Business Law Final Exam

business ethics

decisions businesses make or have to make and whether those decisions are right or wrong

profit maximization

if all firms strictly adhere to the goal of profit maximization, resources flow to where they are most highly valued by society. In an ideal world, profit maximization leads to the most efficient allocation of scarce resources.

triple bottom line

a corporation’s profits, its impact on people and its impact on the planet

When making decisions, a business should evaluate:

1. the legal implications of each decision

2. the public relations impact

3. the safety risks for consumers and employees

4. the financial implications

Long run profit maximization

In the short run a company may increase its profits by continuing to sell a product even though it knows that the product is defective. In the long run because of lawsuits and settlements, such unethical decisions will cause profit to suffer. Business ethics is consistent only with long run profit maximization and an overemphasis on short run is the most common reason that ethical problems occur.

Moral minimum

Compliance with the law is a moral minimum, if people and entities merely comply with the law they are acting at the lowest ethical level society will tolerate.

duty based ethics

rooted in the idea that every person has certain duties to others, including both humans and the planet. this focuses on the obligations of the corporation. (often stemmed from religious beliefs)

principle of rights

Believe that the key factor in determining whether a business is ethical is how that decision affects the rights of others

outcome based ethics

Focuses on the impacts of a decision on society or on key stakeholders. Focuses on the consequences of an action, not on the nature of the action itself or on any set of preestablished moral values or religious beliefs.

Utilitarianism model of ethics

An action is morally correct when among the people it affects it produces the greatest amount of good for the greatest number of people or creates the least amount of harm for the fewest people.

Applying this model requires:

1. a determination of which individuals will be affected by the action in question

2. a cost benefit analysis, which involves an assessment of the negative and positive effects of alternative actions on these individuals

3. s choice among alternative actions that will produce maximum societal utility

corporate social responsibility

combines a commitment to good citizenship with a commitment to making ethical decisions improving society and minimizing enviornmental impact

Business Process Pragmatism

1. Inquiry: Understand the problem, identify parties involved, collect relevant facts and legal and ethical principles that will guide decision.

2. Discussion: List possible actions and goals for the decision and evaluated.

3. Decision

4. Justification: Articulate the reasons for the proposed action

5. Evaluation: Solution to be analyzed.

sarbanes oxely act

Helps reduce corporate fraud and unethical management decisions. The act requires companies to set up confidential systems so that employees can raise red flags about suspected illegal or unethical auditing and accounting practices

Foreign Corrupt Practices Act

Prohibits US businesspersons from bribing foreign officials to secure beneficial contracts.

First part applies to all US companies and their directors, officers, shareholders, employees and agents. It prohibits bribery if the purpose is to motivate the official to act in his or her official capacity to provide business opportunites.

Second part is directed towards accountants. Must keep records accurately and fairly and accounting systems must provide reasonable assurance.

Penalties for Violating FCPA

Business violation may be fined up to $2 million

Individual violation may be fined up to $100,000 and may be imprisoned up to 5 years

Section1 of the restatement (third) of agency

Defines agency as “the fiduciary relation that results from the manifestation of consent by one person to another that the other shall act in his or her behalf and subject to his or her control and consent by the other so to act”

in other words, in a principal-agent relationship, the parties have agreed that the agent will act on behalf and instead of the principal in negotiating and transacting business with third parties

Fiduciary relationship

The relationship has trust and confidence

Who are agents

All employees that deal with third parties are deemed to be agents. A salesperson in a store is an agent of the stores owner and acts on the owners behalf.

Section 2 of the Restatement of agency

Defines independent contractor as:

“a person who contracts with another to do something for him but who is not controlled by the other nor subject to the others right to controll with respect to his physical conduct in the performance of the undertaking. He may or may not be an agent”

An agency relationship can arise in 4 ways:

1. By agreement of the parties

2. By ratification: A person who is in fact not an agent makes a contract on behalf of another. If the principal approves or affirms that contract by word or by action, an agency relationship is created.

3. By estoppel: A principal causes a third person to believe that another person is the principals agent and the third person acts to his or her detriment in reasonable reliance on that belief.

4. By operation of law

Agents duties to the principal

1. Performance: must use diligence and skill when performing duties

2. Notification: required to notify the principal of all matters that concern the subject of the agency

3. Loyalty: duty to act solely for the principals benefit

4. Obedience: must follow all lawful and stated instructions

5. Accounting: must provide records of all property and funds recieved or paid out on the principals behalf

Principals duties to the agent

1. Compensation

2. Reimbursement and Indemnification: Principal must reimburse the agent for any funds paid out at the principals request, as well as for necessary expenses

3. Cooperation: Principal must cooperate with and assist an agent in performing his or her duties.

4. Safe working conditions

Express authority

authority declared in clear, direct and definite terms. can be oral or in writting

Implied authority

Can do what is reasonably necessary to carry out express authority and accomplish the objectives of the agency. Authority can be implied by custom or inferred from the position the agent occupies

Apparent authority

When the principal, by either word of action, causes a third party reasonably to believe that the agent has authority to act even though the agent has no express or implied authority

ratification

occurs when the principal affirms or accepts responsibility for an agents unauthorized act. the principal is bound to the agents act and the act is treated as if it had been authorized by the principal from the onset

3 issues in business ethics

■ Don't break the law 

■ Don’t embarrass the company 

■ Engage in CSR to the extent you want to 

– Business ethics example – VW emissions scandal, but they were breaking the law 

– In long run, short-run unethical behavior will hurt profits

Approaches to ethical questions (no single correct answer)

•  Duty-based ethics: – Religion (rules you have to follow to be ethical) – Principle of rights (no religion, we have certain rights that should be respected first)

• Kant (Not treat people as instrumentalities but as people who should be respected for their individuality)

• Categorical imperative ( It mandates that you should only act according to principles that you would want to become a universal law for all people)

•  ■ Utilitarianism – Jeremy Bentham/John Stuart Mill 

• ■ Outcome-based – i.e. cost-benefit analysis

Ethics slide

• Corporate Social Responsibility (CSR) (is a self-regulating business model where companies integrate social, environmental, and ethical concerns into operations to positively impact society while pursuing profit)

• ■ Social aspects 

• ■ Corporate aspects 

• ■ Stakeholder approach – Ethical decision-making model (systematic approach – Business Process Pragmatism TM, See page 97): 

• ■ 1. Inquiry 

• ■ 2. Discussion 

• ■ 3. Decision

•  ■ 4. Justification 

• ■ 5. Evaluation

Ethics slide

• Ethical leadership starts at the top – i.e. pressure for results 

• – Wells Fargo– SOX 

• – International Ethics: 

• ■ Employees overseas treated poorly 

• ■ Foreign Corrupt Practices Act

Agency relationship

Principal/Agent – contractual relationship – at will, consensual – for any legal purpose – agreement can be express or implied, written or oral

■ Agency by ratification

■ Agency by estoppel (apparent authority) – Third party’s reliance must be reasonable – Created by the principal’s conduct

■ Agency by operation of law – i.e. family, emergency

– Agent acts on behalf and instead of the principal

– Fiduciary relationship

Agency relationship

Employees typically agents, but the relationship between a principal and an independent contractor may or may not involve an agency relationship.

– Employer generally not liable for the actions of an independent contractor

– Copyright owned by creator unless it is “work for hire” by employee

Elements a court uses to determine existence of employment vs. independent contractor relationship

■ Control? – most important

■ What is the occupation/business of the worker?

■ Work directed by employer?

■ Does employer supply tools at the place of work?

■ Length of employment?

■ Method of payment?

■ Degree of skill of worker?

Agents Authority

■ Express authority – Equal dignity rule – contract and authority must be in writing – Power of Attorney (notarized)

■ Implied authority – To do what is reasonably necessary to carry out express authority and accomplish the objectives of the agency – Also – custom

Apparent authority/contractural liability

Apparent authority – Due to principal’s actions over time – When principal, by either word or action, causes a third party to reasonably believe that the agent has authority to act

■ Contractual liability: disclosed, partially-disclosed, undisclosed principal – potential liability of agent at issue – liability of principal depends upon whether the act was authorized or not

Agency slides

Liability for torts/crimes – agent always held liable, whether principal held liable depends upon whether the action was in the furtherance of the principal’s business – was it within the scope of employment? Respondeat superior – ALSO, did the principal authorize the conduct?

– Scope of employment test – classic English case from 1834 Joel v. Morison –detour vs. frolic – if servant took a mere detour from master's business, master liable, if servant was on a frolic of his own and not in any way on his master's business, the master not liable

■ i.e. commuting not on principal's business, but for traveling salesman it might be

– intentional torts by agent can create liability to principal if within the scope of employment.

Termination of agency

■ At will

– Lapse of time

– Purpose achieved

– Occurrence of a specific event

– Mutual agreement

– At the option of one party

■ Revocation – if by principal

■ Renunciation – if by agent

■ Wrongful termination can lead to liability for breach of contract

Termination of agency

■ Termination by operation of law:

– Death or insanity

– Impossibility

– Bankruptcy

– War