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CHAPTER FOUR

Legal, Regulatory, and Political Issues

Chapter Objectives

●● To understand the rationale for government regulation of business

●● To examine the key legislation that structures the legal environment for business

●● To analyze the role of regulatory agencies in the enforcement of public policy

●● To compare the costs and benefits of regulation

●● To examine how business participates in and influences public policy

●● To describe the government’s approach for legal and ethical compliance

Chapter Outline

Government’s Influence on Business

The Contemporary Political Environment

The Government’s Strategic Approach for Legal and Ethical Compliance

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In the technology industry, protecting one’s intellectual

property through patents is crucial to the survival of

a company. A patent gives an organization such as

Microsoft a temporary monopoly over a new technol-

ogy. Patents are intended to reward firms for the risks

they take in developing new products. They not only

allow the firms to recoup their investment but also

give them the chance to earn a significant profit. This

prompts technology firms to constantly innovate and

stay ahead of the competition by patenting new items.

Companies will often file lawsuits seeking dam-

ages from those they believe violated their intellectual

property rights. One well-publicized case occurred

between two titans of the cell phone industry, Apple

and Samsung. After Apple introduced its iconic iPhone,

Samsung came out with its own smartphone called

Galaxy S. Apple filed a lawsuit against Samsung, accus-

ing it of violating its iPhone patent by copying many

components of the iPhone, including the rectangular

shape; the black color of the phone; the tap to zoom,

the flip to rotate, the slide to scroll features; and so

on. It also claimed that Samsung copied features of its

iPad product.

Samsung countersued, claiming that many of

these components had already been patented by

Samsung; thus, Samsung—and not Apple—held the

intellectual property rights. The lawsuit soon snow-

balled, with suits being filed in the United States, South

Korea, Germany, Japan, and other areas. Many of these

countries came to different conclusions. For instance,

the United States found Samsung guilty of intellectual

property violations and ordered Samsung to pay Apple

$1 billion in damages (this was later reduced). However,

South Korea determined that Apple violated two

of Samsung’s patents, while Samsung violated one

of Apple’s. The United Kingdom ruled in favor of

Samsung, while Germany banned sales of the Galaxy

Tab 2.0 because of its similarities to Apple’s iPad 2.

The different court rulings demonstrate the com-

plexities of international regulations. The ethical and

legal standards of intellectual property vary from coun-

try to country, making it difficult for firms to protect

their intellectual property. Samsung appealed the rul-

ing in the United States. In 2012, Apple filed another

lawsuit against Samsung in the United States alleging

that it had violated another five of its patents. The

United States ordered Samsung to pay Apple $119.6

million. Apple requested that Samsung be banned from

sales in the United States, but this was not granted, and

legal experts say a direct ban is unlikely.

With so many different verdicts, it can be hard to

determine which, if any, of the companies is at fault.

Samsung has encountered price-fixing allegations in

the past and has been accused by more than one com-

petitor of copying its technology. However, Apple has

also been involved in lawsuits. Apple recently paid to

settle a lawsuit that it engaged in no-hiring agreements

with competitors in the tech industry. Both companies

have had to deal with past issues of legal misconduct.

Whoever is at fault, the current ruling on intellectual

property will have a major impact on the technology

industry as a whole.1

Apple and Samsung Face Off in Legal Dispute

Opening Vignette

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The government has the power through laws and regulations to struc-ture how businesses and individuals achieve their goals. The purpose of regulating firms is to create a fair competitive environment for businesses, consumers, and society. All stakeholders need to demonstrate a commitment to social responsibility through compliance with relevant laws and proactive consideration of social needs. The law is one of the most important business subjects in terms of its effect on organizational practices and activities. Thus, compliance with the law is a fundamental expectation of social responsibility. Because the law is based on principles, norms, and values found within society, the law is the foundation of responsible decision-making.

This chapter explores the complex relationship between business and government. First, we discuss some of the laws that structure the environ- ment for the regulation of business. Major legislation relating to compe- tition and regulatory agencies is reviewed to provide an overview of the regulatory environment. We also consider how businesses can participate in the public policy process through lobbying, political contributions, and political action committees. Finally, we offer a framework for a strategic approach to managing the legal and regulatory environment.

Government’s Influence on BusIness The government has a profound influence on business. Most Western countries have a history of elected representatives working through demo- cratic institutions to provide the structure for the regulation of business conduct. For example, one of the differences that have long characterized the two major parties of the U.S. political system involves the govern- ment’s role with respect to business. In general terms, the Republican Party tends to favor smaller central government with less regulation of business, while the Democratic Party is more open to government oversight, fed- eral aid program, and sometimes higher taxes. From the start, President Obama worried some businesspeople, as he has promised more oversight of many different areas of the economy. For example, he promised to be tough on antitrust violations and has followed through by reversing a Bush-era policy that made it more difficult for the government to pursue antitrust violations.2

President Obama has brought U.S. policy regarding antitrust cases more in line with Europe’s model.3 Third-party and independent candi- dates typically focus on specific business issues or proclaim their distance from the two major political parties. However, the power and freedom of big business have resulted in conflicts among private businesses, govern- ment, private interest groups, and even individuals as businesses try to influence policy makers.

In the United States, the role that society delegates to government is to provide laws that are logically deduced from the Constitution and the Bill of Rights and to enforce these laws through the judicial system. Individuals

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and businesses, therefore, live under a rule of law designed to protect society and support an acceptable quality of life. Ideally, by limiting the influence and force by some parties, the overall welfare and freedom of all participants in the social system will be protected.

The provision of a court system to settle disputes and punish crimi- nals, both organizational and individual, provides for justice and order in society. Both Google and Microsoft have come under numerous ongoing investigations for alleged antitrust activity in Europe, where the com- panies have been accused of engaging in behavior that prevents smaller companies from competing. The European Commission agreed to settle with Google, allowing them to avoid a $5 billion fine, after it was found guilty of restricting other search engine results with a built-in algorithm. Microsoft was fined $731 million by the European Union (EU) for failing to comply with an agreement that stated consumers would have a choice as to which internet browser to launch when using Windows. The EU found that 15 million consumers were defaulted to the company’s own internet browser, Internet Explorer, after an update on the operating system took effect.4 The European Union is famous for being tough on companies suspected of antitrust cases, igniting the ire of many multinational corpo- rations that feel as if they are being punished for being successful. Being aware of antitrust laws is important for all large corporations around the world, because judicial systems can punish businesses that fail to comply with laws and regulatory requirements.

The legal system is not always accepted in some countries as insur- ance that business will be conducted in a legitimate way. For example, after generations of being known for its top-secret bank accounts, Swiss banks were ordered by the United States Internal Revenue Service to dis- close information about some of their clients because of concerns over illegal activities. In many places around the world, the business climate has become less tolerant of illegal and immoral actions, and countries like Switzerland, Liechtenstein, and Luxembourg now are being pressured to share information on potential tax dodgers with government agencies like the IRS. Credit Suisse pleaded guilty to aiding wealthy Americans in tax evasion and was ordered to give the Justice Department all records concerning American clients and was charged a fine of $2.6 billion for criminal misconduct.5 This case illustrates the complexity of complying with international business laws.

While many businesses may object to regulations aimed at maintain- ing ethical cultures and preserving stakeholder welfare, businesses’ very existence is based on laws permitting their creation, organization, and dissolution. From a social perspective, it is significant that a corporation has the same legal status as a “person” who can sue, be sued, and be held liable for debts. Laws may protect managers and stockholders from being personally liable for a company’s debts, but individuals as well as organi- zations are still responsible for their conduct. Because corporations have a perpetual life, larger companies like ExxonMobil, Ford, and Sony take on an organizational culture, including social responsibility values, that

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extends beyond a specific time period, management team, or geographical region. Organizational culture plays an important role in the ability of cor- porations to outlive individual executives—it sets the tone for the business and allows for continuity even during times of leadership turnover.

Most, generally smaller, companies are owned by individual propri- etors or operated as partnerships. However, large incorporated firms like those just mentioned often receive more attention because of their size, visibility, and impact on so many aspects of the economy and society. In a pluralistic society, diverse stakeholder groups such as business, labor, consumers, environmentalists, privacy advocates, and others attempt to influence public officials who legislate, interpret laws, and regulate busi- ness. The public interest is served through open participation and debate that result in effective public policy. Because no system of government is perfect, legal and regulatory systems are constantly evolving and changing in response to changes in the business environment and social institutions. For example, increasing use of the internet for information and business created a need for legislation and regulations to protect the owners of creative materials from unauthorized use and consumers from fraud and invasions of privacy. The line between acceptable and illegal activity on the internet is increasingly difficult to discern and is often determined by judges and juries and discussed widely in the media.

In response, the Better Business Bureau (BBB), a self-regulatory asso- ciation supported by businesses, offers an Online Accredited Business cer- tification to 221,519 retailers, which certifies their high ethical standards and safety for online shoppers. The BBB lists the companies on its website and directs consumers to approved businesses’ websites.6 Over a million times a month, web users click on the BBBOnline seals to check a firm’s credibility and high standards.7

Like the companies that have pursued and received the BBB accredi- tation, firms 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.

In the next section, we take a closer look at why and how the govern- ment affects businesses through laws and regulation, the costs and benefits of regulation, and how regulation may affect companies doing business in foreign countries.

The Rationale for Regulation The United States was established as a capitalist system, but the prevailing capitalistic theory has changed over time. Adam Smith published his criti- cal economic ideas in The Theory of Moral Sentiments and Inquiry into the Nature and Causes of the Wealth of Nations during the late 1700s, which are still considered important today. Smith observed the supply and demand, contractual efficiency, and division of labor of various companies

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within England. Smith’s writings formed the basis of modern economics. Smith’s idea of laissez faire, or “the invisible hand,” is critical to capitalism in that it assumes the market, through its own inherent mechanisms, will keep commerce in equilibrium.

A second form of capitalism gained support at the beginning of the Great Depression. During the 1930s, John Maynard Keynes argued that the state could stimulate economic growth and improve stability in the private sector—through, for example, controlling interest rates, taxation and public projects.8

Keynes argued that government policies could be used to increase aggregate demand, thus increasing economic activity and reducing unem- ployment and deflation. He argued that the solution to depression was to stimulate the economy through some combination of a reduction in inter- est rates or government investment in infrastructure. President Franklin D. Roosevelt employed Keynesian economic theories to pull the United States out of the Great Depression.

The third and most recent form of capitalism was developed by Milton Friedman and represented a swing to the right on the political spec- trum. Friedman had lived through the Great Depression but rejected the Keynesian conclusion that the market sometimes needs some intervention in order to function most efficiently. Friedman instead believed in deregu- lation because he thought that the system could reach equilibrium without government intervention.9 Friedman’s ideas were the guiding principles for government policy making in the U.S., and increasingly throughout the world, starting in the second half of the twentieth century, especially dur- ing the presidencies of Ronald Reagan, George H.W. Bush, Bill Clinton, and George W. Bush. However, President Barack Obama’s policies moved back in the direction of Keynesian capitalism with higher taxes and more spending on healthcare, as well as other public projects related to stabiliz- ing the economy after the financial crisis.

Many communist countries too are adopting components of capi- talism. State capitalism occurs when the government runs commercial activity in a capitalist manner. In China, for instance, many of the largest for-profit firms are owned in some capacity by the government. Despite this ownership, the day-to-day workings of the companies operate in a capitalist manner. This gives them the ability to compete against global firms. Table 4.1 gives a brief overview of the different forms of capitalism.

Although the opinions of which form of capitalism is the better option has changed over time, the federal and state governments in the United States have always stepped in to enact legislation and create regulations to address particular issues and restrict the behavior of business in accor- dance with society’s wishes. Many of the issues used to justify business regulation can be categorized as economic or social.

Economic and Competitive Reasons for Regulation A great number of regulations have been passed by legislatures over the last 100 years in an effort “to level the playing field” on which businesses operate. When the

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United States became an independent nation in the eighteenth century, the business environment consisted of many small farms, manufacturers, and cottage industries operating on a primarily local scale. With the increas- ing industrialization of the United States after the Civil War, “captains of industry” like John D. Rockefeller (oil), Andrew Carnegie (railroads and steel), Andrew Mellon (aluminum), and J.P. Morgan (banking) began to consolidate their business holdings into large national trusts.

Trusts are organizations generally established to gain control of a product market or industry by eliminating competition. Such organiza- tions are often considered detrimental because, without serious competi- tion, they can potentially charge higher prices and provide lower quality products to consumers. Thus, as these firms grew in size and power, public distrust of them likewise grew because of often-legitimate concerns about unfair competition. This suspicion and the public’s desire to require these increasingly powerful companies to act responsibly spurred the first antitrust legislation. If trusts are successful in eliminating competition, a monopoly can result.

A monopoly occurs when just one business provides a good or service in a given market. Utility companies that supply electricity, natural gas, water, or cable television are recent examples of monopolies, but that is starting to change. The government tolerates these monopolies because the cost of supplying the good or providing the service is so great that few companies would be willing to invest in new markets without some protec- tion from competition. Monopolies may also be allowed by patent laws that grant the developer of a new technology a period of time (usually 20 years) during which no other firm can use the same technology without the patent holder’s consent. Patent protections are permitted to encourage businesses to engage in riskier research and development by allowing them time to recoup their research, development, and production expenses and to earn a reasonable profit.

trusts Organizations established to gain control of a product market or industry by elimi- nating competition.

monopoly A market type in which just one business provides a good or service in a given market.

tABle 4.1 Forms of Capitalism

Type of Capitalism Description Example

Adam Smith’s laissez faire

The market, through its own inherent mechanisms, will keep commerce in equilibrium

Popular in the United States during the nineteenth century

Keynesian capitalism Government policies could be used to stimulate growth

Popular in the United States after the Great Depression

Friedman capitalism Emphasizes deregulation and significantly less government intervention

Popular in the second half of the twentieth century

State capitalism Major organizations are owned by the government but run in a capitalist manner

China’s economic system

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Because trusts and monopolies lack serious competition, there are concerns that they may either exploit their market dominance to restrict their output and raise prices or lower quality to gain greater profits. This concern is the primary rationalization for their regulation by the government. Public utilities, for example, are regulated by state public utility commissions and, where they involve interstate commerce, are subject to federal regulation as well. In recent years, some of these industries have been deregulated with the idea that greater competi- tion will police the behavior of individual firms. However, in areas like utilities it is difficult to develop perfect competition because of the large sunk costs required. Oftentimes, deregulation has led to increased costs to stakeholders. For example, Maryland deregulated the state’s residen- tial energy market in the late 1990s, and when rate caps came off in 2004, residences were hit with skyrocketing utilities costs. The problem has been market prices—when petroleum costs are high, so are the costs to generate energy. In a deregulated privatized market, these costs are passed on to consumers. The governor has tried numerous tactics to relieve the burden, including a one-time handout, but stakeholders remain concerned.10

Related to the issue of regulation of trusts and monopolies is the soci- ety’s desire to restrict destructive or unfair competition. What is consid- ered unfair varies with the standard practice of the industry, the impact of specific conduct, and the individual case. When one company dominates a particular industry, it may engage in destructive competition or employ anticompetitive tactics. For example, it may slash prices in an effort to drive competitors out of the market and then raise prices later. It may con- spire with other competitors to set, or “fix,” prices so that each firm can ensure a certain level of profit. Other examples of unfair competitive trade practices are stealing trade secrets or obtaining confidential information from a competitor’s employees, trademark and copyright infringement, false advertising, and deceptive selling methods such as “bait and switch” and false representation of products.

Regulation is also intended to protect consumers from unethical business practices. Senior citizens, for instance, are a highly vulnerable demographic that are often the victim of business scams. New laws have taken aim at financial scams on seniors, such as free lunch seminars. The state of Arkansas has taken the forefront on this issue, conducting police sweeps of suspected scams, increasing fines, and amending laws to impose increased penalties for those who prey on the elderly. Older people are the most vulnerable group when it comes to financial scams, as they rely on their savings for retirement security.11

Social Reasons for Regulation Regulation may also occur when market- ing activities result in undesirable consequences for society. Many manu- facturing processes, for example, create air, water, or land pollution. Such consequences create uncounted “costs” in the form of contamination of natural resources, illness, and so on that neither the manufacturer nor the

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consumer “pays” for directly, although consumers may end up paying for these costs nevertheless. Because few companies are willing to shoul- der these costs voluntarily, regulation is necessary to ensure that all firms within an industry do their part to minimize damages and pay their fair share. Likewise, regulations have proven necessary to protect natural (e.g., forests, fishing grounds, and other habitats) and social resources (e.g., his- torical and architecturally or archeologically significant structures). We will take a closer look at some of these environmental protection regula- tions and related issues in Chapter 11 on sustainability.

Other regulations have come about in response to social demands for equality in the workplace, especially after the 1960s. Such laws and regulations require that companies ignore race, ethnicity, gender, religion, and disabilities in favor of qualifications that more accurately reflect an individual’s capacity for performing a particular job. Likewise, deaths and injuries because of employer negligence resulted in regulations designed to ensure that people can enjoy a safe working environment. The airline industry has become a prime example of how tough economic times result in overworked, under-trained employees. Many pilots receive low compen- sation, poor health benefits, and are forced to work long hours—all factors that contribute to a weak and careless organizational culture. A helicopter crash that killed three people in Alaska may have occurred as a result of a culture that facilitates risky behavior and deemphasizes safety precau- tions. Records show that the pilot, on top of working his regular shift, also consistently volunteered for overtime and standby shifts because of the pay they generated. Additionally, the decision to fly in hazard weather was left mostly to the pilot, who usually chose to fly because otherwise he would not get paid for the shift.12

Still other regulations have resulted from special-interest group cru- sades for safer products. For example, Ralph Nader’s Unsafe at Any Speed, published in 1965, criticized the automobile industry as a whole, and General Motors specifically, for putting profit and style ahead of lives and safety. Nader’s consumer protection organization, popularly known as Nader’s Raiders, successfully campaigned for legislation that required automakers to provide safety belts, padded dashboards, stronger door latches, head restraints, shatterproof windshields, and collapsible steering columns in automobiles. As we will see in Chapter 8, consumer activists also helped secure passage of several other consumer protection laws, such as the Wholesome Meat Act of 1967, the Clean Water Act of 1972, and the Toxic Substance Act of 1976.

Issues arising from the increasing use of the internet have led to demands for new laws protecting consumers and business. Laws such as the Stop Online Piracy Act (SOPA) and the Protect Intellectual Property Act (PIPA) were proposed to prevent copyright infringement over the internet. Under these provisions companies could be penal- ized for posting pirated content over the internet. However, Google, Yahoo, and other internet companies protested the bills, saying that

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it gave the government too much power to shut down websites and infringe on freedom of speech.13 Wikipedia, Google, and other websites underwent a service blackout for an entire day to protest the bills. The proposed laws were defeated, much to the frustration of content provid- ers who hoped the bills would help protect their intellectual property. Intellectual property protection versus freedom of speech is a tricky balance that requires legislators to research solutions that respects both of these rights.

As we shall see in Chapter 10, the technology associated with the internet has generated a number of issues related to privacy, fraud, and copyrights. For instance, creators of copyrighted works such as movies, books, and music are calling for new laws and regulations to safeguard their ownership of these works. In response to these concerns, Congress enacted the Digital Millennium Copyright Act in 1998, which extended existing copyright laws to better protect “digital” recordings of music, movies, and the like. While other countries have implemented similar measures, copyright violations continue to plague many global indus- tries, which to some critics calls into question the effectiveness of legal action. A team of security specialists recommends technological, not legal, solutions as most effective in the fight against piracy and copyright infringement.14

Concerns about the collection and use of personal information, espe- cially regarding children, resulted in the passage of the Children’s Online Privacy Protection Act of 2000 (COPPA). The Federal Trade Commission (FTC) enforces the act by levying fines against non-complying website operators. For example, the FTC imposed a $250,000 fine on social gam- ing company RockYou when it was discovered they had collected the emails of 179,000 children under the age of 13. The claim also mentioned that this information was stored in clear text, making it easy for hackers to access.15

Internet safety among children is a major topic of concern. This is true for children of all ages. Studies have shown that approximately 50 percent of children between the ages of six and nine use social media, and over 90 percent of children under the age of two have accessible information online, including photos and other personal information. Many are urging parents to encourage their children to practice safe online behaviors such as using privacy restrictions and not posting information or photos that contain too much personal information.16

Another major concern is online fraud. According to the Internet Crime Complaint Center (IC3), online fraudsters are becoming more and more creative by making use of over 20 listed types of scams. These scams are designed to target all age groups and together contribute to the loss of nearly $200 million a year. While online fraud is a major concern, it is only a small portion of the entirety of online crimes committed. In 2013, total losses neared $800 million, an increase of nearly 49 percent from the year before.17

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Ethical Responsibilities in Marketing

Herbalife Faces Challenges with Compensation System

Herbalife International is the third largest direct-selling

company in the world, with independent contractors

in 90 countries. Its product line consists of weight-

management and nutrition products. Like many direct

selling companies, Herbalife employs a multilevel mar-

keting compensation system. Multilevel marketing is a

compensation system wherein contractors earn income

from their own sales of products as well as commissions

from sales made by those they have recruited. However,

sales are never forced, and independent contractors

do not receive additional compensation unless their

recruits make sales.

Multilevel marketing is a legal activity. However,

pyramid schemes are illegal. These schemes occur when

investors are promised large profits based primarily on

recruiting others to join their program. The promise

is not based on profits from any real investment or

sale of goods. The reason why this scheme is illegal

is because it is unsustainable—the scheme falls apart

once new recruits dry up, and investors often lose their

investments.

Because of the similarities between the two, many

people mistake legal multilevel marketing with illegal

pyramid schemes. China, in fact, has banned multilevel

marketing in the belief that it too closely resembles a

pyramid scheme. However, U.S. courts have determined

multiple times that multilevel marketing is a legitimate

way of doing business.

Like other direct selling companies, Herbalife has

faced accusations of operating pyramid schemes.

However, one of its biggest challenges occurred when a

famous hedge fund manager tried to discredit the com-

pany. In 2012, Herbalife was accused of being an elabo-

rate pyramid scheme by hedge fund manager William

Ackman. Ackman had bet $1 billion in a short sale off

Herbalife’s stock. Short selling occurs when an investor

sells shares borrowed from a lender in the belief that

the stock will decrease. If the stock decreases, the inves-

tor profits.

Ackman’s accusations against Herbalife included the

following: (1) the majority of contractors for Herbalife

lose money, (2) Herbalife pays more for recruiting

new contractors than selling actual products, and (3)

only the top 1 percent of contractors earn most of

the money. Herbalife defended its business model and

pointed out that many people become contractors to

get a 25 percent discount on their purchases. Often

they are not trying to make money. Also, indepen-

dent contractors who decide not to sell products have

the option of returning merchandise to Herbalife. A

respected Nielsen survey found that 7.9 million con-

sumers, or 3.3 percent of the U.S. population, had

purchased a Herbalife product in the last three months.

This supports the fact that Herbalife uses a valid and

successful business model, which is producing profits

directly related to product sales.

Although Herbalife’s stock initially dropped due

to the allegations, it has now recovered. Many have

criticized Ackman, claiming that his short against

the company created an incentive for him to try to

discredit Herbalife. Ackman took a loss on 8 million

shares of stock. On the other hand, in 2014 the Federal

Trade Commission claimed they were investigating

Herbalife’s operations, although the reason or purpose

of their investigation remains unclear. Herbalife clearly

has many challenges to overcome, but it continues to

do so by staunchly defending its integrity and legal

compliance.

Sources: Adapted from the case “Multilevel Marketing Under Fire: Herbalife Defends Its Business Model,” developed by Michelle Urban and Jennifer Sawayda for the UNM Daniels Fund Ethics Initiative.

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Laws and Regulations As a result of business abuses and social demands for reform, the federal government began to pass legislation to regulate business conduct in the late nineteenth century. In this section, we will look at a few of the most significant of these laws. Table 4.2 summarizes many more laws that affect business operations.

tABle 4.2 Major Federal Legislation Regulating Business

Sherman Antitrust Act, 1890 Prohibits monopolies

Clayton Act, 1914 Prohibits price discrimination, exclusive dealing, and other efforts to restrict competition

Federal Trade Commission Act, 1914 Created the Federal Trade Commission (FTC) to help enforce antitrust laws

Robinson-Patman Act, 1936 Prohibits price discrimination between retailers and wholesalers

Wheeler-Lea Act, 1938 Prohibits unfair and deceptive acts regardless of whether competition is injured

Lanham Act, 1946 Protects and regulates brand names, brand marks, trade names, and trademarks

Celler-Kefauver Act, 1950 Prohibits one corporation from controlling another when the effect substantially lessens competition

Consumer Goods Pricing Act, 1975 Prohibits price maintenance agreements among manufacturers and resellers in interstate commerce

Antitrust Improvements Act, 1976 Strengthens earlier antitrust laws; gives Justice Department more investigative authority

Federal Corrupt Practices Act, 1977 Makes it illegal to pay foreign government officials to facilitate business or to use third parties such as agents and consultants to provide bribes to such officials

Trademark Counterfeiting Act, 1984 Provides penalties for individuals dealing in counterfeit goods

Trademark Law Revision Act, 1988 Amends the Lanham Act to allow brands not yet introduced to be protected through patent and trademark registration

Federal Trademark Dilution Act, 1995 Provides trademark owners the right to protect trademarks and requires them to relinquish those that match or parallel existing trademarks

Digital Millennium Copyright Act, 1998

Refines copyright laws to protect digital versions of copyrighted materials, including music and movies

Sarbanes-Oxley Act, 2002 Made securities fraud a criminal offense; stiffened penalties for corporate fraud; created an account- ing oversight board; and instituted numerous other provisions designed to increase corporate transpar- ency and compliance

(Continued )

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Sherman Antitrust Act The Sherman Antitrust Act, passed in 1890, is the principal tool employed by the federal government to prevent busi- nesses from restraining trade and monopolizing markets. Congress passed the law, almost unanimously, in response to public demands to curtail the growing power and abuses of trusts in the late nineteenth century. The law outlaws “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce.”18 The law also makes a violation a felony crime, punishable by a fine of up to $10 million for corporate violators and $350,000 and/or 3 years in prison for individual offenders.19

The Sherman Antitrust Act applies to all firms operating in interstate commerce as well as to U.S. firms engaged in foreign commerce. The law has been used to break up some of the most powerful companies in the United States, including the Standard Oil Company (1911), the American Tobacco Company (1911), and AT&T (1984). There was also an attempt to break up Microsoft. In the Microsoft case, a U.S. district court judge ruled that the software giant inhibited competition by using unlawful tactics to protect its Windows monopoly in computer operat- ing systems and by illegally expanding its dominance into the market for internet Web-browsing software. However, the ruling to break up Microsoft was appealed, and the order overturned. Microsoft agreed to adhere to a consent decree, where it complied with stricter rem- edies to prevent non-competitive business practices through 2010. The Sherman Act remains the primary source of antitrust law in the United States, although it has been supplemented by several amendments and additional legislation.

Clayton Antitrust Act Because the provisions of the Sherman Antitrust Act were vague, the courts have interpreted the law in different ways. To rectify this situation, Congress enacted the Clayton Antitrust Act in 1914 to limit mergers and acquisitions that have the potential to stifle compe- tition.20 The Clayton Act also specifically prohibits price discrimination,

Controlling the Assault of Non- solicited Pornography and Marketing Act (CAN-SPAM), 2003

Bans fraudulent or deceptive unsolicited commercial email and requires senders to provide information on how recipients can opt out of receiving additional messages

Fraud Enforcement and Recovery Act, 2009

Strengthens provisions to improve the criminal enforcement of fraud laws, including mortgage fraud, securities fraud, financial institutions fraud, and fraud related to the federal assistance relief program

Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)

Increases accountability and transparency in the financial industry, protects consumers from deceptive financial practices, and establishes the Consumer Financial Protection Bureau

tABle 4.2 (Continued)

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tying agreements (when a supplier furnishes a product to a buyer with the stipulation that the buyer must purchase other products as well), exclusive agreements (when a supplier forbids an intermediary to carry products of competing manufacturers), and the acquisition of stock in another corpo- ration where the effect may be to substantially lessen competition, or tend to create a monopoly. In addition, the Clayton Act prohibits members of one company’s board of directors from holding seats on the boards of com- peting corporations. The law also exempts farm corporations and labor organizations from antitrust laws.

Federal Trade Commission Act In the same year the Clayton Act was passed, Congress also enacted the Federal Trade Commission Act to further strengthen the antitrust provisions of the Sherman Act. Unlike the Clayton Act, which prohibits specific practices, the Federal Trade Commission Act more broadly prohibits unfair methods of competition. More significantly, this law created the Federal Trade Commission (FTC) to protect consumers and businesses from unfair competition. Of all the federal regulatory agen- cies, the FTC has the greatest influence on business activities.

When the FTC receives a complaint about a business or finds rea- son to believe that a company is engaging in illegal conduct, it issues a formal complaint stating that the firm is in violation of the law. If the company continues the unlawful practice, the FTC can issue a cease-and- desist order, which requires the offender to stop the specified behavior. The weight loss industry has been a target for complaints in recent years. In fact, the FTC initiated a campaign called “Operation Failed Resolution” aimed at companies in the industry accused of misleading advertising. Four companies, including Sensa, L’Occitane, LeanSpa, and HCG Diet Direct, settled with the commission for a total of $34 million in settlements.21

Although a firm can appeal to the federal courts to have the order rescinded, the FTC can seek civil penalties in court, up to a maximum penalty of $10,000 a day for each infraction, if a cease-and-desist order is ignored. The commission can also require businesses to air corrective advertising to counter previous ads the commission considers misleading. For example, Lasik surgery providers were required by the FTC to run corrective advertising to inform consumers of the risks of undergoing the irreversible surgery along with the benefits.22

In addition, the FTC helps to resolve disputes and makes rulings on business decisions. The FTC ruled that POM Wonderful LLC, maker of a pomegranate juice product, made unsubstantiated claims about the prod- uct’s health benefits. The FTC mandated that POM could not claim its product helped fight disease unless backed up by two pharmaceutical clini- cal trials. A federal appeals court upheld the FTC’s finding but questioned whether the need for two clinical trials in order to make health claims could be a free speech violation.23 In this case, the FTC helped to reinforce truthfulness in advertising, but some question whether its requirements for POM are too stringent.

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Proposed Financial Reforms In response to the 2008–2009 financial cri- sis, government leaders proposed sweeping reforms to increase consumer protection. This proposed legislation has been a step away from the dereg- ulation practices of the last several decades, instead giving government a freer hand in regulating the financial industry. The Obama administra- tion has given the Federal Reserve more power over the financial indus- try and established a new Consumer Financial Protection Bureau that aids in regulating banks and other financial institutions. More specifically, the agency monitors financial instruments like subprime mortgages and other high-risk lending practices. The problems leading up to the financial crisis included inaction on the part of federal regulators to protect consumers from fraud and predatory lending practices, lack of responsibility on the part of mortgage brokers taking large risks, conflicts of interest among credit rating industries, and complex financial instruments that investors did not understand.

To prevent these problems from leading to future financial crises, the Obama administration proposed legislation that would include the follow- ing reforms among others: removing some of the FTC’s powers and creat- ing a Consumer Financial Protection Bureau; creating a Financial Stability Oversight Council to identify and address key risks to the financial indus- try; requiring loan bundlers to retain a percentage of what they sell (a proposal also being considered by the EU); providing new powers for the Securities and Exchange Commission to monitor credit rating industries for objectivity; and requiring complex financial instruments to be traded on a regulated exchange.

Enforcement of the Laws Because violations of the Sherman Antitrust Act are felony crimes, the Antitrust Division of the U.S. Department of Justice enforces it. The FTC enforces antitrust regulations of a civil, rather than criminal, nature. There are many additional federal regulatory agen- cies (see Table 4.3) that oversee the enforcement of other laws and regu- lations. Most states also have regulatory agencies that make and enforce laws for individuals and businesses. In recent years, cooperation among state attorneys general, regulatory agencies, and the federal government has increased, particularly in efforts related to the control of drugs, orga- nized crime, and pollution.

The 2008–2009 financial meltdown revealed the need for better enforcement of the financial industry. Institutions took advantage of loopholes in the regulation system to make quick profits. For example, some adjustable mortgage rates offered low “teaser” rates that did not even cover the monthly interest on loans. This ended up increasing the principal balances on mortgages, resulting in debt that many consum- ers could not pay off. Unethical actions such as these led to the financial crisis. However, since these institutions were not as carefully monitored as other institutions, such as banks, regulators did not catch them until it was too late.24

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tABle 4.3 Federal Regulatory Agencies

Food and Drug Administration, 1906

Enforces laws and regulations to prevent distribution of adulterated or misbranded foods, drugs, medical devices, cosmetics, veterinary products, and potentially hazardous consumer products

Federal Reserve Board, 1913 Regulates banking institutions; protects the credit rights of consumers; maintains the stability of the financial system; conducts the nation’s monetary policy; and serves as the nation’s central bank

Federal Trade Commission, 1914 Enforces laws and guidelines regarding business practices; takes action to stop false and deceptive advertising and labeling

Federal Deposit Insurance Corporation, 1933

Insures deposits in banks and thrift institutions for at least $250,000; identifies and monitors risks related to deposit insurance funds; and limits the economic effects when banks or thrift institutions fail

Federal Communications Commission, 1934

Regulates communication by wire, radio, and television in interstate and foreign commerce

Securities and Exchange Commission, 1934

Regulates the offering and trading of securities, including stocks and bonds

National Labor Relations Board, 1935

Enforces the National Labor Relations Act; investigates and rectifies unfair labor practices by employers and unions

Equal Employment Opportunity Commission, 1970

Promotes equal opportunity in employment through administrative and judicial enforcement of civil rights laws and through education and technical assistance

Environmental Protection Agency, 1970

Develops and enforces environmental protection standards and conducts research into the adverse effects of pollution

Occupational Safety and Health Administration, 1971

Enforces the Occupational Safety and Health Act and other workplace health and safety laws and regulations; makes surprise inspections of facilities to ensure safe workplaces

Consumer Product Safety Commission, 1972

Ensures compliance with the Consumer Product Safety Act; protects the public from unreasonable risk of injury from any consumer product not covered by other regulatory agencies

Commodity Futures Trading Commission, 1974

Regulates commodity futures and options markets. Protects market users from fraud and abusive trading practices

Federal Housing Finance Industry, 2008

Combined the agencies of the Office of the Federal Housing Enterprise Oversight, the Federal Housing Finance Board, and the GSE mission office of the Department of Housing and Urban Development to oversee the country’s secondary mortgage markets

Consumer Financial Protection Bureau, 2010

Created as part of the Dodd-Frank Act to educate consumers and protect them from deceptive financial products

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New enforcement aims to require brokers to display a greater fiduciary duty to their clients, requiring them to put their clients’ interests above their own and eliminating any conflicts of interest. This could cause them to offer products that are less costly and more tax-efficient for consum- ers rather than promoting products that would benefit their companies at consumers’ expense.25

In addition to enforcing stricter regulations for financial institutions, the Obama administration has taken steps to protect consumers. This includes encouraging consumers to manage credit cards, savings, and mortgages more carefully; providing cardholders with warnings about how long it will take to pay off their debt if they only pay the minimum on their credit cards each month; and preventing certain credit card issuers from offering credit cards to people under the age of 21.

In addition to enforcement by state and federal authorities, lawsuits by private citizens, competitors, and special-interest groups are used to enforce legal and regulatory policy. Through private civil actions, an individual or organization can file a lawsuit related to issues such as anti- trust, price fixing, or unfair advertising. An organization can even ask for assistance from a federal agency to address a concern. For example, broad- casting companies gained the assistance of the Department of Justice in fighting the start-up service Aereo, which used equipment to stream local television content to consumers for a fee. The case was eventually taken to the Supreme Court, where it was ruled that Aereo needed to secure permis- sion from content providers.26

Apple has been under an antitrust investigation for fixing prices on electronic books as a means to block competition with Amazon. A U.S. District Court Judge ruled that the company colluded with five e-book publishers on pricing. Apple denies any wrongdoing and claims its pricing is due to natural competitive pressures that resulted as they entered the market. The company filed an appeal to the ruling that was denied. As a result, 33 states are moving forward with the case, which could result in Apple paying up to $840 million back to consumers.27

Global Regulation The twentieth century brought a number of regional trade agreements that decreased the barriers to international trade. The North American Free Trade Agreement (NAFTA) and the EU are two such agreements that were formed with the intention of enhancing regional competitive- ness and decreasing inequalities. NAFTA, which eliminates virtually all tariffs on goods produced and traded between the United States, Canada, and Mexico, makes it easier for businesses of each country to invest in the other member countries. The agreement also provides some coor- dination of legal standards governing business transactions among the three countries. NAFTA promotes cooperation among various regulatory agencies to encourage effective law enforcement in the free trade area. Within the framework of NAFTA, the United States and Canada have

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developed many agreements to enforce each other’s antitrust laws. The agreement provides for cooperation in investigations, including requests for information and the opportunity to visit the territory of the other nation in the course of conducting investigations.

The European Union was established in 1958 to promote free trade among its members and now includes 28 European nations, with more expected to join in coming years.28 To facilitate trade among its members, the EU standardized business laws and trade barriers, eliminated customs checks among its members, and introduced the euro as a standard cur- rency. Moreover, the Commission of the European Communities has entered into an agreement with the United States, similar to NAFTA, regarding joint antitrust laws. The European Union is in favor of tighter financial-market regulation in the wake of the financial crisis. Proposals discussed by the European Commission include laws restricting propri- etary trading at large banks, revisions on rules regulating occupational pension funds, and improving benchmarks used as reference prices for financial instruments.29 However, not all countries in the EU agree on which reforms to adopt. Banks in the United Kingdom are encouraging the U.K. to oppose certain measures that would give euro countries more of a majority in financial-services rule-making. As a country that has not adopted the euro, U.K. banks are concerned they might lose influence in the development of new financial legislation.30

A company that engages in commerce beyond its own country’s borders must contend with the potentially complex relationship among the laws of its own nation, international laws, and the laws of the nation in which it will be trading, as well as various trade restrictions imposed on international trade. International business activities are affected to varying degrees by each nation’s laws, regulatory agencies, courts, the political environment, and special-interest groups. The European Union, for example, has been tough on large businesses, leaving some critics in the United States to call the EU anti-competitive and anti-innovative. However, as regulations in the United States and the EU continue to be modified as a result of the 2008–2009 financial crisis, incongruences from each side can be seen. For example, as part of the Dodd-Frank Act, the United States mandated that large banks rely more upon liquid capital for financing rather than debt. While this mandate seems to reduce risks in the financial industry, those banks in the EU see this mandate as creating a competitive disadvantage. Financial firms have historically been held to local standards of the country where busi- ness is conducted. EU regulators fear that this new capital requirement will restrict economic growth and give U.S. firms an advantage over those in the EU. They also cite potential issues regarding international trade.31

This example demonstrates how companies can experience major barriers when doing business in foreign countries. In addition to stricter regulations, countries can also establish import barriers, including tariffs, quotas, minimum price levels, and port-of-entry taxes that affect the importation of products. Other laws govern product quality and safety, distribution methods, and sales and advertising practices.

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Although there is considerable variation in focus among different nations’ laws, many countries have laws that are quite similar to those in the United States. Indeed, the Sherman Act has been copied throughout the world as the basis for regulating fair competition. Antitrust issues, such as price fixing and market allocation, have become a major area of international cooperation in the regulation of business.32 Table 4.4 pro- vides a list of situations and signs indicating that antitrust may become a concern.

Costs and Benefits of Regulation Costs of Regulation Regulation results in numerous costs for businesses, consumers, and society at large. Although many experts have attempted to quantify these costs, it is quite difficult to find an accurate measurement tool. To generate such measurements, economists often classify regula- tions as economic (applicable to specific industries or businesses) or social (broad regulations pertaining to health, safety, and the environment). One yardstick for the direct costs of regulation is the administrative spending patterns of federal regulatory agencies. The 2013 estimated cost of regu- latory activities was over $58 billion, which was up by approximately 8 percent from 2011. Many people in the business world and beyond are concerned about the upward trajectory of regulatory costs. Another way to measure the direct cost of regulation is to look at the staffing levels of federal regulatory agencies. The expenditures and staffing of state and local

tABle 4.4 Signs of Possible Antitrust Violation

• Any evidence that two or more competing sellers of similar products have agreed to price their products a certain way, to sell only a certain amount of their product or to sell only in certain areas or to certain customers;

• Large price changes involving more than one seller of very similar products of different brands, particularly if the price changes are of an equal amount and occur at about the same time;

• Suspicious statements from a seller suggesting that only one firm can sell to a particular customer or type of customer;

• Fewer competitors than normal submit bids on a project;

• Competitors submit identical bids;

• The same company repeatedly has been the low bidder on contracts for a certain product or service or in a particular area;

• Bidders seem to win bids on a fixed rotation;

• There is an unusual and unexplainable large dollar difference between the winning bid and all other bids; or

• The same bidder bids substantially higher on some bids than on others, and there is no logical cost reason to explain the difference.

Source: U.S. Department of Justice, “Antitrust Enforcement and the Consumer,” http://www.justice .gov/atr/public/div_stats/antitrust-enfor-consumer.pdf (accessed June 11, 2014).

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regulatory agencies also generate direct costs to society. Federal regulatory agency jobs have been on the rise in recent years, growing to 290,690 full-time jobs in 2013, indicating a 2.5 percent increase or approximately 7,000 new employees each year.33

Still another way to approach the measurement of the costs of regu- lation is to consider the burden that businesses incur in complying with regulations. Various federal regulations, for example, may require compa- nies to change their manufacturing processes or facilities (e.g., smokestack “scrubbers” to clean air and wheelchair ramps to make facilities accessible to customers and employees with disabilities). Companies also must keep records to document their compliance and to obtain permits to implement plans that fall under the scope of specific regulatory agencies. Again, state regulatory agencies often add costs to this burden. Regulated firms may also spend large amounts of money and other resources to prevent addi- tional legislation and to appear responsible. Of course, businesses gener- ally pass these regulatory costs on to their consumers in the form of higher prices, a cost that some label a “hidden tax” of government. Additionally, some businesses contend that the financial and time costs of complying with regulations stifle their ability to develop new products and make investments in facilities and equipment. Moreover, society must pay for the cost of staffing and operating regulatory agencies, and these costs may be reflected in federal income taxes. Table 4.5 describes the primary driv- ers to the cost of regulation, including those associated with administering, enforcing, and complying with the regulation.

Benefits of Regulation Despite business complaints about the costs of regulation, it provides many benefits to business, consumers, and society as a whole. These ben- efits include greater equality in the workplace, safer workplaces, resources

tABle 4.5 Cost of Regulation

Type of Cost Description

1. Administration and Enforcement

Expenditures by government to develop and administer regulatory requirements, including the salaries of government workers, hiring inspectors, purchasing office supplies, and other overhead expenses

2. Compliance Expenditures by organizations, both private and public, to meet regulatory requirements, such as reporting activities and establishing an ethics and compliance program

3. Costs of Legal Consultants Expenditures by organizations for company or outside legal consultants to deal with legal accusations or issues associated with regulation

4. Additional Costs to Operation

Additional costs to the operations of an organization related to improved safety, sustainability, communication, product requirements, and more

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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 to ensure that future generations can enjoy their beauty and diversity.

Companies that fail to respond to consumer desires or that employ inefficient processes are often forced out of the marketplace by more effi- cient and effective firms. Truly competitive markets also spur companies to invest in researching and developing product innovations as well as new, more efficient methods of production. These innovations benefit consum- ers through lower prices and improved goods and services. For example, companies such as Apple, Samsung, and Lenovo continue to engineer smaller, faster, and more powerful computers and mobile devices that help individuals and businesses to be more productive.

Regulatory Reform Many businesses and individuals believe that the costs of regulation outweigh its benefits. They argue that removing regulation will allow Adam Smith’s “invisible hand of competition” to more effec- tively and efficiently dictate business conduct. Some people desire complete deregulation, or removal of all regulatory authority. Proponents of deregu- lation believe that less government intervention allows business markets to work more effectively. For example, many businesses want their industries deregulated to decrease their costs of doing business. Many industries have been deregulated to a certain extent since the 1980s, including trucking, airlines, telecommunications (long-distance telephone and cable televi- sion), and more recently, electric utilities. In many cases, this deregulation has resulted in lower prices for consumers as well as in greater product choice.

However, the onset of the 2008–2009 financial crisis slowed the call for deregulation. After the economy plummeted, the United States and other countries around the world saw the need for greater regulation, par- ticularly of the financial industry, and began to reverse the deregulatory trend of the previous two or three decades. Although the economic crisis stemmed from a variety of factors, many perceived that much of it stemmed from a lack of appropriate governmental oversight and a lack of ethical leadership in businesses. However, governments’ reactions and plans have many worrying that governments will assume too much control. There has always been considerable debate on the relative merits and costs of regula- tion, and these new changes resulting from the worst financial crisis since the Great Depression are not likely to lessen this controversy.

Self-Regulation Many companies attempt to regulate themselves in an effort to demonstrate social responsibility, to signal responsibility to stake- holders, and to preclude further regulation by federal or state government. Many firms choose to join trade associations that have self-regulatory programs, often established as a preventative measure to stop or delay the development of laws and regulations that would restrict the associations’ business practices. Some trade associations establish codes of conduct by

deregulation Removal of all regulatory authority.

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which their members must abide or risk discipline or expulsion from the association. The Direct Marketing Association in the United Kingdom expelled Reactiv Media from its membership after its own investigation upheld consumer complaints regarding the company’s telemarketing prac- tices.34

Perhaps the best-known self-regulatory association is the Better Business Bureau. Founded in 1912, today there are 114 bureaus in the United States, parts of Canada, Puerto Rico, and the Caribbean territories. The bureaus have accredited over 375,000 local and national businesses and charities and resolve problems for millions of consumers and busi- nesses each year.35 Each bureau also works to champion good business practices within a community, although it usually does not have strong tools for enforcing its business conduct rules. When a company violates what the BBB believes to be good business practices, the bureau warns consumers through local newspapers or broadcast media.

If the offending organization is a member of the BBB, it may be expelled from the local bureau. For example, the membership of Honest Company was revoked by the Better Business Bureau after numerous customer complaints regarding advertisements, suppliers, and goods and services were recorded. The online retailer failed to address two of the complaints, which led to the revocation.36

Self-regulatory programs like the Better Business Bureau have a num- ber of advantages over government regulation. Establishment and imple- mentation of such programs are usually less costly, and their guidelines or codes of conduct are generally more practical and realistic. Furthermore, effective self-regulatory programs reduce the need to expand govern- ment bureaucracy. However, self-regulation also has several limitations. Nonmember firms are under no obligation to abide by a trade associa- tion’s industry guidelines or codes. Moreover, most associations lack the tools or authority to enforce their guidelines. Finally, these guidelines are often less strict than the regulations established by government agencies.

the contemporAry polItIcAl envIronment During the 1960s, a significant “antiestablishment” movement manifested in the form of hostile protests toward businesses. These efforts spurred a 15-year wave of legislation and regulation to address a number of issues of the day, including product safety, employment discrimination, human rights, energy shortages, environmental degradation, and scandals related to bribery and payoffs. During the1980s, the pendulum swung back in favor of business, and the economic prosperity of the 1990s was driven by technological advances and the self-regulation of business. In addition, business priorities were beginning to be focused on protecting competition and the natural environment. These policies continued through 2008, with

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continued self-regulation of industries and the rolling back of environmen- tal laws that businesses deemed detrimental. However, the regulatory cli- mate changed again in 2009 toward more regulation of environmental and health issues, resulting in higher taxes and increased social services. The onset of the financial crisis created an even greater need for stricter legisla- tion, such as the Troubled Assets Recovery Program (TARP) that autho- rized the U.S. Treasury to purchase up to $700 billion of troubled assets like mortgage-backed securities. It has also resulted in support for entirely new regulation and regulatory agencies like the Consumer Financial Protection Bureau. These new regulations have had wide-sweeping effects over the financial industry. Other organizations such as the Environmental Protection Agency and the Food and Drug Administration also began to regulate with the aim of protecting stakeholders with renewed vigor.

Such changes in the political environment over the last 50 years shaped the political environment in which businesses operate and created new avenues for businesses to participate in the political process. Among the most significant factors shaping the political environment were changes in Congress and the rise of special-interest groups. As the Obama administra- tion sought to revive and increase oversight of the finance industry, more companies became interested in hiring lobbyists to campaign on behalf of their interests in Washington.

Changes in Congress Among the calls for social reform in the 1960s were pressures for changes within the legislative process of the U.S. Congress itself. Bowing to this pressure, Congress enacted an amendment to the Legislative Reorganization Act in 1970, which ushered in a new era of change for the political process. This legislation significantly revamped the procedures of congressional committees, most notably stripping commit- tee chairpersons of many of their powers, equalizing committee and chair assignments, and requiring committees to record and publish all roll-call votes taken in the committee. By opening up the committee process to public scrutiny and reducing the power of senior members and commit- tee leaders, the act reduced the level of secrecy surrounding the legislative process and effectively brought an end to an era of autonomous committee chairs and senior members.37

Another significant change occurred in 1974 when Congress amended the Federal Election Campaign Act to limit contributions from individuals, political parties, and special-interest groups organized to get specific can- didates elected or policies enacted.38 Around the same time, many states began to shift their electoral processes from the traditional party caucus to primary elections, further eroding the influence of the party in the political process. These changes ultimately had the effect of reducing the importance of political parties by decreasing members’ dependence on their parties. Many candidates for elected offices began to turn to special-interest groups to raise enough funds to mount serious campaigns and reelection bids.

In 2002, Congress passed the Bipartisan Campaign Reform Act (BRCA), sponsored by Senators John McCain and Russell Feingold.

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This new act limited the amount of contributions parties could donate to political campaigns, and it implemented rules for how corporate and labor treasury funds could be used in federal elections. The act also for- bade national party committees from raising or spending unregulated funds. Though the act outraged certain legislators, who appealed to the Supreme Court over its constitutionality, the Supreme Court upheld it.39

However, the Supreme Court decision popularly referred to as Citizens United grants more powers to organizations regarding corporate contri- butions. Citizens United gives corporations the right to spend as much as they want in independent political expenditures to support governmental candidates. These independent political expenditures are provided through political action committees. Political action committees (PACs) are orga- nizations that solicit donations from individuals and then contribute these funds to candidates running for political office. Companies can organize PACs to which their executives, employees, and stockholders can make significant donations as individuals. PACs operate independently of busi- ness and are usually incorporated. Labor unions and other special-interest groups, such as teachers and medical doctors, can also establish PACs to promote their goals.

The Citizens United decision enabled the creation of what has been termed Super PACs. Before Citizens United, individuals were able to con- tribute $2,500 to PACs, and unions and corporations were not allowed to contribute. The Supreme Court ruled that these prohibitions violated the First Amendment. After the Supreme Court decision, many PACs were dubbed Super PACs because of what is seen as their unlimited abil- ity to receive political donations.40 The Federal Election Committee has rules to restrict PAC donations to $5,000 per candidate for each election. However, many PACs exploit loopholes in these regulations by donating so-called soft money to political parties that do not support a specific can- didate for federal office. Under the current rules, these contributors can make unlimited donations to political parties for general activities.

Rise of Special-Interest Groups The success of activists’ efforts in the 1960s and 1970s marked the rise of special-interest groups. The move- ments to promote African American and women’s rights and to protest the Vietnam War and environmental degradation evolved into well-organized groups working to educate the public about significant social issues and to crusade for legislation and regulation of business conduct they deemed irresponsible. These progressive groups were soon joined on Capitol Hill by more conservative groups working to further their agendas on issues such as business deregulation, restriction of abortion and gun control, and promotion of prayer in schools. Businesses joined in by forming industry and trade associations. These increasingly powerful special-interest groups now focused on getting candidates who could further their own political agendas elected. Common Cause, for example, is a nonprofit, nonpartisan organization working to fight corrupt government and special interests backed by large sums of money. Since 1970, Common Cause, with nearly

political action committees (PACs) Organizations that solicit donations from individuals and contribute these funds to candidates running for political office.

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400,000 members, has campaigned for greater openness and accountabil- ity in government. Some of its self-proclaimed “victories” include reform of presidential campaign finances, tax systems, congressional ethics, open meeting standards, and disclosure requirements for lobbyists. Table 4.6 lists the dates and subject matter of Common Cause’s major accomplish- ments over the past three decades.

tABle 4.6 Accomplishments of Common Cause

1971: Helps pass the Twenty-Sixth Amendment, giving 18-year olds the right to vote

1974: Leads efforts to pass presidential public financing, contribution limits, and disclosure requirements

1974–1975: Helps pass Freedom of Information Act (FOIA) and open meetings laws at federal, state, and local levels

1978: Leads efforts to pass the historic Ethics in Government Act of 1978, requiring financial disclosure for government officials and restricting the “revolving door” between business and government

1982: Works to pass extension of the Voting Rights Act

1989: Successfully lobbies for passage of the Ethics in Government Act

1990: Works to help pass the Americans with Disabilities Act, guaranteeing civil rights for the disabled

1995: Lobbies for limits on gifts in the House and Senate and for passage of the Lobby Reform Act, providing disclosure of lobbyists’ activity and spending

2000: Successfully works for legislation to unmask and require disclosure of “527” political groups

2001: Lobbies successfully with a coalition for the Help America Vote Act, which provided funding to states for improvement of the nation’s system of voting

2002: Leads successful multiyear campaign to enact the Bipartisan Campaign Reform Act, banning soft money in federal campaigns. In 2003, in a landmark decision, the U.S. Supreme Court upheld the law

2004: Launches major voter mobilization and election monitoring programs for presidential election

2005: Wins the fight against efforts to cut federal funding for the Corporation for Public Broadcasting, and gathers 150,000 petition signatures calling for the resignation of CPB Chairman Ken Tomlinson for partisan and unethical behavior

2005/2006: Leads the charge against disgraced Majority Leader Tom DeLay and fights for major ethics reform

2007: Fights successfully for passage of the Honest Leadership and Open Government Act of 2007, making major improvements in ethics and lobby laws and rules

2008: Leads successful campaign to create the first-ever independent ethics commission in the U.S. House of Representatives

2010: Spurred by the U.S. Supreme Court’s Citizens United decision that lifted the decades-old ban on corporate and union spending around elections, Common Cause redoubles efforts to pass the Fair Elections Now Act, which would allow candidates to run competitive campaigns on small donations and fair elections funds

Source: Common Cause, “History and Accomplishments,” http://www.commoncause.org/site/ pp.asp?c=dkLNK1MQIwG&b=4860205 (accessed June 11, 2014).

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Corporate Approaches to Influencing Government Although some businesses view regulatory and legal forces as beyond their control and simply react to conditions arising from those forces, other firms actively seek to influence the political process to achieve their goals. In some cases, companies publicly protest the actions of legislative bodies. More often, companies work for the election of political candidates who regard them positively. Lobbying, political action committees, and cam- paign contributions are some of the tools businesses employ to influence the political process.

Lobbying Among the most powerful tactics business can employ to par- ticipate in public policy decisions is direct representation through full-time staff who communicate with elected officials. Lobbying is the process of working to persuade public and/or government officials to favor a particu- lar position in decision-making. Organizations may lobby officials either directly or by combining their efforts with other organizations.

Many companies concerned about the threat of legislation or regula- tion that may negatively affect their operations employ lobbyists to com- municate their concerns to officials on their behalf. Google, for example, has recently expanded its Washington office to one the size of the White House. Less than a decade ago, the company had a small presence in Washington but today they are within the top five of the companies with the largest lobbying activities. With all of the controversy over data col- lection and privacy concerns, both of which are core aspects of Google’s business, the company has learned to be an active member in shaping the political conversation.41 Table 4.7 provide examples of organizations that spend money on lobbying.

lobbying The process of working to persuade public and/ or government officials to favor a particular position in decision-making.

tABle 4.7 Organizations that Engage in Lobbying

Lobbying Organization Total

U.S. Chamber of Commerce $1,066,810,680

American Medical Association $306,077,500

General Electric $301,650,000

National Association of Realtors $265,549,856

American Hospital Association $259,177,661

Pharmaceutical Research and Manufacturers of America $255,146,420

AARP $234,422,064

Blue Cross/Blue Shield $231,835,532

Northrop Grumman $213,642,213

Exxon Mobil $198,992,742

Source: The Center for Responsive Politics, “Top Spenders,” Open Secrets, 2014, https://www.opensecrets .org/lobby/top.php?indexType=s (accessed July 11, 2014).

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The financial industry has long employed lobbyists to push for increased deregulation so that it can pursue riskier and more profitable avenues. However, changes in regulation and compensation practices in the financial sector are making this a more difficult task. In the past, bank officials have often been awarded for the quantity of business they do, rather than the quality, which encouraged employees to engage in riskier business practices to increase their compensation packages. Some changes in bank compensation packages include adjusting pay to account for any risks taken in the process of generating profits and changing the system of awarding bonuses from a more individualistic focus to one that is more encompassing of the entire organization. Additionally, new Treasury rules mandate banks to better inform borrowers about the costs of certain loans, create greater supervision of bank practices, and even establish a capital surcharge for certain banks. Banks and other financial organizations voiced their opinions on these financial reforms through discreet lobbying and industry groups.42

Companies may attempt to influence the legislative or regulatory process more indirectly through trade associations and umbrella organiza- tions that represent collective business interests of many firms. Virtually every industry has one or more trade associations that represent the interests of their members to federal officials and provide public edu- cation and other services for their members. Examples of such trade associations include the National Association of Home Builders, the Tobacco Institute, the American Booksellers Association, and the Pet Food Institute. Additionally, there are often state trade associations, such as the Hawaii Coffee Association and the Michigan Beer and Wine Wholesalers Association, which work on state- and regional-level issues. Umbrella organizations such as the National Federation of Independent Businesses and the U.S. Chamber of Commerce also help promote business interests to government officials. The U.S. Chamber of Commerce takes positions on many political, regulatory, and economic questions. With more than 3 million member companies, its goal is to promote its members’ views of the ideal free enterprise marketplace. The cozy relationship between cor- porations and the government has been a growing concern for years, and was a topic of serious discussion after the 2008–2009 financial industry meltdown. For example, 48 members of the House Energy and Commerce Committee that were at the forefront of climate change legislation owned stock in energy, oil, and natural gas companies. This was a concern to some citizens as these investments could create a conflict of interest among legislators. However, House and Senate ethics do not forbid Congress from having a stake in companies unless they pass a law that would benefit only their own interests.43

Campaign Contributions Corporate money can also be channeled into candidates’ campaign coffers as corporate executives’ or stockholders’ per- sonal contributions. A sizable contribution to a candidate may carry with it an implied understanding that the elected official will perform some favor,

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such as voting in accordance with the contributor’s desire on a particular law. Occasionally, some businesses find it so important to ensure favor- able treatment that they make illegal corporate contributions to campaign funds. As mentioned earlier, it is also common for businesses and other organizations to make donations to political parties through PACs. Critics are concerned that decisions such as Citizens United will give organiza- tions unfettered power to allow large corporations to effectively “buy” elections.44

the Government’s strAteGIc ApproAch for leGAl And ethIcAl complIAnce Thus far, we have seen that, although legal and regulatory forces have a strong influence on business operations, businesses can also affect these forces through the political process. In addition, socially responsible firms strive to comply with society’s wishes for responsible conduct through legal and ethical behavior. Indeed, the most effective way for businesses to man- age the legal and regulatory environment is to establish values and policies that communicate and reward appropriate conduct. Most employees will try to comply with an organization’s leadership and directions for respon- sible conduct. Therefore, top management must develop and implement a highly visible strategy for effective compliance. This means that top manag- ers must take responsibility and be accountable for assessing legal risks and developing corporate programs that promote acceptable conduct.

Federal Sentencing Guidelines for Organizations Companies are increasingly establishing organizational compliance pro- grams to ensure that they operate legally and responsibly, as well as to generate a competitive advantage based on a reputation for responsible citizenship. There are also strong legal incentives to establish such pro- grams. The Federal Sentencing Guidelines for Organizations (FSGO) was developed by the U.S. Sentencing Commission and approved by Congress in November 1991. These guidelines streamline sentencing and punish- ment for organizational crimes and holds companies, as well as their employees, responsible for misconduct. The guidelines codified into law incentives to reward organizations for implementing controls to prevent misconduct, such as developing effective internal legal and ethical compli- ance programs.45 The commission describes seven steps that companies must implement to demonstrate due diligence. These steps are discussed in Table 4.8.

The assumption underlying the FSGO is that good, socially respon- sible organizations maintain compliance systems and internal governance controls that deter misconduct by their employees. Thus, these guidelines provide guidance for both organizations and courts regarding program

Federal Sentencing Guidelines for Organiza- tions (FSGO) Developed by the U.S. Sentencing Commission and approved by Congress in November 1991 to streamline sentencing and punishment for organizational crimes and holds companies and employees responsible for misconduct.

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effectiveness. Organizations have flexibility about the type of program they develop; the seven steps are not a checklist requiring that legal procedures be followed to gain certification of an effective program. Organizations implement the guidelines through effective core practices that are appro- priate for their firms. The programs they put into effect must be capable of reducing the opportunity for organizational misconduct.

The guidelines pertain to all felonies and class A misdemeanors com- mitted by employees regarding their work. Organizations demonstrating due diligence in developing effective compliance programs can avoid or reduce organizational penalties if an employee commits a crime.46 When it was discovered that bribery had occurred at Ralph Lauren’s Argentine operations, the company took immediate action. Its thorough investigation generated praise from the Securities and Exchange Commission (SEC). Although the company paid $882,000 in penalties to the Department of Justice and $735,000 to the Securities and Exchange Commission, for the first time the SEC entered into a non-prosecution agreement with Ralph Lauren. This was a clear demonstration that the company was being rewarded for its due diligence in handling the misconduct.47

Overall, the spirit behind the FSGO is that legal violations can be prevented through organizational values and a commitment to ethical conduct. The law develops new amendments almost every year. Table 4.9 shows all of the amendments made to date.

In 2004, an amendment to the FSGO placed responsibility on the busi- ness’s governing authority, requiring them to be knowledgeable about the company’s ethics program regarding content, implementation, and effec- tiveness. Usually the governing authority in an organization is the board of directors. The board must make certain there is a high-ranking manager responsible for the daily oversight of the ethics program; provide for suffi- cient authority, resources, and access to the board or an appropriate board subcommittee; and ensure that there are confidential mechanisms so the organization’s employees and agents may ask questions or report concerns without fear of retaliation. The board is also required to oversee the dis- covery of risks and to design, apply, and modify approaches to deal with those risks. If board members do not understand how to execute an ethics

tABle 4.8 Seven Steps to Effective Compliance and Ethics Programs

1. Establish codes of conduct (identify key risk areas).

2. Appoint or hire high-level compliance manager (ethics officer).

3. Take care in delegating authority (background checks on employees).

4. Institute a training program and communication system (ethics training).

5. Monitor and audit for misconduct (reporting mechanisms).

6. Enforce and discipline (management implementation of policy).

7. Revise program as needed (feedback and action).

Source: U.S. Federal Sentencing Guidelines for Organizations.

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tABle 4.9 Institutionalization of Ethics through the U.S. Sentencing Guidelines for Organizations

1991 Laws: U.S. Sentencing Guidelines for Organizations were created for federal prosecutions of organizations. These guidelines provide for just punishment, adequate deterrence, and incentives for organizations to prevent, detect, and report misconduct. Organizations need to have an effective ethics and compliance program to receive incentives in the case of misconduct.

2004 Amendments: The definition of an effective ethics program now includes the development of an ethical organizational culture. Executives and board members must assume the responsibility of identifying areas of risk, providing ethics training, creating reporting mechanisms, and designating an individual to oversee ethics programs.

2007–2008 Additional definition of a compliance and ethics program: Firms should focus on due diligence to detect and prevent misconduct and to promote an organizational culture that encourages ethical conduct. More details are provided, encouraging the assessment of risk and outlining appropriate steps in designing, implementing, and modifying ethics programs and training that will include all employees, top management, and the board or governing authority. These modifications continue to reinforce the importance of an ethical culture in preventing misconduct.

2010 Amendments: Chief compliance officers are directed to make their reports to their firm’s board rather than to the general counsel. Companies are encour- aged to create hotlines, perform self-audit programs, and adopt controls to detect misconduct internally. More specific language has been added to the word prompt in regards to what it means to promptly report misconduct. The amendment also extends operational responsibility to all personnel within a company’s ethics and compliance program

2012 Amendments for securities fraud: These amendments were developed to account for changes instituted by the 2010 passage of the Dodd-Frank Act. These amendments propose changes in how fraud losses are calculated, in the sentencing of professionals guilty of insider trading, the determination of losses resulting from mortgage fraud, and the different levels of offense for financial fraud.

Sources: “U.S. Sentencing Guidelines Changes Become Effective November 1,” FCPA Compliance and Ethics Blog, November 2, 2010, http://tfoxlaw.wordpress.com/2010/11/02/us-sentencing-guide- lines-changes-become-effective-november-1/ (accessed June 12, 2014); United States Sentencing Commission, “Amendments to the Sentencing Guidelines,” April 30, 2012, http://www.ussc.gov/ Legal/Amendments/Reader-Friendly/20120430_RF_Amendments.pdf (accessed June 12, 2014).

program, the organization risks insufficient oversight and misconduct that can snowball into a crisis.48

In 2005, the Supreme Court held that the federal sentencing guidelines were not mandatory but would act as recommendations for judges to use in their decisions. Some legal experts thought that this might weaken the effectiveness of the FSGO, but the majority of federal sentences have remained similar to what they had been before the Supreme Court deci- sion. Thus, the guidelines are important in developing a successful ethics and compliance program.49

The 2007–2008 amendments to the FSGO extend the necessary ethics training to board members or the governing authority, managers, employees,

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and the organizations’ agents. This change pertains to mandatory training at all organizational levels. Simply disseminating a code of ethics is not enough to meet training requirements. The new amendments compelled most gov- ernmental contractors to implement ethics and compliance training.

In 2010, the FSGO adopted four new amendments. The first amend- ment simplified reporting relationships by recommending that chief com- pliance officers report misconduct directly to the board or to a board committee, rather than simply to the general counsel. The second amend- ment encouraged organizations to strengthen internal controls through hotlines, self-auditing programs, and other mechanisms to increase the chances that misconduct will be detected internally instead of externally. The third amendment adopted more specific wording to clarify what it means to report an ethical violation promptly. Finally, a fourth amend- ment extended operational responsibility to all personnel within a com- pany’s ethics and compliance program. This means that everyone in an organization has a responsibility to ensure ethical conduct.50

In 2012, amendments were introduced that covered different topics, with major emphasis given to changes stemming from the Dodd-Frank Act. These amendments advocate increased penalties for certain types of securities fraud. The FSGO suggests that lawmakers differentiate between those who engage in frequent and purposeful insider trading and those who engage in it because of the opportunity to generate quick profits. Increased sentences are also recommended, depending upon the money gained from the insider trading scheme and the willfulness of those involved. The amend- ments listed four questions to ask to determine the level of financial institu- tion fraud: (1) did the fraud caused the organization to become insolvent? (2) did it force the organization to reduce benefits to pensioners or the insured? (3) did it cause the organization to become unable on demand to fully refund a deposit, payment, or investment? and (4) did it deplete the assets of the organization to such an extent that it was forced to merge with another organization? Penalties are increased based upon the level of offense. Those convicted of this fraud can have their sentences increased or decreased beyond the FSGO guidelines, depending upon the extent of the loss.51

The Department of Justice also recommended general principles to apply in cases of corporate misconduct. Ethics and compliance programs are essential in discovering the types of misconduct common in a particu- lar organization’s industry. If an organization does not have an effective ethics and compliance program in place, a firm convicted of misconduct will likely not be treated lightly, particularly as the prosecutor has a large amount of freedom in determining when, whom, and whether to prosecute illegal conduct. Even minor misconduct could result in significant penalties if committed by a large number of employees or approved by upper man- agement. Without an effective ethics and compliance program to identify misconduct, a firm can face severe consequences from legal issues, enforce- ment, and sentencing.52 Legal and administrative policies mostly agree that an effective ethics and compliance program is required to prevent miscon- duct and reduce legal repercussions should it occur.

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Sarbanes-Oxley (SOX) Act The Sarbanes-Oxley Act was enacted to restore stakeholder confidence and provide a new standard of ethical behavior for U.S. businesses in the wake of Enron and WorldCom in the early 2000s. During probes into financial reporting fraud at many of the world’s largest companies, investigators learned that hundreds of public corporations were not reporting their financial results accurately. Accounting firms, lawyers, top corporate officers, and boards of directors had developed a culture of deception in an attempt to gain investor approval and competitive advantage. The downfall of many of these companies resulted in huge losses to thousands of investors, and employees even lost much of their savings from 401ks.

The Sarbanes-Oxley Act (SOX) legislation protects investors by improving the accuracy and reliability of corporate disclosures. The act had almost unanimous support by Congress, government regulatory agencies, and the general public. When President Bush signed the act, he emphasized the need for the standards it provides, especially for top management and boards of directors responsible for company oversight. Table 4.10 details the requirements of the act.

Sarbanes-Oxley Act Enacted to restore stake- holder confidence and provide a new standard of ethical behavior for U.S. businesses in the wake of Enron and WorldCom in the early 2000s.

tABle 4.10 Major Provisions of the Sarbanes-Oxley Act

1. Requires the establishment of an Independent Accounting Oversight Board in charge of regulations administered by the Securities and Exchange Commission.

2. Requires CEOs and CFOs to certify that their companies’ financial statements are true and without misleading statements.

3. Requires that corporate board of directors’ audit committees consist of independent members with no material interests in the company.

4. Prohibits corporations from making or offering loans to officers and board members.

5. Requires codes of ethics for senior financial officers; code must be registered with the SEC.

6. Prohibits accounting firms from providing both auditing and consulting services to the same client.

7. Requires company attorneys to report wrongdoing to top managers and, if necessary, to the board of directors; if managers and directors fail to respond to reports of wrongdoing, the attorney should stop representing the company.

8. Mandates “whistle-blower protection” for persons who disclose wrongdoing to authorities.

9. Requires financial securities analysts to certify that their recommendations are based on objective reports.

10. Requires mutual fund managers to disclose how they vote shareholder proxies, giving investors information about how their shares influence decisions.

11. Establishes a ten-year penalty for mail/wire fraud.

12. Prohibits the two senior auditors from working on a corporation’s account for more than five years; other auditors are prohibited from working on an account for more than seven years; in other words, accounting firms must rotate individual auditors from one account to another from time to time.

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The section of SOX that initially caused the most concern for com- panies was compliance with section 404. Section 404 comprises three central issues: (1) it requires that management create reliable internal financial controls; (2) it requires that management attest to the reli- ability of those controls and the accuracy of financial statements that result from those controls; and (3) it requires an independent auditor to further attest to the statements made by management. Because the cost of compliance was so high for many companies, some publicly traded companies considered de-listing themselves from the U.S. Stock Exchange. However, although compliance costs were high after Sarbanes–Oxley, they have decreased over the years. Compliance costs have decreased 50 percent from their level when the laws were put into effect. The current costs of compliance range from between $100,000 and $500,000.53

To address fraudulent occurrences, SOX required the creation of the Public Company Accounting Oversight Board, which provides oversight of the accounting firms that audit public companies and sets standards for the auditors in these firms. The board has investigatory and disciplin- ary power over accounting firm auditors and securities analysts who issue reports about companies. Specific duties include: (1) registration of public accounting firms; (2) establishment of auditing, quality control, ethics, independence, and other standards relating to preparation of audit reports; (3) inspection of accounting firms; (4) investigations, disciplinary proceed- ings, and imposition of sanctions; and (5) enforcement of compliance with accounting rules of the board, professionals standards, and securities laws relating to the preparation and issuance of audit reports and obligations and liabilities of accountants.

SOX also requires corporations to take more responsibility and to provide principles-based ethical leadership. Enhanced financial disclosures are required, including certification by top officers that audit reports are complete and that nothing has been withheld from auditors. For example, registered public accounting firms are now required to identify all mate- rial correcting adjustments to reflect accurate financial statements. Also, all material off-balance sheet transactions and other relationships with unconsolidated entities that affect current or future financial conditions of a public company must be disclosed in each annual and quarterly financial report. In addition, public companies must also report “on a rapid and current basis” material changes in the financial condition or operations. Section 201 of SOX prohibits registered public accounting firms from providing both audit and non-audit services to a public company, a major issue with the now defunct accounting firm Arthur Andersen in its rela- tionship with Enron.

Other provisions of the act include whistle-blower protection and changes in the attorney-client relationship so that attorneys are now required to report wrongdoing to top managers or to the board of direc- tors. Employees of public companies and accounting firms, in general, are also accountable to report unethical behavior. SOX intends to moti-

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vate employees through “whistle-blower” protection that would prohibit the employer from taking certain actions against employees who law- fully disclose private employer information to, among others, parties in a judicial proceeding involving a fraud claim. Whistle-blowers are also granted a remedy of special damages and attorney’s fees. This protection is designed to encourage whistleblowers to come forward when detecting business misconduct, as much of the fraud that eludes audits or other controls may be detected by employees. According to a 2008 report pub- lished by the Association of Certified Fraud Examiners, data compiled on 959 cases of occupational fraud between 2006 and 2008 revealed that 46 percent of the cases were detected by tipsters such as employees or vendors.54 Acts of retaliation that harm informants, including interfer- ence with the lawful employment or livelihood of any person, shall result in fines and/or imprisonment for ten years. Table 4.11 lists the benefits of the act.

Dodd-Frank Wall Street Reform and Consumer Protection Act In 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was passed. The act was hailed as “a sweeping overhaul of the finan- cial regulatory system. . .on a scale not seen since the reforms that fol- lowed the Great Depression.”55 Dodd-Frank seeks to prevent financial crisis through improved financial regulation, additional oversight of the industry, and preventative measures to reduce the types of risk-taking, deceptive practices, and lack of oversight that led to the financial fallout in 2007–2008.56 Its provisions include increasing the transparency of finan- cial institutions, creating a bureau to educate consumers about financial

Dodd–Frank Wall Street Reform and Consumer Protection Act Passed in 2010 to prevent financial crisis by increased financial deregulation, additional oversight of the industry, and preventative measures against unhealthy risk-taking and deceptive practices.

tABle 4.11 Benefits of Sarbanes-Oxley

1. Greater accountability by top management and board of directors to employees, commu- nities, and society. The goals of the business will be to provide stakeholders with a return on their investment rather than providing a vehicle for management to reap excessive compensation and other benefits.

2. Renewed investor confidence providing managers and brokers with the information they need to make solid investment decisions, which will ultimately lead to a more stable and solid growth rate for investors.

3. Clear explanations by CEOs about why their compensation package is in the best interest of the company. It eliminates certain traditional senior management perks, including com- pany loans, and requires disclosures about stock trades, thus making executives more like other investors.

4. Greater protection of employee retirement plans. Employees can develop greater trust that they will not lose savings tied to such plans.

5. Improved information from stock analysts and rating agencies.

6. Greater penalties and accountability of senior managers, auditors and board members. The penalties now outweigh the rewards of purposeful manipulation and deception.

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products and protect them from deceptive financial practices, implement- ing added incentives for whistle-blowers, increasing oversight of the finan- cial industry, and regulating the use of derivatives.

Unlike Sarbanes-Oxley, there was not a clear consensus on the Dodd- Frank Act. Opponents of the act expressed many concerns, asserting that the rules on derivatives would be too difficult to follow, the changes would create chaos in the financial system, and the government could gain too much power.57 J.P. Morgan claimed that they supported the law but were against certain provisions.58 Included in these provisions was the creation of new financial regulatory agencies that would increase government over- sight of the financial system.

The Office of Financial Research was developed with the responsibility to improve the quality of financial data accessible to government officials and construct an improved system of analysis for the finance industry.59 The Financial Stability Oversight Council (FSOC) has been given the responsibility to keep the financial system stabilized through market monitoring, threat identification, the promotion of market discipline among public constituents, and responses to risks that threaten stability.60 FSOC can limit or supervise financial risks, create more stringent rules for banking and nonbanking financial organizations, and break up financial organizations that present major risks to market stability.61 The purpose of these two new agencies is to eliminate loopholes that allowed financial companies to commit risky and deceptive actions leading up to the finan- cial crisis.

The Dodd-Frank Act also developed the Consumer Financial Protection Bureau (CFPB). The CFPB is an independent agency within the Federal Reserve System that “regulate[s] the offering and provision of consumer financial products or services under the Federal consumer financial laws.”62 A major problem leading up to the financial meltdown was that average investors usually did not understand the complex financial products in which they were trading. The federal government has granted the CFPB supervisory power over credit markets and the ability to monitor lenders to ensure they are in legal compliance.63 The CFPB also has authority to restrict unfair lending and credit card practices, enforce consumer financial protection laws, and ensure the safety of financial products before their release onto the market.64

Some have major concerns about the extent of the agency’s powers. For instance, critics are concerned that this increased power could lead to severe sanctions or heavy regulations.65 Goldman Sachs was one financial organization effected by the regulation. In order to comply with part of the Dodd-Frank Act, it was forced to limit investing in its own private- equity funds. This provision restricts financial organizations from using their own money to make large bets.66 The CFPB has oversight powers over organizations that tend to be accused of questionable conduct, such as payday lenders and debt collectors.67 The CFPB’s goal is to maintain a more transparent financial environment for consumers.

Consumer Financial Protection Bureau (CFPB) Established by the Dodd– Frank Act to regulate banks and other financial institutions by monitoring financial instruments like subprime mortgages and high-risk lending practices.

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Finally, the Dodd–Frank law created a whistle-blower bounty pro- gram. Whistle-blowers who report financial fraud to government agencies are eligible to receive 10–30 percent of fines and settlements if their reports result in convictions of more than $1 million in penalties.68 In 2012, the government awarded its first payout of $50,000 to a whistleblower who assisted regulators in convicting a company of fraud.69

summAry 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 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 regula- tory 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. 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.

The Sherman Antitrust Act is the principal tool used to prevent busi- nesses 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 competi- tion 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.

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

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innovation and investments in new facilities and equipment. Regulation also provides many benefits, including greater equality in the workplace, safer workplaces, 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.

Because government is a stakeholder of business (and vice versa), busi- nesses 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 40 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. Until the Citizens United decision, corporations were restricted in giving contributions to political action committees. However, the Supreme Court decision gives corporations the right to spend as much as they want in political independent expenditures to support governmental candidates.

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 deci- sion-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 candi- dates’ campaign coffers as corporate executives’ or stockholders’ personal contributions, although such donations can violate the spirit of corporate campaign laws. It is also common 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 gener- ate 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 imple- mented 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

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