You are on page 1of 9

Chapter 4 Legal,

Regulatory, and Political

Issues 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 regulatory environment.
Economic reasons for regulation often relate to efforts to level
the playing field on which businesses operate. These efforts include
regulating trusts, which are generally established to gain control of
a product market or industry by eliminating competition and
eliminating monopolies, which occur when just one business
provides a good or service in a given market.

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 innovation and investments in
new facilities and equipment.

Another rationale for regulation is societys desire to restrict

destructive or unfair competition. Social reasons for regulation
address imperfections in the market that result in undesirable con

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), businesses and government can work together as both
legitimately participate in the political process. Business
participation can be a positive or negative force in societys
interest, depending not only on the outcome but also on the
perspective of various stakeholders.

Changes over the last forty 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
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 decision 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 candidates campaign coffers as corporate executives
or stockholders personal contributions, although such donations can
violate the spirit of corporate campaign laws.
Although laws limit corporate contributions to specific
candidates, it is acceptable 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 generate 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 employees crime must be able to demonstrate that it has
implemented a reasonable program for deterring and preventing
To implement an effective compliance program, an organization
should develop a code of conduct that communicates expected standards,
assign oversight of the program to high-ranking personnel who abide by
legal and ethical standards, communicate standards through training and
other mechanisms, monitor and audit to detect wrongdoing, punish
individuals responsible for misconduct, and take steps to continuously
improve the program. A strong compliance program acts as a buffer to
keep employees from committing crimes and to protect a companys
reputation should wrongdoing occur despite its best efforts.

Enacted after many corporate financial fraud scandals, the

Sarbanes-Oxley Act created the Public Company Accounting
Oversight Board to provide oversight and set standards for the
accounting firms that audit public companies. The board has
investigatory and disciplinary power over accounting firm auditors
and securities analysts.
The act requires corporations to take responsibility to provide
principles-based ethical leadership and holds CEOs and CFOs
personally accountable for the credibility and accuracy of their
companys financial statements. Ideally, the act will provide for a
new standard of ethical behavior for U.S. business, especially for
top management and boards of directors responsible for company