Chapter 4 – Legal, Regulatory, And

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Chapter 4 – Legal,

Regulatory, and Political

Issues – Summary


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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 andregulatory 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.


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company that engages in commerce beyond its own country

must contend with the comple! 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 amongdifferent nations" laws, but many countries" antitrust laws are #uite

similar to those of the $nited %tates.

&egulation creates numerous costs for businesses, consumers,

and society at large. %ome 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 e#uipment.


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nother rationale for regulation is society"s desire to restrict

destructive or unfair competition. %ocial reasons for regulation

address imperfections in the market that result in undesirable con


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&egulation also provides many benefits, including greater

e#uality in the workplace, safer workplaces, resources for

disadvantaged members of society, safer products, more

information about and greater choices among products, cleaner airand water, and the preservation of wildlife habitats. ntitrust laws

and regulations strengthen competition and spur companies to

invest in research and development. -any businesses and

individuals believe that the costs of regulation outweigh its benefits. %ome people desire complete deregulation, or removal of

regulatory authority

ecause government is a stakeholder of business )and vice

versa*, businesses and government can work together as both

legitimately participate in the political process. usiness

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.


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Changes over the last forty years have shaped the political

environment in which businesses operate. mong the most

significant of these changes were amendments to the +egislative

&eorganization ct and the (ederal Election Campaign ct, which

had the effect of reducing the importance of political parties. -any

candidates for elected offices turned to increasingly powerful

specialinterest groups to raise funds to campaign for elected office

%ome organizations view regulatory and legal forces as beyondtheir control and simply react to conditions arising from those

forces/ other firms seek to influence the political process to achieve

their goals. 'ne way they can do so is through lobbying, the

process of working to persuade public and0or government officials

to favor a particular position in decision making.

.


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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 bechanneled into candidates" campaign coffers as corporate e!ecutives"

or stockholders" personal contributions, although such donations can

violate the spirit of corporate campaign laws.

lthough laws limit corporate contributions to specific

candidates, it is acceptable for businesses and other organizations to

make donations to political parties. -ore 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.


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$nder the (ederal %entencing 1uidelines for 'rganizations )(%1'*,

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 e!pected standards,

assign oversight of the program to highranking personnel who abide by

legal and ethical standards, communicate standards through training andother mechanisms, monitor and audit to detect wrongdoing, punish

individuals responsible for misconduct, and take steps to continuously

improve the program. 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.


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Enacted after many corporate financial fraud scandals, the

%arbanes'!ley ct created the 2ublic Company ccounting

'versight oard 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 re#uires corporations to take responsibility to provide

principlesbased ethical leadership and holds CE's and C('s 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 $.%. business, especially for

top management and boards of directors responsible for company

oversight.

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