regulations

• Import barriers
• Tariffs and quotas
• Minimum price levels
• Port-of-entry taxes
• Product quality, safety, distribution, sales, and advertising regulation
• North American Free Trade Agreement (NAFTA)
• Eliminates virtually all tariffs on goods produced and traded between the U.S., Canada,
and Mexico
• European Union (EU)
• Promotes free trade between member nations
Anti-Trust Violations

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.

Cost of Regulation

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, and 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.

Political Environment

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.

Federal Sentencing Guidelines for Organizations

• Passed in 1991 to streamline the sentencing and punishment of organizational crime
• Provides an incentive for organizations to establish due diligence ethics and compliance programs
• Operates on the underlying assumption that good corporate citizens maintain compliance systems
and internal governance controls that deter misconduct by their employees
• Focuses on crime prevention and detection by mitigating penalties for firms with compliance
programs in the event that one of their employees commits a crime

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.

Overview of Sarbanes-Oxley Act

- Legislation to protect investors by improving accuracy and reliability of corporate
disclosures
• Requires an independent accounting oversight board
• Requires CEOs and CFOs to certify financial statements
• Requires corporate board’s audit committee to be independent
• Prohibits corporations from making loans to officers and board members
• Requires codes of ethics for senior financial officers
• Prohibits using the same firm for auditing and consulting
• Mandates whistle blower protection
• Requires company attorneys to report wrongdoing
•
Benefits of Sarbanes-Oxley
• Greater accountability by top management and boards to employees, communities, and
society
• Renewed investor confidence
• Required justification of executive compensation packages
• Greater protection of employee retirement plans
• Greater penalties and accountability of senior management, auditors, and board members