Legal Environment of Business: Law, Ethics & Employment

Introduction to the Legal Environment of Business

Modern businesses must operate under a variety of laws and regulations. Business managers must ensure that all federal and state mandated laws are followed in order to avoid litigation and penalties. In addition to the laws on the books, businesses must also be sensitive to public opinion and ethics. Some ethical issues are covered by law, but others may relate to a company's public image and can be of equal importance to some businesses.

Trends in Legal Decision-Making: Ethics and Law

Interaction Between Ethics and Law

As ethics and law increasingly become interwoven, it grows more and more difficult to draw a clear distinction between the two. Both ethics and law deal with right and wrong, and both lay down rules for social cooperation and business conduct. Ethics practiced by society are often incorporated into the law through legislation or court decisions and are thus followed as part of the law (Reed et al., 2005).

Ethics are learned from society and are often imposed on an individual by that society's norms. What constitutes permissible ethical behavior is determined by society — the family, the company, or even the law, which incorporates societal ethics into legislation. The motivation to follow ethics that are not part of the law comes from within the individual. Even when the law addresses a matter we may also consider ethically correct, the motivation to follow the law comes from outside the individual, in the form of compliance with state law. Most people knew that slavery was unethical, but because it had not been sanctioned as illegal, it continued until it was declared so.

Our morals inform our ethics. As was known then as it is now, discrimination on the grounds of race, color, sex, and religion in business transactions is ethically incorrect, but the force of law was required to curb the selfishness present in human nature. As Justice Holmes observed, "A bad man who cares nothing for an ethical rule which is believed and practiced by his neighbors is likely nevertheless to care a good deal to avoid being made to pay money, and will want to keep out of jail if he can" (Reed et al., 2005).

The legal system attempts to set a basic minimum standard, while ethics may demand more. The logic behind an ethical approach in business is sometimes divided into two categories: formalism and consequentialism. Formalism advocates absolute morality — a particular act is wrong regardless of the justification. A formalist would consider lying to be wrong under any circumstances. A consequentialist, by contrast, focuses on the outcomes of actions: lying itself is not inherently unethical; rather, it is the loss of trust or the harm caused by lying that is unethical (Reed et al., 2005).

The consequentialist definition can appear overly flexible. If accepted without limits, it could justify many questionable actions — for example, paying bribes to win an international contract on the grounds that doing so creates jobs and does not harm national interests. Because this kind of reasoning has been exploited in practice, businesses must be bound by a variety of laws to enforce good business conduct. Reed et al. (2005) identify four sources that influence business ethics:

• Legal regulation
• Professional codes of ethics
• Organizational codes of ethics
• Individual values

One of the most important factors pressing businesses to be more aware of the ethical dimensions of their decisions is the role of media in exposing gross violations of business ethics. Businesses that move their production to sweatshops in Southeast Asia risk exposure and damaging press coverage — Nike's handling of journalists investigating foreign sweatshops is a well-known example of how such exposure can backfire. Companies like Enron and WorldCom have demonstrated that wrongdoing cannot easily be hidden. Even undue favoritism in awarding government contracts in distant countries is readily exposed in today's media environment.

Business ethics are critically important in today's economy, and a strong legal framework is equally essential to compel companies to follow the norms of decent business practice.