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The Legal and Regulatory Environment of Business

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					BA 385 - Business Environment




     BA 385 - Business Environment
                           Week 4
                    Legal, Regulatory, and
                       Political Issues



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BA 385 - Business Environment


           Government Influence on
                 Business
 • Laws derived from the Constitution and Bill of Rights
   influence business.
     – Provide underlying structure
 • Laws are enforced through the judicial system.
     – Settle disputes and punishes criminals
 • Corporations have the same legal status as a person.
     – Can sue
     – Can be sued
     – Can be held liable for debt



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BA 385 - Business Environment



       Capitalism & the Free Market
[The rich] consume little more than the poor, and in spite of their
   natural selfishness and rapacity…they divide with the poor the
   produce of all their improvements. They are led by an invisible
   hand to make nearly the same distribution of the necessaries of
   life, which would have been made, had the earth been divided into
   equal portions among all its inhabitants, and thus without intending
   it, without knowing it, advance the interest of the society, and
   afford means to the multiplication of the species.

Adam Smith, The Theory of Moral Sentiments



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BA 385 - Business Environment



             Reasons for Regulation
 • Failure of the “Invisible Hand” of competition
 • Economic: Level the “playing field”
     – Preventing trusts and monopolies from using their market
       dominance to negatively manipulate output, pricing, and
       quality.
     – Eliminating unfair competition and anti-competitive practices.
 • Social: Protecting the environment, supporting
   equality in the workplace, and ensuring product
   safety.


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BA 385 - Business Environment



     Major Laws Affecting Business
 • Sherman Antitrust Act
     – Supports free trade and restrains monopolistic activities
 • Clayton Act
     – Prohibits price discrimination
 • Federal Trade Commission Act
     – Creates the FTC to prevent unfair competition
 • Robinson-Patman Act
     – Prohibits price discrimination
 • Lanham Act
     – Protects and regulates brand names/marks
 • Sarbanes - Oxley act
     – Increased accountability for corporate officers
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BA 385 - Business Environment



         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)
 •   Equal Employment Opportunity Commission (1970)
 •   Environmental Protection Agency (1970)
 •   Occupational Safety & Health Administration (1971)
 •   Consumer Product Safety Commission (1972)

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BA 385 - Business Environment



          Global Regulation Factors
 • Import barriers
     – Tariffs and quotas
     – Minimum price levels
     – Port-of-entry taxes
 • Varying local laws & 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 European nations
 • World Trade Organization (WTO)

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BA 385 - Business Environment



                Costs of Regulation
 • Cost U.S. economy ~$1 trillion (hard to measure)
 • Regulatory Agencies’ combined bugdets ~$41 billion
 • Cost of social regulation exeeded economic by the
   early 1970’s
 • Business expenditures to stay in compliance
   with regulations (hidden taxes)
     – Environmental
     – Workplace and hiring
     – Product quality and safety
 • Self regulation much cheaper


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BA 385 - Business Environment



               Benfits of Regulation

 • Greater equality in          •   Strenthen competition
   workplace                    •   More product choice
 • Safer workplaces             •   Fairer prices
 • Benefit disadvantaged        •   Spur investment
 • Cleaner environment          •   Encourage innovation
 • Better product quality



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BA 385 - Business Environment



                        Deregulation
 • What: Removal of regulatory authority
 • Belief that less government intervention allows
   business markets to work more effectively
 • Many industries have been deregulated.
     –   Trucking
     –   Airlines
     –   Telecommunications
     –   Media ownership
 • Critics of deregulation cite higher prices and poorer
   service/quality (eg. Enron, Clear Channel).

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BA 385 - Business Environment



                     Self-Regulation
 • Companies 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.
 • Lower costs and more practical and realistic
   programs, but less strict and lacks enforement


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BA 385 - Business Environment



The Contemporary Political Environment
 • Wave of reform starting in the 1960’s
     – Greater transparency in the congressional committee process
     – Decreased influene of Political parties
     – Rise of special interest groups
 • Limiting campaign contributions fromindividuals,
   political parties, and special interest groups
   (Federal Election Campaign Act)
 • Many states have shifted their electoral process from
   traditional party caucus to primary elections.



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BA 385 - Business Environment



             Special-Interest Groups

 • Seek to influence the public and affect
   legislation and regulation of business
 • Focus on getting candidates elected that
   further their political agenda
 • Interested in issues such as deregulation,
   environmental issues, political reform,
   abortion, product liability caps, gun control,
   prayer in schools, etc.

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BA 385 - Business Environment


           Corporate Approaches to
           Influencing Government
 • Lobbying
     – Process of persuading public and/or government officials to
       favor a particular position in decision making
     – Takes place directly or through trade organizations
 • Political Action Committees
     – Organizations that solicit donations from individuals and
       then contribute to political parties (soft money) or candidates
       running for political office
 • Campaign Contributions
     – Individual and corporate (state elections only) donations


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          Last Election: Who Gives?
 OREGON                    Total         Per Capita
 George Bush               $1,207,233    $0.47
 John Kerry                $ 911,782     $0.35
 Howard Dean               $ 270,953     $0.11
 All candidates raised an average of $12.18 per voter out
    of 1,730,432 voters in this cycle.
                            Sources:
                   http://colorofmoney.org
                  http:// followthemoney.org
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BA 385 - Business Environment



         Legal & Ethical Compliance
 1. Establish a code of ethics
 2. Appoint a high-level compliance manager, usually
    an ethics officer
 3. Take care in delegation of authority
 4. Institute a training program and communication
    system
 5. Monitor and audit for misconduct
 6. Enforce and discipline
 7. Revise program as needed

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BA 385 - Business Environment


    Federal Sentencing Guidelines
          for Organizations
 • Passed in 1991 to streamline the sentencing and
   punishment of “white collar” crime
 • Provides an incentive for organizations to establish
   due diligence ethics and compliance programs
 • Assumes that good corporate citizens maintain
   compliance systems and internal governance
   controls that deter misconduct by their employees
 • Bolsters prevention and detection by mitigating
   penalties for firms with compliance programs in the
   event that one of their employees commits a crime


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BA 385 - Business Environment



                Organizations Fined




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BA 385 - Business Environment



          Sarbanes-Oxley Act (SOX)
 • 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 whistleblower protection
     – Requires company attorneys to report wrongdoing

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BA 385 - Business Environment



         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



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