Business law principles and applications

Business Law

The Relationship Between Ethics & Law in Business

Business is a generic term that refers to enterprise relationships between a provider of either a good or service and the client/customer or to another business. Business transactions throughout the course of history have involved a level of discretion between ethical and fair behaviour and the due process of law and litigation of various kinds. The relationship between Ethics and Law ostensibly is that of intent and accountability of intent. Ethically, the agents of a contractual obligation have a responsibility to honour the contract and each tenet stated in the contract.

Dunfee (1996) defines the relationship between business ethics and law as having attracted the attention of leading academics in the legal and philosophy profession over many decades. (e.g., Atiyah" 1981; Coleman, 1988; Dworkin, 1978; Greenawalt, 1989; Hart, 1963; Posner, 1983). Dunfee draws into question the synonym of morality to ethics and the research literature in business ethics and law. According to Dunfee (1996), "The overall view of these texts concerning the relationship between the legal and moral domains is summarized in the following quotes: "Law is the public's agency for translating morality into explicit social guidelines and practices and for stipulating punishments for offenses." (Beuchamp & Bowie, p.g4.) (Dunfee, 1996)

A more specific area of business is that of management, or transformational leadership. Odom (2003) considers law and ethics relevant to the process of transformational leadership within the organization and across industry. Odom draws an inference of a connection between law and ethical leadership as a function of the concern to the well-being of members of society. Odom provides a clear reason for a relationship to exist between law and ethics.

The notion of ethics as a component facilitating the paradigm shift in business attention to society, separate from the profit generating motivation of the business, including all acts of Goodwill, Social Entrepreneurship, Social Sustainability, and Social Responsibility. Transformational Leaders espouse the belief of a holistic environment where ethics and corporate governance drive social responsibility.

Certainly, recent events in the financial and energy sectors point to fiscal mismanagement, illegal accounting practices, and breaches in regulatory oversight (in-house and governmental), have brought to light whether ethics in business is lacking or whether legal oversight is the lacking factor necessary to mitigate the moral hazard of the principal/agent conflict of agency theory (Gachter, Konigstein, 2009)

According to Gachter, Konigstein (2009), "Contracting problems are arguably the most important common paradigm in courses on organizational economics, personnel economics, and contract theory taught in economics departments and business schools. This fact is documented, for example, in the textbooks by Milgrom and Roberts (1992), Lazear (1998), Baron and Kreps (1999), and Brickley, Smith, and Zimmerman (2001) that appear on many syllabi of organizational economics courses. These authors devote considerable space to the issue of contracting and the principal-agent paradigm." (Gachter, Konigstein, 2009)

According to Kern (2006), corporate governance, which is the supposed nexus of ethics and law, is accountable for the oversight of all financial institutions and matters concerning the fiscal regulation of these entities. The Enron debacle was central to the relationship between ethics and law. The ethical violations were egregious and certainly indicative of the type of actions inherent under the principal/agent theory. The response to the ethics violation was an increase in law, ostensibly, with the inception of the Sarbanes-Oxley Act of 2002.

According to Alexander (2006), "The design 'principal-agent problem' was first used by Ross (Stephen Ross, 1973) 'The economic theory of agency: The principal's problem' American Economic Review, Vol. 53, No. 2, pp. 134-39) to refer to the general problem of devising a contract to ensure that the agent pursues the principal's goals as efficiently as possible." (Alexander, 2006)

The relationship between ethics and the law in business is essentially a question of whether there is a potential principal-agent problem where the possibility of an ethical breach may not be prosecuted even when regulation and other law domiciled measures are in place. Should the opportunity exist for an ethical breach, the probability is greater than 0 for a unethical decision to be made. The relationship hence, between ethics and law in business is the legal response to the unethical act. A sort of knee-jerk reaction due to the nature of legal proceedings and the legal principle of 'stare decisis'.

Does Canada have too much business law? Would we be better off with less regulation?

Overregulation has been a symptom of corruption in industry and in the financial markets, stemming from international banking equity trading violations to corporate financial accounting fraud. Specific to current regulation in Canada however, managers are currently very concerned with the current and future climate of the business environment.

According to Portis and Pearce (1977), the readers of the magazine 'The Business Quarterly' blame government regulation as the force that detracts the laissez-faire regulation of a free market. Government as analyzed by corporate is an overburdening entity that seeks to control and manipulate corporate behaviour at the expense of corporate profits. According to Portis & Pearce (1977), "Eighty-five percent of businessmen see no reduction of government involvement in Canadian business, and many believe that government regulation will increase even without serious economic inflation." (Portis, Pearce, 1977)

The 1977 research suggests that regulation is extensive during the late 1970's. The implication is Canada would be more competitive should the level of regulation ease. Such an overbearing level of regulation is oppressive to the risk-taking nature businesses thrive and grow on.

According to Bruce, McLaren (1978), "A Canadian government study indicates that the government's view of the business community is undergoing a period of significant change. The primary conclusion of the study is that the government is backing off from implementation of further controls and regulations over business. The government's view of business appears to be moving closer to a more traditional businessman's view of the role of business in society." (Bruce, McLaren, 1978)