For the Case Study you selected, describe the company. For example, what is its business? How is it structured? Size? Stakeholders? General Motors Manhattan U.S. Attorney Announces Criminal Charges Against General

WK2 ASSIGNMENT Write a Paper:

Consider the actions of the business in the Case Study you selected and write an APA7 paper that covers the following:

• Explain the role of ethics in shaping business decisions.
• For the Case Study you selected, describe the company. For example, what is its business? How is it structured? Size? Stakeholders? General Motors Manhattan U.S. Attorney Announces Criminal Charges Against General Motors And Deferred Prosecution Agreement With $900 Million Forfeiture (read below)
•  
• Summarize the decision the company made that is the primary issue in the Case Study, and its outcome. Identify the ethical framework applicable to the company’s decision making. (See Week 1 Lesson.)  You must explain how this framework applies. For example, explain the framework. Then, what are the facts in the case -- the company’s actions -- that illustrate the company's adherence to this framework? What were the factors in reaching the decision?
• Identify a different ethical framework that, if applied and followed, might have led the company to reach a different decisional outcome.  Explain the framework and how following it would prompt a different approach and actions.

Paper Instructions:

• APA 7th Edition Style format for paper structure and citations 
  • The following outline suggests pages and organizational elements for your paper. Additional APA Help Sources and Paper Guidance are listed below, including a video for how to set up an APA7 paper in Word. 
    • Title Page 
    • Body of Paper (See APA7 Style for formatting - use subheadings) - Do NOT include the brackets in your subheadings; they are instructional to indicate where to insert a name.
      • Introduction  
      • Role of Ethics in Shaping Business Decisions 
      • The Case of [Company Name] 
        • [Company Name’s] Decision 
        • [Name of] Ethical Framework 
      • [Ethics Framework Name]: An Alternate Framework 
      • Conclusion 
• References (separate page)
  • All sources listed in your Reference list must be cited in-text in your paper’s narrative 
  • Minimum 5 credible references, including:
    • one (1) APA7 citation of the listed source(s) given above for the Case Study you selected;  and
    • one (1) APA7 citation of at least one (1) of the Core References listed above at the top of the Assignment
• Word length: 1400 - 1600  Title page and References list not included

What Are Business Ethics?

Business ethics are principles that guide decision-making. As a leader, you’ll face many challenges in the workplace because of different interpretations of what's ethical. Situations often require navigating the “gray area,” where it’s unclear what’s right and wrong.

When making decisions, your experiences, opinions, and perspectives can influence what you believe to be ethical, making it vital to:

· Be transparent.

· Invite feedback.

· Consider impacts on employees, stakeholders, and society.

· Reflect on past experiences to learn what you could have done better.

“The way to think about ethics, in my view, is: What are the externalities that your business creates, both positive and negative?” says Harvard Business School Professor Vikram Gandhi in Leadership, Ethics, and Corporate Accountability. “And, therefore, how do you actually increase the positive element of externalities? And how do you decrease the negative?”

Related: Why Managers Should Involve Their Team in the Decision-Making Process

Ethical Responsibilities to Society

Promoting ethical conduct can benefit both your company and society long term.

“I'm a strong believer that a long-term focus is what creates long-term value,” Gandhi says in Leadership, Ethics, and Corporate Accountability. “So you should get shareholders in your company that have that same perspective.”

Prioritizing the triple bottom line is an effective way for your business to fulfill its environmental responsibilities and create long-term value. It focuses on three factors:

· Profit: The financial return your company generates for shareholders

· People: How your company affects customers, employees, and stakeholders

· Planet: Your company’s impact on the planet and environment

Ethical and corporate social responsibility (CSR) considerations can go a long way toward creating value, especially since an increasing number of customers, employees, and investors expect organizations to prioritize CSR. According to the Conscious Consumer Spending Index, 67 percent of customers prefer buying from socially responsible companies.

To prevent costly employee turnover and satisfy customers, strive to fulfill your ethical responsibilities to society.

Ethical Responsibilities to Customers

As a leader, you must ensure you don’t mislead your customers. Doing so can backfire, negatively impacting your organization’s credibility and profits.

Actions to avoid include:

· Greenwashing: Taking advantage of customers’ CSR preferences by claiming your business practices are sustainable when they aren't.

· False advertising: Making unverified or untrue claims in advertisements or promotional material.

· Making false promises: Lying to make a sale.

These unethical practices can result in multi-million dollar lawsuits, as well as highly dissatisfied customers.

Ethical Responsibilities to Employees

You also have ethical responsibilities to your employees—from the beginning to the end of their employment.

One area of business ethics that receives a lot of attention is employee termination. According to Leadership, Ethics, and Corporate Accountability, letting an employee go requires an individualized approach that ensures fairness.

Not only can wrongful termination cost your company upwards of $100,000 in legal expenses, it can also negatively impact other employees’ morale and how they perceive your leadership.

Ethical business practices have additional benefits, such as attracting and retaining talented employees willing to take a pay cut to work for a socially responsible company. Approximately 40 percent of millennials say they would switch jobs to work for a company that emphasizes sustainability.

Ultimately, it's critical to do your best to treat employees fairly.

“Fairness is not only an ethical response to power asymmetries in the work environment,” Hsieh says in the course. “Fairness—and having a successful organizational culture–can benefit the organization economically and legally.”

Manhattan U.S. Attorney Announces Criminal Charges Against General Motors And Deferred Prosecution Agreement With $900 Million Forfeiture

Thursday, September 17, 2015

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For Immediate Release

U.S. Attorney's Office, Southern District of New York

Loretta E. Lynch, the Attorney General of the United States, Anthony Foxx, the United States Secretary of Transportation, Preet Bharara, the United States Attorney for the Southern District of New York, Mark R. Rosekind, Administrator of the National Highway Traffic Safety Administration (“NHTSA”), Calvin L. Scovel, III, Inspector General of the United States Department of Transportation (“DOT-OIG”), Christy Goldsmith Romero, Special Inspector General of the Office of the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”), and Diego Rodriguez, the Assistant Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), announced the filing of criminal charges against General Motors Company (“GM” or the “Company”), an automotive company headquartered in Detroit, Michigan, that has designed, manufactured, assembled, and sold Chevrolet, Pontiac, and Saturn brand vehicles, among others.  GM is charged with concealing a potentially deadly safety defect from its U.S. regulator, the National Highway Traffic Safety Administration (“NHTSA”), from the spring of 2012 through February 2014, and, in the process, misleading consumers concerning the safety of certain of GM’s cars.  The defect consisted of an ignition switch that had been designed and manufactured with too-low torque resistance and could therefore move easily out of the “Run” position into “Accessory” or “Off” (the “Defective Switch”).  When the switch moved out of Run, it could disable the affected car’s frontal airbags – increasing the risk of death and serious injury in certain types of crashes in which airbags were otherwise designed to deploy.  The models equipped with the Defective Switch were the 2005, 2006, and 2007 Chevrolet Cobalt; the 2005, 2006, and 2007 Pontiac G5; the 2003, 2004, 2005, 2006, and 2007 Saturn Ion; the 2006 and 2007 Chevrolet HHR; the 2007 Saturn Sky; and the 2006 and 2007 Pontiac Solstice. To date, GM has acknowledged a total of 15 deaths, as well as a number of serious injuries, caused by the Defective Switch.

Mr. Bharara also announced a deferred prosecution agreement with GM (the “Agreement”) under which the Company admits that it failed to disclose a safety defect to NHTSA and misled U.S. consumers about that same defect.  The admissions are contained in a detailed Statement of Facts attached to the Agreement.  The Agreement imposes on GM an independent monitor to review and assess policies, practices, and procedures relating to GM’s safety-related public statements, sharing of engineering data, and recall processes.  The Agreement also requires GM to transfer $900 million to the United States by no later than September 24, 2015, and agree to the forfeiture of those funds pursuant to a parallel civil action also filed today in the Southern District of New York.         

The criminal charges are contained in an Information (the “Information”) alleging one count of engaging in a scheme to conceal material facts from NHTSA and one count of wire fraud.  If GM abides by all of the terms of the Agreement, the Government will defer prosecution on the Information for three years and then seek to dismiss the charges.

Attorney General Loretta E. Lynch said: “Every consumer has the right to expect that car manufacturers are taking their safety seriously.  The Department of Justice is committed to ensuring that the products Americans buy are safe; that consumers are protected from harm; and that auto companies follow the law.”

Transportation Secretary Anthony Foxx said:  “General Motors not only failed to disclose this deadly defect, but as the Department of Justice investigation shows, it actively concealed the truth from NHTSA and the public.  Today’s announcement sends a message to manufacturers: Deception and delay are unacceptable, and the price for engaging in such behavior is high.”

Manhattan U.S. Attorney Preet Bharara said:  “For nearly two years, GM failed to disclose a deadly safety defect to the public and its regulator.  By doing so, GM put its customers and the driving public at serious risk.  Justice requires the filing of criminal charges, detailed admissions, a significant financial penalty, and the appointment of a federal monitor.  These measures are designed to make sure that this never happens again.”

NHTSA Administrator Mark R. Rosekind said:  “Today’s action strengthens NHTSA’s efforts to protect the driving public.  It sends a message not only to GM, but to the entire auto industry, that when it comes to safety, telling the full truth is the only option.”

DOT Inspector General Calvin L. Scovel, III, said:  “To the families and friends of those who died and to those who were injured as a result of crashes related to GM’s defective ignition switches, I offer my deepest sympathies for your loss and my highest admiration for the strength you demonstrate every day.  As is true for Secretary Foxx and the Department of Transportation, safety is and will remain the highest priority of my office, and we will continue to work relentlessly to ensure accountability throughout the Department and transportation sector.  The OIG is committed to working with our law enforcement and prosecutorial partners in pursuing those who commit criminal violations. The efforts of this dedicated multi-agency team and the agreement reached with General Motors, and that with Toyota in March 2014, must continue to serve as a clarion call to all auto manufacturers and their suppliers of the need to be vigilant and forthcoming to keep the public safe.”

SIGTARP Special Inspector General Christy Goldsmith Romero said:  “General Motors’ criminal conduct found by SIGTARP and our law enforcement partners defies comprehension.   Our investigation uncovered that GM learned about a life-threatening ignition switch defect that would cause air bags not to inflate, but concealed the deadly safety defect from its regulator, and from people buying used cars from GM dealers.  The worst part about this tragedy is that it was entirely avoidable.  GM could have significantly reduced the risk of this deadly defect by improving the key design for less than one dollar per vehicle but GM chose not to because of the cost.  Americans stepped up and bailed out General Motors with $50 billion; and General Motors must step up and make substantial corporate changes to prevent anything like this from happening again. SIGTARP commends U.S. Attorney Bharara for bringing these charges and standing united in the fight against TARP-related crime.”

FBI Assistant Director-in-Charge Diego Rodriguez said:  “GM concealed a safety defect from consumers and regulators, which put drivers at risk.  The resolution of this case shows that safety should never take a backseat to expediency.”

According to the allegations in the Information, as well as other documents filed today in Manhattan federal court, including the Statement of Facts:

From the spring of 2012 through February 2014, GM deceived consumers and failed to make a required disclosure to NHTSA, its U.S. regulator, by regarding the connection that certain of its personnel had identified between the Defective Switch and airbag non-deployment.  GM also falsely represented to consumers that vehicles equipped with the Defective Switch posed no safety concern.

Early Knowledge of the Defective Switch

GM engineers knew before the Defective Switch even went into production in 2002 that it was prone to easy movement out of the Run position.  Testing of a prototype showed that the torque return between the Run and Accessory positions fell below GM’s own internal specifications.  But the engineer in charge of the Defective Switch approved its production anyway.

In 2004 and 2005, as GM employees, media representatives, and GM customers began to experience sudden stalls and engine shutoffs caused by the Defective Switch, GM considered fixing the problem.  However, having decided that the switch did not pose a safety concern, and citing cost and other factors, engineers responsible for decision-making on the issue opted to leave the Defective Switch as it was and simply promulgate an advisory to dealerships with tips on how to minimize the risk of unexpected movement out of the Run position.  GM even rejected a simple improvement to the head of the key that would have significantly reduced unexpected shutoffs at a price of less than a dollar a car.

At the same time, in June 2005, GM made public statements that, while acknowledging the existence of the Defective Switch, gave assurance that the defect did not pose a safety concern.

GM’s Knowledge that the Defective Switch Causes Airbag Non-Deployment

By the spring of 2012, GM knew that the Defective Switch presented a safety defect because it could cause airbag non-deployment in certain GM cars.  Specifically, GM personnel investigating the cause of a series of airbag non-deployment incidents learned that the Defective Switch could cause frontal airbag non-deployment in at least some model years of the Cobalt, and were aware of several fatal incidents and serious injuries that occurred as a result of accidents in which the Defective Switch may have caused or contributed to airbag non-deployment.  This knowledge extended well above the ranks of investigating engineers to certain supervisors and attorneys at the Company.

GM’s Failure to Disclose the Defect and Recall Affected Cars

Yet not until approximately 20 months later, in February 2014, did GM first notify NHTSA and the public of the connection it had identified between the Defective Switch and airbag non-deployment incidents.  The Company thus egregiously disregarded NHTSA’s five-day regulatory reporting requirement for safety defects.

Moreover, for much of the period during which GM failed to disclose this safety defect, it not only failed to correct its June 2005 assurance that the Defective Switch posed no safety concern but also actively touted the reliability and safety of cars equipped with the Defective Switch, with a view to promoting sales of used GM cars.  Although GM sold no new cars equipped with the Defective Switch during this period, GM dealers were still, from in or about the spring of 2012 through in or about the spring of 2013, selling pre-owned Chevrolet, Pontiac, and Saturn brand cars that would later become subject to the February 2014 recalls.  These sales were accompanied by certifications from GM, assuring the unwitting consumers that the vehicles’ components, including their ignition systems and keys, met all safety standards.

GM’s delay in disclosing the defect at issue was the product of actions by certain personnel responsible for shepherding safety defects through GM’s internal recall process, who delayed the recall until GM could fully package, present, explain, and handle the deadly problem.  Rather than move swiftly and efficiently toward recall of at least the population of cars known to be affected by the safety defect and thus certainly destined for recall, GM personnel took affirmative steps to keep the Company’s internal investigation into airbag non-deployment caused by the Defective Switch “offline” – outside of GM’s regular recall process.

Moreover, on at least two occasions while the Defective Switch condition was well known by some within GM but not disclosed to the public or NHTSA, GM personnel made incomplete and therefore misleading presentations to NHTSA assuring the regulator that GM would and did act promptly, effectively, and in accordance with its formal recall policy to respond to safety problems – including airbag-related safety defects.

GM’s Acceptance of Responsibility and Cooperation in the Government Investigation

In February 2014, GM finally conducted a recall of approximately 700,000 vehicles affected by the Defective switch.  By March 2014, the recall population had grown to more than 2 million vehicles.

Since February 2014 and the inception of this federal criminal investigation, GM has taken exemplary actions to demonstrate acceptance and acknowledgement of responsibility for its conduct.  GM, among other things, conducted a swift and robust internal investigation, furnished the Government with a continuous flow of unvarnished facts gathered during the course of that internal investigation, voluntarily provided, without prompting, certain documents and information otherwise protected by the attorney-client privilege, provided timely and meaningful cooperation more generally in the federal criminal investigation, terminated wrongdoers, and established a full and independent victim compensation program that has to date paid out hundreds of millions of dollars in awards.

Mr. Bharara praised the outstanding investigative work of SIGTARP, DOT-OIG, NHTSA, and the FBI.

This case is being handled by the Office’s Securities and Commodities Fraud Task Force and Complex Frauds and Cybercrime Unit.  Assistant U.S. Attorney Bonnie Jonas, Deputy Chief of the Criminal Division, and Assistant U.S. Attorneys Sarah Eddy McCallum and Edward A. Imperatore are in charge of the prosecution, and Assistant U.S. Attorney Jason H. Cowley, Chief of the Money Laundering and Asset Forfeiture Unit, is responsible for the forfeiture aspects of the case.

1 Legal Risk Management

1.0 Introduction

Often, law for business students might be taught as a sort of compressed version of law school. Subjects are taught much like they might be for law students, albeit at a simplified level. This sort of training can be very useful, but it ignores a crucial difference between how lawyers and managers relate to the law: lawyers are trained to argue for specific legal conclusions on behalf of a client, while managers make decisions to manage legal risk. Law is rarely black and white, such as “don’t do this or you’ll go to jail.” Rather, legal decisions often involve questions such as “Our trademark is similar to several others. Is it too similar?” Or, “Adding this statement to the label of our product might expose us to liability, but it’s not prohibited by regulation. Should we proceed?” This leaves many managerial decisions involving law up to the risk tolerance of the manager. Compared to how attorneys operate, this requires a very different approach to legal reasoning! In this sense, a business-focused course on legal topics should essentially be a course on business strategy related to legal issues. It should equip managers with a broad overview of legal risks associated with running a business, how their decisions alter those risks, and how to minimize or otherwise use those risks to their advantage.

For these reasons, this text begins with a broad discussion of how one might evaluate risk generally. In this chapter, we will learn techniques for assessing, evaluating, and managing legal risks. Risk management is a topic for an entire course by itself, so in this chapter we will only touch on several major points and then apply them to the law. Throughout the course, examples and exercises will relate back to these concepts.

1.1 An Approach to Evaluating Risk

Risk management will be a major focal point of business and societal decision making in the twenty-first century. Businesses face an incredible variety of risks every day, which range both in severity and in frequency. Some risks are minor (e.g., an employee might steal paperclips), and others may entail losing the business (a pandemic arises which eliminates demand for certain services). Some risks are frequent (bad weather for a drive-in movie theater), and some are infrequent (new government regulation alters the healthcare landscape). Legal risks span these same spectrums. Some legal risks are constant (potential slip and falls in a grocery store) and some are infrequent (a major intellectual property lawsuit). Some are minor (producing a product label well within regulatory standards) and some are significant (criminal negligence results in the death of customers).

Businesses face a variety of risks every day.

In this section, we will discuss legal risk, which is one of a variety of risks businesses face every day. If we wish to understand and use the concepts of risk and uncertainty, we need to be able to measure (at least roughly) these concepts’ outcomes. Psychological and economic research shows that emotions such as fear, dread, ambiguity avoidance, and feelings of emotional loss represent valid risks. Such feelings are thus relevant to decision making under uncertainty. Our focus here, however, will draw more on financial metrics rather than emotional or psychological measures of risk perception.

We will discuss one particular approach to measuring risk here, which is a useful model in the legal context. We will not impose a mathematical framework on this model, for two reasons. First, this is a course on business law, not a course on statistics or probability models, and developing those models together would exceed the time available in this course. Second, and more foundationally, assuming exact probabilities for potential legal events implies a level of certainty that will likely never exist in real life.^[1] We also emphasize from the start that measuring risk using the model in this chapter is a multi-step process. We must evaluate how appropriate the underlying model might be for the specific occasion. Further, we need to evaluate each question in terms of the risk level that each entity is willing to assume for the gain each hopes to receive. Firms must understand the assumptions behind worst-case or ruin scenarios, since many firms do not want to take on risks that “bet the house.” To this end, knowing the severity of losses that might be expected in the future is a first step (legal consequences). However, financial decision making requires that we evaluate severity levels based upon what an individual or a firm can comfortably endure (attitudes towards risk,  or risk appetite).

Risky behavior?

1.2 Legal Consequences

Legal consequences range dramatically from minor to severe. Most of the consequences we will look at in this textbook are civil in nature. Civil cases involve one party suing another to seek compensation for a wrong. Criminal cases are certainly of interest to business, especially as companies may break criminal laws. A criminal case involves a governmental decision—whether state or federal—to prosecute someone (named as a defendant) for violating society’s laws. If you break a criminal law, you can lose your freedom (in jail) or your life (if you are convicted of a capital offense). We will discuss criminal law mainly in the context of insider trading, which can easily come with jail time. In a civil action, you would not be sent to prison; in the worst case, you can lose property (usually money or other assets), such as when Ford Motor Company lost a personal injury case and the judge awarded $295 million to the plaintiffs^[2] or when Pennzoil won a $10.53 billion verdict against Texaco. Damages can be compensatory (to put someone in the same position as if they had not been harmed) or punitive (intended to punish wrongdoing). If you are sued, you should also expect to spend a substantial amount on attorney fees, regardless of whether you win or lose.^[3]  On the civil side, courts can also impose injunctions, which are orders to perform, or not perform, a specific action.

If the financial consequences are severe enough, the firm might risk bankruptcy. Bankruptcy law governs the rights of creditors and insolvent debtors who cannot pay their debts. In broadest terms, bankruptcy deals with the seizure of the debtor’s assets and their distribution to the debtor’s various creditors. In bankruptcy, the firm might be liquidated or reorganized. As we will see later in the text, bankruptcy provides debtors a fresh start, but for many firms the consequences of bankruptcy are severe enough that they will avoid actions that likely lead to bankruptcy.

Exercises

1.2.1 Search the news and find examples of recent lawsuits or judgments in an industry of interest to you. Have there been criminal charges or liability? On the civil side, what kind of lawsuits do you find? Do you see examples of significant awards, such as the Ford and Pennzoil cases discussed above?

1.3 Attitudes Towards Risk

Different people and companies can view the legal risks above very differently. Some individuals do not mind the prospect of personal bankruptcy, for instance, and some companies are structured to take substantial risk. Others view the prospect of being sued with trepidation. In other words, different people and firms have different attitudes toward the risk-return tradeoff. People are risk averse when they shy away from risks and prefer to have as much security and certainty as is reasonably affordable in order to lower their discomfort level. They would be willing to pay extra to have the security of knowing that unpleasant risks would be removed from their lives. Economists and risk management professionals consider most people to be risk averse. So, why do people invest in the stock market where they confront the possibility of losing everything? Perhaps they are also seeking the highest value possible for their pensions and savings and believe that losses may not be pervasive—very much unlike the situation in the financial crisis of 2008.

A risk seeker, on the other hand, is not simply the person who hopes to maximize the value of retirement investments by investing in the stock market. Much like a gambler, a risk seeker is someone who will enter into an endeavor (such as blackjack card games or slot machine gambling) as long as a positive long run return on the money is possible, however unlikely.

Finally, an entity is said to be risk neutral when its risk preference lies in between these two extremes. Risk neutral individuals will not pay extra to have the risk transferred to someone else, nor will they pay to engage in a risky endeavor. To them, money is money.  Economists consider most widely held or publicly traded corporations as making decisions in a risk-neutral manner since their shareholders have the ability to diversify away risk—to take actions that seemingly are not related or have opposite effects, or to invest in many possible unrelated products or entities such that the impact of any one event decreases the overall risk. Risks that cannot be diversified away remain candidates for transfer.

Attitude towards risk often changes when children are involved.

Exercises

1.3.1 Would you describe yourself as a risk seeking, risk neutral, or risk averse individual? Why? Does it depend on what activity you’re considering?

1.3.2 Choose a company you know well. How would you describe their attitude towards risk using the framework above?

1.4 A model for Evaluating Legal Risk

This section combines the ideas from the prior sections to implement a simple, non-mathematical model for evaluating legal risk. A “model” is a simplified framework for evaluating a real-life situation. It will never capture all of the nuance involved in a particular choice, but it may be useful to decisionmakers. In particular, the model presented here is non-mathematical. It relies on simple categorization of the likelihood of an event, the consequences of that event, and the decisionmaker’s approach to evaluating risk. We will use this model throughout the exercises in the text.

First, evaluate the likelihood of the event. We will categorize the likelihood as “low”, “medium”, or “high”. Much of this course will aim to teach you how to categorize potential legal events in this framework. For example, as we study intellectual property law you will gain a sense of the likelihood of being sued based on similarity of your trademark to existing trademarks, and as we study tort law you will get a sense for which torts are common and uncommon. We won’t use specific probabilities for these events in formal calculations, but you might think of a low probability event as one that rarely occurs for similar companies, a medium probability event as one that has occurred several times in the last year for similar companies, and a high probability event as one that will almost certainly result in litigation.

Next, categorize the severity of the outcome as “slight”, “manageable”, or “severe”. Again, much of this course aims to teach you which events are which. As you did the Exercise under “Legal Consequences” above, you likely started to see some of the newsworthy severe events faced by firms in your industry. For modeling purposes, a slight outcome is one which would not harm the financial health of the company in a significant way. An example might be a somewhat frivolous lawsuit which is settled as a "nuisance suit" for a few thousand dollars. A manageable outcome is one which would generate discussion among managers about potential budgets for a loss, such as a small-business customer injured in an accident who has major medical bills. This kind of outcome might worry managers, but does not risk the future of the business. A severe outcome is one which risks bankruptcy, criminal charges, or other substantial long-term consequences for the firm.

Finally, decide the correct attitude towards risk. Is the firm risk averse, risk neutral, or risk seeking? In our model, the attitude towards risk forms the shaded “danger zone” in the grid, dividing causes of little from significant concern. The more risk averse the individual or firm, the farther up and to the left we shift the dividing line, and the more risk-seeking the firm, the farther lower and to the right we shift the line. An extremely risk averse firm would avoid even low probability severe events (as shown in the first figure below), while an extremely risk-seeking firm might avoid only high probability severe events (as shown in the second figure below).

A highly risk averse firm avoids the possibility of severe legal outcomes.

A risk seeking firm might avoid only the most likely and severe legal consequences.

Applying this model might look something like the following. We (1) classify the risk tolerance of the firm, (2) then the likelihood of the legal event, and (3) the severity of the consequence. Finally, (4) we analyze how those three interact and offer a conclusion: is this a high risk decision, in the legal danger zone, or a low risk decision, in the zone of safety? Suppose the firm under consideration is a tech startup like Uber. The firm consistently pushes legal boundaries, such as in classifying workers as independent contractors rather than employees, as it attempts to increase market share in a quickly growing industry.^[4]  Suppose also that the firm was considering whether to expand to a city that has somewhat hostile regulations for ride-sharing. At the same time, the consequences for entering the market and losing a legal challenge are simply to withdraw or pay an insubstantial fine. Let’s apply the model:

1.     We might thus classify this firm as risk seeking based on its past attitude towards the law and the potential rewards at stake.

2.     As the new market appears hostile, the likelihood of legal challenge is probably medium or high.

3.     Relative to the size of the firm, a modest fine is a relatively small consequence. We might then classify the severity of outcome as slight.

4.     Although the likelihood of legal action is medium to high, the potential consequence is slight. This decision is likely a low-risk legal decision, in the legal safety zone for the firm.

Exercises

1.4.1 Jane’s Diner is a small restaurant in Boise. It is a family owned business without substantial assets beyond a trademark recognizable in the local area. It prides itself on deep commitment to retaining employees through thick and thin. Bankruptcy isn’t an option. The diner is considering how to respond to recent public interest in socially-distanced dining spaces for health reasons. If the tables are far apart, fewer customers can attend, which will have worrying negative financial consequences. If the tables are close together, there is a small chance that a customer could contract a fatal disease from another and sue, which the diner worries could cost millions. Use the framework above to analyze the diner’s options.

1.4.2 Using a company with which you are familiar, analyze a potential future strategic decision using the framework above.

1.4.3 Consider this article about Uber’s growth. Describe Uber’s behavior in terms of the legal risk model above.

1.5 Mitigating and Managing Legal Risk

We conclude this chapter by highlighting methods to mitigate legal risk. We will cover many of these topics in greater detail later, but it is worth noting them in abbreviated form now, both to round off this initial topic and to preview what we will study throughout the semester.

• Insurance. Both individuals and businesses have significant needs for various types of insurance, to provide protection for health care, for their property, and for legal claims made against them by others. Insurance allows individuals to pay a certain amount today to avoid uncertain losses in the future. Businesses face a host of risks that could result in substantial liabilities. Many types of policies are available, including policies for owners, landlords, and tenants (covering liability incurred on the premises); for manufacturers and contractors (for liability incurred on all premises); for a company’s products and completed operations (for liability that results from warranties on products or injuries caused by products); for owners and contractors (protective liability for damages caused by independent contractors engaged by the insured); and for contractual liability (for failure to abide by performances required by specific contracts). Some years ago, different types of individual and business coverage had to be purchased separately and often from different companies. Today, most insurance is available on a package basis, through single policies that cover the most important risks. These are often called multiperil policies.
• Smart contracting. As we will study in contract law later in this text, in order to limit risk in contracts, many contractual drafters choose to include “liquidated damages” clauses. These are statements in the contract that spell out what damages will be if the contract is broken. This makes the damages certain, which lowers risk for the contracting parties. For example, in a contract for sale of a home, a party might lose their “earnest money” if they back out of the agreement without cause.
• Regulatory review. Many firms find it worthwhile to preemptively hire an attorney to review products for regulatory and litigation risk before launching the product. For a fee, a specialized attorney can examine the product and provide a report on potential regulatory violations and lawsuit risks. Many firms might be surprised at the substantial increased risk of litigation based on innocuous statements on packaging, for instance. We will return to this theme when we cover administrative law (the law of government regulation of business).
• Preemptive tort defense. The liberal use of liability waivers, warning labels, caution signs, safety rails, handguards, and so on, can help prevent tort litigation. Liability waivers reduce litigation risk by having individuals specifically agree they will not sue in case of injury during an activity. In other cases, often such litigation turns not on whether someone was injured from a product, but whether they were appropriately warned that such injury could occur. Physical safeguards against injury can help reduce the probability of potential negligence lawsuits by preventing injury in the first place. Businesses that practice prudent preemptive tort defense can lower their legal risks substantially.
• Knowing the law. Finally, a prime way to reduce legal risk is to simply be familiar with the law. An attorney will not always be around to consult, or it may be cost-prohibitive to use their services at times. Law is vast and complicated, but many legal concepts foundational to business are easy to understand. The more one knows about the law, the easier it is to avoid compromising legal situations, to be conversant with those that can offer legal counsel, and to make decisions that balance legal and ethical interests with other strategic concerns.

1.6 The Role of Ethics in Legal Risk

While the material in this chapter aims to introduce you to useful models for evaluating legal risk, it should not be read as encouraging legally risky or unethical behavior. Companies have a duty to obey the law and behave ethically. The model in this chapter will be most useful when the law is unclear or when a manager is considering how to avoid legal risks. Immediately following a general introduction to the law in Chapter 2, we will devote all of Chapter 3 to principles of ethical business conduct. A company’s attitude toward legal risk must be informed by these principles as well as sound legal understanding. Applying the law without considering ethics is asking what a company can do rather than what it should do.

1.7 Summary and Exercises

Key Takeaways

·   Approaching law from a risk management approach is crucial to evaluate the legal environment of business.

·   Evaluating legal risk requires understanding the likelihood of legal action, the severity of the consequences, and the risk tolerance level of the company. Even low probability legal events can be so severe that risk averse firms should take action to avoid them, while even high probability legal events may not bother risk seeking firms.

·   Much of this text will offer ways to reduce legal risk associated with business decisions, such as preemptively avoiding tort liability and employing smart contracting principles. Insurance against legal claims can also reduce uncertainty, at a price.

2 Foundations of Law and Legal Systems

Learning Objectives

After completing the material in this chapter, you should be able to do the following:

1.     Distinguish different philosophies of law—schools of legal thought—and explain their relevance.

2.     Identify the various aims that a functioning legal system can serve.

3.     Explain how politics and law are related.

4.     Identify the sources of law and which laws have priority over other laws, including international law.

5.     Understand some basic differences between the US legal system and other legal systems.

Law has different meanings as well as different functions. Philosophers have considered issues of justice and law for centuries, and several different approaches, or schools of legal thought, have emerged. In this chapter, we will look at those different meanings and approaches and will consider how social and political dynamics interact with the ideas that animate the various schools of legal thought. We will also look at typical sources of “positive law” in the United States and how some of those sources have priority over others, and we will set out some basic differences between the US legal system and other legal systems.

2.0 What is Law?

Law

is a word that means different things at different times. Black’s Law Dictionary says that law is “a body of rules of action or conduct prescribed by controlling authority, and having binding legal force. That which must be obeyed and followed by citizens subject to sanctions or legal consequence is a law.”^[1]

Functions of the Law

At the macro level, the law can serve to (1) keep the peace, (2) maintain the status quo, (3) preserve individual rights, (4) protect minorities against majorities, (5) promote social justice, and (6) provide for orderly social change. Conversely, the law may keep peace at the expense of individual rights, maintain an ugly status quo, be used to oppress minorities, and so on. In a democracy, law ultimately reflects how society wishes to order itself, while in authoritarian governments law is used to perpetuate existing power structures. In that sense, law and politics are deeply entwined. At the micro level, law provides the “rules of the game” for how businesses operate, restricting certain kinds of conduct and encouraging others. It can be used by businesses as a shield, giving them freedom to operate, and as a sword, such as when using litigation as a strategy against their competitors.

Law and Politics

In the United States, legislators, judges, administrative agencies, governors, and presidents make law, with substantial input from corporations, lobbyists, and a diverse group of nongovernment organizations (NGOs) such as the American Petroleum Institute, the Sierra Club, and the National Rifle Association. In the fifty states, judges are often appointed by governors or elected by the people. The process of electing state judges has become more and more politicized in the past fifteen years, with growing campaign contributions from those who would seek to seat judges with similar political leanings.

The Supreme Court has a long political history.

In the federal system, judges are appointed by an elected official (the president) and confirmed by other elected officials (the Senate). If the president is from one party and the other party holds a majority of Senate seats, political conflicts may come up during the judges’ confirmation processes. Such a division has been fairly frequent over the past fifty years.

In most nation-states (as countries are called in international law), knowing who has power to make and enforce the laws is a matter of knowing who has political power; in many places, the people or groups that have military power can also command political power to make and enforce the laws. Revolutions are difficult and contentious, but each year there are revolts against existing political-legal authority; an aspiration for democratic rule, or greater “rights” for citizens, is a recurring theme in politics and law.

Key Takeaways

Law is the result of political action, and the political landscape is vastly different from nation to nation. Unstable or authoritarian governments often fail to serve the principal functions of law.

Exercises

2.0.1 Is there a sense in which non-governmental entities, such as a church or social group, exercise “law”?

2.0.2 Law at its highest levels, such as deciding who sits on the Supreme Court, is deeply political. What are the pros and cons of this? Can you think of a less political way to appoint members of the Supreme Court?

2.1 Schools of Legal Thought

Learning Objectives

1.     Distinguish different philosophies of law—schools of legal thought—and explain their relevance.

2.     Explain why natural law relates to the rights that the founders of the US political- legal system found important.

3.     Describe legal positivism and explain how it differs from natural law.

4.     Differentiate critical legal studies from both natural law and legal positivist perspectives.

3 Corporate Social Responsibility and Business Ethics

Learning Objectives

After completing the material in this chapter, you should be able to do the following:

1.     Define ethics and explain the importance of good ethics for business people and business organizations.

2.     Understand the principal philosophies of ethics, including utilitarianism, duty-based ethics, and virtue ethics.

3.     Distinguish between the ethical merits of various choices by using an ethical decision model.

4.     Explain the difference between shareholder and stakeholder models of ethical corporate governance.

5.     Explain why it is difficult to establish and maintain an ethical corporate culture in a business organization.

Few subjects are more contentious or important than the role of business in society, particularly, whether corporations have social responsibilities that are distinct from maximizing shareholder value. While the phrase “business ethics” is not oxymoronic (i.e., a contradiction in terms), there is plenty of evidence that businesspeople and firms seek to look out primarily for themselves. However, business organizations ignore the ethical and social expectations of consumers, employees, the media, nongovernment organizations (NGOs), government officials, and socially responsible investors at their peril. Legal compliance alone no longer serves the long-term interests of many companies, who find that sustainable profitability requires thinking about people and the planet as well as profits.

This chapter has a fairly modest aim: to introduce potential businesspeople to the differences between legal compliance and ethical excellence by reviewing some of the philosophical perspectives that apply to business, businesspeople, and the role of business organizations in society.

3.0 What Is Ethics?

Learning Objectives

1.     Explain how both individuals and institutions can be viewed as ethical or unethical.

2.     Explain how law and ethics are different, and why a good reputation can be more
important than legal compliance.

Most of those who write about ethics do not make a clear distinction between ethics and morality. The question of what is “right” or “morally correct” or “ethically correct” or “morally desirable” in any situation is variously phrased, but all of the words and phrases are after the same thing: what act is “better” in a moral or ethical sense than some other act? People sometimes speak of morality as something personal but view ethics as having wider social implications. Others see morality as the subject of a field of study, that field being ethics. Ethics would be morality as applied to any number of subjects, including journalistic ethics, business ethics, or the ethics of professionals such as doctors, attorneys, and accountants. We will venture a definition of ethics, but for our purposes, ethics and morality will be used as equivalent terms.

People often speak about the ethics or morality of individuals and also about the morality or ethics of corporations and nations. There are clearly differences in the kind of moral responsibility that we can fairly ascribe to corporations and nations; we tend to see individuals as having a soul, or at least a conscience, but there is no general agreement that nations or corporations have either. Still, our ordinary use of language does point to something significant: if we say that some nations are “evil” and others are “corrupt,” then we make moral judgments about the quality of actions undertaken by the governments or people of that nation. For example, if North Korea is characterized by the US president as part of an “axis of evil,” or if we conclude that WorldCom or Enron acted “unethically” in certain respects, then we are making judgments that their collective actions are morally deficient.

In talking about morality, we often use the word good; but that word can be confusing. If we say that Microsoft is a “good company,” we may be making a statement about the investment potential of Microsoft stock, or their preeminence in the market, or their ability to win lawsuits or appeals or to influence administrative agencies. Less likely, though possibly, we may be making a statement about the civic virtue and corporate social responsibility of Microsoft. In the first set of judgments, we use the word good but mean something other than ethical or moral; only in the second instance are we using the word good in its ethical or moral sense.

A word such as good can embrace ethical or moral values but also nonethical values. If I like Daniel and try to convince you what a “good guy” he is, you may ask all sorts of questions: Is he good-looking? Well-off? Fun to be with? Humorous? Athletic? Smart? I could answer all of those questions with a yes, yet you would still not know any of his moral qualities. But if I said that he was honest, caring, forthright, and diligent, volunteered in local soup kitchens, or tithed to the church, many people would see Daniel as having certain ethical or moral qualities. If I said that he keeps the Golden Rule as well as anyone I know, you could conclude that he is an ethical person. But if I said that he is “always in control” or “always at the top of his game,” you would probably not make inferences or assumptions about his character or ethics.

There are three key points here:

1.     Although morals and ethics are not precisely measurable, people generally have similar reactions about what actions or conduct can rightly be called ethical or moral.

2.     As humans, we need and value ethical people and want to be around them.

3.     Saying that someone or some organization is law-abiding does not mean the same as saying a person or company is ethical.

References

**Title: What Are Business Ethics & Why Are They Important? Michael Boyles on July 27, 2023

**Title Business Law: A Risk Management Approach (Second Edition)

Author Jeff Lingwall

Additional Subject(s)

Business ethics and social responsibility

Institution

Boise State University

Publication Date

December 20, 2022

Darmstadter, H. (2016). The Times and General Motors: What went wrong? Cogent Arts & Humanities, 3(1)https://doi.org/10.1080/23311983.2015.1134030

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Author: NORA FREEMAN ENGSTROM,+ DAVID FREEMAN ENGSTROM,++ JONAH B. GELBACH,+++ AUSTIN PETERS++++ & AARON SCHAFFERNEITZ+++++

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Taylor, P. L. (2019). Beyond false positives. Criminology & Public Policy, 18(4), 807–822. https://doi.org/10.1111/1745-9133.12460