Lesson 5

SECTION 5.1

IntroductionIn Section 5.1, you will learn about the how government and businesses interact with each other through laws, rules, and regulations. Government affects business in all areas of operations: people, competition, products, pricing, technology, and international trade. Section 5.1 Features Discuss the impact of government on business Describe the various antitrust laws Discuss the impact of government on consumer protection Differentiate between the various types of intellectual property laws Examine the various types of employment laws Examine the various types of international trade and information technology laws Discuss the costs of compliance

Impact of Government on BusinessImpact of Government on Business  Government impacts business through the issuance of various laws, rules, and regulations (LRRs). This impact is felt through regulations to control environmental emissions, labor practices, workplace safety, product liability, import and export laws, and banking practices, among other areas. Government’s fiscal and monetary policies affect employment, production, inflation, interest rates, government spending, and money supply in the economy. The US Congress has the legislative power to issue new LRRs. These LRRs can be perceived as a constraint on business operations. However, another way to view them is as an opportunity to provide safer and more efficient products and services to consumers.

Impact of Business on GovernmentImpact of Business on Government Businesses use lobbyists to impact government. Lobbyists are individuals representing a specific industry or interest group who persuade legislators or  government agencies to act in favor of the group's interests. The lobbyists' intentions are to block a new bill before it's voted into law, void or repeal an existing bill, introduce a new bill, or amend an existing law.  Often, lobbyists representing a specific company attempt to influence the legislature to write laws to favor one company and damage or disfavor its competitors in the same industry. Government agencies with the responsibility of developing regulations controlling certain activities—such as the EPA's regulation of polluting emissions—are frequently also targeted by lobbyists.  If the legislators’ job is to pass laws, the lobbyists’ job is to amend or reverse them, as much as possible.

Not all lobbyists work on behalf of business or industry. Mothers Against Drunk Driving (MADD) (www.madd.org) is a lobbying organization promoting government policies against drunk driving pushing for stricter policies against underage drinking.

Laws, Rules, and Regulations Affecting BusinessesGovernmental authorities at local, state, and federal levels pass laws, rules, and regulations to affect the conduct of business organizations, individuals, and governmental agencies. These LRRs provide societal benefits or tax revenues so that government can provide services to citizens.     The following list includes only a few types of LRRs that are important to business organizations. However, there are thousands of LRRs on the books. Antitrust Environmental protection Consumer protection Investment securities Intellectual property Interstate communication Employment Bankruptcy International trade Information technology

US Antitrust LawsBoth the federal government and individual states have issued various laws dealing with antitrust. When federal statutes are combined with state legislations, they're intended to promote and preserve competition in a free enterprise system and to prevent monopoly power.  There are three goals of the US antitrust laws: Ensure free and fair competition in the marketplace Prohibit anticompetitive practices such as price fixing, deceptive pricing, price discrimination, and promotional pricing Prevent unreasonable concentration of economic power that can weaken competition. Examples of federal antitrust laws include the Sherman Act, the Clayton Act, the Federal Trade Commission Act, the Robinson-Patman Act, and the Celler Antimerger Act.  

As an example of state-level antitrust laws, Washington State has its own set of regulations: http://www.atg.wa.gov/guide-antitrust-laws  US antitrust law is applied when companies merge with each other in the same industry to make sure the combined company allows for fair competition. To see the 2015 Department of Justice opinions on antitrust issues, please visit: http://www.justice.gov/atr/press-releases

Sherman Antitrust ActThe goal of the Sherman Antitrust Act of 1890 was to curb business conduct if it unfairly destroys competition in the marketplace. The purpose of the Act was not to protect businesses from the working of the market efficiencies, but to protect the public (consumers) from the failure of the market efficiencies.  The Act was intended to oppose the combination of business organizations, such as monopolies, that could potentially harm competition.  The Act allows for market gains (like profit and market share) obtained by honest means that benefit the consumers more than the competitors.

Antitrust Case Study  Microsoft spent over 20 years fighting antitrust allegations from the US government.  Issue: Did Microsoft use its monopoly from its Windows products to put pressure on computer makers to use its Internet Explorer browser instead of the browser made by Netscape?  Ruling: In 2000, it was ruled that Microsoft did in fact use its monopoly power to prevent competition in Web browsers.  At that time, there were two main browsers. Now consumers are able to choose from many web browsers.  For more information, please visit: http://www.seattletimes.com/business/microsoft/long- antitrust-saga-ends-for-microsoft/

Clayton Antitrust ActThe Clayton Act of 1914 prohibits the use of exclusive or tying contracts when their use “substantially lessens competition or tends to create a monopoly.” Exclusive or tying contracts are contracts in which the seller agrees to sell a product to a buyer on the condition that the buyer won't purchase products from the seller’s competitors.   The Act made intercorporate stockholders (where two companies own stock in each other’s company) illegal if they tend to greatly reduce competition. In addition, the Clayton Act makes interlocking directorates (having the same individual on two or more boards of directors) illegal if the corporations are competitive and if at least one of the corporations is of a certain minimum size.  The Clayton Act can be applied on a local level as well as on a national level.

Local Example: In 2007, a proposed merger between the Evanston Northwestern Hospital in Illinois and the Highland Park Hospital in Illinois was rejected under the Clayton Act because it was deemed an anticompetitive merger in managed care in an area within Illinois.  For more information, please read: https://www.ftc.gov/news-events/press- releases/2007/08/commission-rules-evanston- northwestern-healthcare-corps   National Example: In 2009, Google and Apple were investigated for violations of the Clayton Act. At that time, Google and Apple shared two board members (interlocking directorates), which was viewed as anticompetitive.  For more information, please read: http://www.lawyersandsettlements.com/features/antitrust/antitrust-laws-act-policy-apple.html#.VZa43tpViko

Other Antitrust ActsRobinson-Patman Act   The Robinson-Patman Act of 1936 prohibits price discrimination, where a seller charges one buyer more than another for the same product. It makes it unlawful for sellers to grant concessions to buyers unless concessions are granted to all buyers on terms that are proportionally equal. The Act reaches the quantity discount, a major form of price discrimination.   This kind of price discrimination may give favored customers an edge in the market that has nothing to do with a buyer’s efficiency. Price discrimination is legal if it can be justified because of differences in costs or to meet a competitor’s price.  The Act applies only to sales, not to leases, agency/consignment arrangements, licenses, or refusals to deal (selling to one firm while refusing to deal with another). The scope of the Robinson-Patman Act applies to tangible personal property (commodities) and in the sale of services or intangibles such as advertising.     Celler Antimerger Act   The Celler Antimerger Act of 1950 makes it illegal for a corporation to acquire the assets and stocks of a competing corporation if the effect is to greatly reduce competition or to tend to create a monopoly.

Fact: Amazon has a large market share in print and electronic books. Amazon has been trying to receive better terms from publishers because of its size.  Book publishers have accused Amazon of violating the Robinson-Patman Act by using its size to gain better pricing for books. Amazon reportedly will refuse to sell a publisher's books if the price demands are not met, which affects both the publishers and the authors of the books being sold. To see how this issue affected late-night talk show host Stephen Colbert, please read the following article: http://money.cnn.com/2014/06/05/news/companies/colbert-amazon/index.html

Federal Trade Commission (FTC) ActThe Federal Trade Commission (FTC) (www.ftc.gov) protects consumers and promotes competition.  Regarding consumers, the FTC protects consumers by stopping unfair, deceptive, or fraudulent practices in the marketplace. Regarding competition, the FTC challenges anticompetitive mergers and business practices that could harm consumers, resulting in higher prices, lower quality, fewer choices, or reduced rates of innovation. This means the FTC has a dual role in prohibiting unfair methods of competition and anticompetitive practices.   The FTC also has the authority to prohibit false and misleading advertising and product misrepresentation in labeling. The FTC Act declares unfair methods of competition in commerce and unfair or deceptive acts or practices as unlawful and issues “cease and desist” orders.

US Environmental Protection LawsEnvironmental law is growing in importance because of the concern that business practices are harming the environment. Companies need to assess the environmental impact of their products and services.  The Environmental Protection Agency (EPA) (www.epa.gov) reviews and comments on these environmental impact statements and provides public notification and access to these documents.   The Clean Air Act calls for all US states and the EPA to solve multiple air pollution problems through programs based on the latest science and technology information. Actions to implement the Clean Air Act have achieved dramatic reductions in air pollution, preventing hundreds or thousands of cases of serious health effects each year.   The Clean Water Act requires all US states and territories to develop lists of impaired waters, which do not meet the water quality standards that states and territories have set for them. The law requires a priority ranking for the waters on these lists and that officials develop action plans to improve them.

Example 1: In 2014, Hyundai and Kia settled with the EPA for violations of the US Clean Air Act. They agreed to pay $100 million for claims that their cars emitted more greenhouses gases than what they initially told the EPA. They also agreed to change their operations to prevent future violations.  For additional information, please read:

http://www2.epa.gov/enforcement/hyundai-and-kia-clean- air-act-settlement  Example 2: In 2015, Duke Energy was charged with violations of the Clean Water Act for dumping coal ash from its North Carolina power plants.  For additional information, please read: https://www.justice.gov/opa/pr/duke-energy-subsidiaries-plead-guilty-and-sentenced-pay-102-million-clean-water-act-crimes

US Consumer Protection LawsThe Consumer Product Safety Commission (CPSC) enforces the Consumer Product Safety Act of 1972 which covers safety of any consumer product not addressed by other regulatory agencies.  The CSPS is intended to aid consumers:  It protects the public against unreasonable risks of injury associated with consumer products. It assists consumers in evaluating the safety of consumer products. It develops uniform safety standards for consumer products and to minimize conflicting state and local regulations. It promotes research and investigation into the causes and prevention of product-related deaths, illnesses, and injuries. Consumer protection includes Product warranty Product liability

Product WarrantyA warranty creates a duty on the seller’s part to ensure that the goods or services sold will conform to certain qualities, characteristics, or conditions. A seller isn't required, however, to warrant what's sold; the seller may, by appropriate words, disclaim (exclude) or modify a particular warranty or all warranties. Because a seller’s power to disclaim or modify is so flexible, consumer protection laws have been enacted to ensure that consumers understand the warranty protection provided them.  Product LiabilityProduct liability is a liability of manufacturers and distributors for defective products that cause injury and death to consumers, resulting from the use of unsafe products. It focuses on negligence and strict liability. If a person knows a product is defective and uses it anyway (assumption of risk), there is no strict liability. Compensatory damage is of two types: special damages (that is, paying for out-of-pocket costs) and general damages (paying for pain and suffering, and loss of a limb). Punitive damages are awarded only for gross negligence due to conduct that is reckless and wanton. Different jurisdictions handle these neglects and damages differently.

US Investment Securities LawsThe primary purpose of US investment securities laws is to prevent fraudulent practices in the sale of investment securities (such as stocks and bonds) and thereby to foster public confidence in the securities market.   The US Congress created the Securities and Exchange Commission (SEC) to take responsibility for enforcing the federal statutes, rules, and regulations addressing investment securities. Both the SEC and the US Department of Justice review, analyze, and investigate the sale of investment securities.   Two such statutes are the Securities Act of 1933 and the Securities Exchange Act of 1934.

Q&A: US Investment Securities LawsRead the questions below and click the orange buttons to reveal the answers. Q: What is the focus of the Securities Act of 1933? A: The Securities Act of 1933 focuses on the issuance of original investment securities (primary transactions).  The Act mainly focuses on information provided to investors to prohibit misrepresentation and deceit. This Act comes into force when a company plans an initial public offering (IPO) to raise initial funds by selling the primary securities in the open market.  Q: What is the focus of the Securities Exchange Act of 1934?  A: The Securities Exchange Act of 1934 deals with trading in already issued securities (secondary transactions). These secondary transactions greatly exceed in volume and value of the original offerings as primary transactions. The Act primarily focuses on disclosure requirements and regulates tender offers and proxy solicitations.

Intellectual Property LawsFederal law grants rights in intellectual property (IP), such as the expression of an idea or an invention, in four distinct areas: copyrights, trademarks or servicemarks, patents, and trade secrets. These IP assets are protected from infringement or unauthorized use by others because they result from people’s creativity and innovation, which increases a country’s economic growth and improves a country’s competitiveness.  Click or tap each of the orange buttons below to learn more about copyrights, trademarks and servicemarks, patents, and trade secrets.

Copyrights foster the production of creative works and the free flow of ideas by providing legal protection for creative expression. Copyright law protects the physical expression of an idea, but not the idea itself. Legal protection exists as soon as the work is expressed in tangible form and registered properly.  Example: All published or unpublished books (online or paper), research papers, songs, poems, arts and crafts, plays and dramas, paintings, sculptures, computer software, movies, and music records are copyrightable items, as long they are filed and registered for copyright protection.

Trademarks and servicemarks protect a commercial identity or brand used to identify a product or service to consumers. The government defines a trademark as “any word, name, symbol, or device used by a person to identify and distinguish his or her goods.” By registering the trademarks and servicemarks, the owner is granted the exclusive right to use the marks in commerce in the United States and can exclude others from using the mark. Example: Company names such as Pfizer and L.L. Bean are trademarked.

A patent is a property right for an invention granted by the government to the inventor. Patents protect the world of inventions. A patent gives the owner the right to exclude others from making, using, and selling devices that embody the claimed invention. Patents generally protect products and processes, not pure ideas.  Example: The Intel chip used in personal computers and other digital devices has a patent.

A trade secret is any information that the owner has taken reasonable measures to keep secret and that has an independent economic value (that is, keeping the secret is essential to making money).  Trade secrets are broader in scope than patents and include scientific and business information. However, the information can be freely used if it's obtained or learned through legitimate means, such as using reverse engineering methods. Moreover, if the trade secret is publicly disclosed, it generally loses its legal protection.    Example:  The formula for Coca-Cola was recognized as a trade secret in 1920.

US Interstate Communication LawsThe US Federal Communications Commission (FCC) regulates interstate and international communications by radio, television, wire, satellite, and cable industries, including mergers and acquisitions in those industries. In addition, the FCC oversees the broadband services provided on the Internet.    As part of the FCC’s Telephone Consumer Protection Act, the FCC recently defined specific guidelines for telemarketers to crack down on their extensive use of robocalls, robotexts, and autodialers using landline (wired) and wireless phones, which are alternatives to the National Do-Not-Call Registry required by the FCC. The FCC started the Act, and the FTC implements the Act.   Click or tap each item below to learn about the lists.

Do-Not-Disturb Technology  The FCC is giving a green light for telephone carriers to offer their robocall-blocking technologies to consumers. It's also giving permission to carriers to implement market-based solutions that consumers could use to stop unwanted robocalls by enabling consumers to implement do-not-disturb technology.

National Do-Not-Call Registry   In 2003, the Federal Trade Commission, the Federal Communications Commission, and state Attorneys General enforced the National Do-Not-Call Registry. This registry is a list of self-identified call recipients who may not receive telemarketing calls. Telemarketers using telephone solicitations must comply with the intent of this law to reduce legal risks. This registry is administered by the FTC.

 Visit: https://www.donotcall.gov/

Employment Discrimination and Employee ProtectionThe goals of employment and protection laws are to address two major categories related to employees, employment discrimination laws and employee protection laws.  Employment Discrimination Employment discrimination laws prohibit discrimination in employment on the basis of race, gender, religion, national origin, age, and disability. Statutes that enforce non-discrimination in employment practices are generally enforced by the Equal Employment Opportunity Commission (EEOC). The EEOC handles affirmative action plans and reverse discrimination issues.  Employee Protection Employee protection laws are aimed to provide a limited right not to be unfairly dismissed from the job, a right to a safe and healthy workplace, compensation for injuries sustained in the workplace, and financial security upon retirement or loss of employment.

Employment Discrimination Examples of laws in this category include the Civil Rights Act, Equal Pay Act, Age Discrimination in Employment Act, Americans with Disabilities Act, and Rehabilitation Act.  Employee Protection Examples of laws in this category include the Occupational Safety and Health Act, Privacy Act, Workers’ Compensation Laws, Social Security Act, Fair Labor Standards Act, Worker Adjustment and Retraining Notification Act, Family and Medical Leave Act, Whistleblower Protection Act, and No FEAR Act.

Q&A: Employment LawsRead the questions below and click the orange buttons to reveal the answers.  Q: What is the Occupational Safety and Health Act? A: The Occupational Safety and Health Act (OSHA) of 1970 was passed to assure every working man or woman safe and healthful working conditions. Every employer engaged in commerce who has one or more employees is covered by the Act. Q: What is the Fair Labor Standards Act?A: The Fair Labor Standards Act (FLSA) was passed in 1938 to cover compensation in the form of minimum wage to both private and public sector employees. The Act establishes a minimum wage floor, discourages oppressive use of child labor (under the age of 16), and encourages limits on the number of weekly hours employees can work through overtime provisions.Q: What is the Worker Adjustment and Retraining Notification Act?A: The Worker Adjustment and Retraining Notification (WARN) Act offers employees early warning of impending layoffs or plant closings. Specifically, it requires employers to give a 60-day notice before a layoff or facility closing involving more than 50 employees. Part-time and seasonal employees are not counted toward the 50-employee rule.Q: What is the Whisteblower Protection Act?  A: The whistleblower protection laws, labor and public safety laws, and many environmental laws mandate whistleblower protections for employees who complain about violations of the law by their employers. Whistleblower remedies can include job reinstatement and payment of back wages. Private

sector organizations, similar to public sector organizations, should develop policies and procedures to protect the whistleblowers and to prevent the reprisal to their employees.Q: What is the Notification and Federal Employee Anti-Discrimination and Retaliation Act?  A: The Notification and Federal Employee Anti- Discrimination and Retaliation Act of 2001 (No FEAR Act) requires agencies to notify employees of the rights and protections available to them under the anti-discrimination and whistleblower statutes in writing and to post this information on their Internet sites. This provision reinforces existing requirements that employees be notified of rights and remedies concerning discrimination and whistleblower protection required of the Whistleblower Protection Act of 1994.   The No FEAR Act requires agencies to report the number of discrimination and whistleblower reprisal cases. It also requires the agencies to report the number of employees disciplined for discrimination, retaliation, or harassment.

US Labor UnionsA labor union is an organization dedicated to protecting workers when negotiating with employers in areas such as pay, hours, and working conditions. The American Federation of Teachers (www.aft.org) is an example of a union.  Employees join labor unions for several reasons: To satisfy their own individual needs first

     - Improved wages, hours, and working conditions      - Improved rules for establishing promotions and seniority levels      - Improved levels of benefits (such as health insurance and pensions)      - Improved job safety from work-related hazards

To protect and preserve the rights of a group of employees Due to lack of trust between labor unions and company management, two laws affect the behavior of these two entities: the Wagner Act and the Taft-Hartley Act.

The Wagner Act of 1935 (also known as the National Labor Relations Act) is a fundamental turnaround in government’s attitudes toward labor relations. The Act is known as a pro-union (pro-employee) act. The goals of this Act are to guarantee the righst of workers to form unions of their own choosing and to bargain collectively with employers.  The Taft-Hartley Act of 1947 (also known as the Labor-Management Relations Act) regulates a wide range of employer-employee conduct. The Act is known as a pro-management (pro-employer) act.

US Bankruptcy LawsBankruptcy is a legal matter always placed under federal jurisdiction. State laws augment federal laws when a federal law is silent or expressly defers to state laws. Generally speaking, a debtor declares bankruptcy to obtain relief from debt, either through a discharge of the debt or through a restructuring of the debt.  Personal Bankruptcy Code

Chapter 13 Code is rehabilitation with a payment for individuals with a regular source of income. This Code enables individuals to develop a plan to pay all or parts of their debt.  Personal and Business Bankruptcy Codes Chapter 7 Code is a basic liquidation plan for individuals and businesses. Also known as straight bankruptcy, it's the simplest and quickest type of bankruptcy available.  Chapter 11 Code is a rehabilitation or reorganization plan, used primarily by businesses' debtors but sometimes used by individuals with substantial debts and assets. Regarding businesses, this Code is known as corporate bankruptcy. Corporate reorganization allows businesses to continue to operate while they follow the court-ordered repayment plans.

International Trade LawsEvery country establishes various laws describing how to handle its exports to other countries and imports from other countries; how to establish and charge import/export prices, taxes, and custom duties; and how to protect its own economy from other countries’ illegal trade practices.   Both imports and exports are governed by the laws and regulations of the countries through which goods and services pass. The most common methods to regulate global trade are through the imposition of tariff barriers and nontariff barriers. These barriers have a tremendous influence on how companies make their trade and investment decisions. These decisions, in turn, are reflected in the patterns of world trade and the flows of investment capital.

Barriers in International TradeTariff barriers are normal import duties or taxes imposed on goods entering the customs territory of a nation. Each imported good can have a different tariff rate based on the country that produced the good and the type of good that is imported. Tariffs are imposed for many reasons, including the collection of revenue, the protection of domestic industries from foreign competition, and political control (for example, to provide incentives to import products from politically friendly countries and to discourage importing products from unfriendly countries).  Nontariff barriers are often disguised in the form of government rules or industry regulations and are often not understood by foreign companies. Countries impose nontariff barriers to protect their national economic, social, and political interests.  Click or tap each of the orange buttons below to learn more about the various types of nontariff barriers.

Product standards control the overall quality of imported goods into a country. These standards include design standards, safety standards, quality standards, health standards, electrical standards, and environmental standards.  Example:   For cars sold in the United States, German car makers are required to meet US environmental and emissions standards, which are different from European standards.

A quota is a restriction imposed by law on the numbers or quantities of goods, or of a particular type of good, allowed to be imported. Unlike tariffs, quotas are not well accepted internationally as a lawful means of regulating trade except in some special cases.  Example:China recently announced a crude oil import quota for one of its petrochemical plants.

An embargo is the most restrictive nontariff barrier, often resulting from political actions. It's a total or near total ban on trade with a particular country, sometimes enforced by military action and usually imposed for political purposes.  Example: An internationally orchestrated embargo was used against Iraq after its invasion of Kuwait in 1990.

A boycott is a refusal from a particular country to trade or do business with certain companies or an entire country on political grounds, economic grounds, or other grounds.  Example: Many world Olympic competitions were the subject of boycotts because of disagreements with the host country’s policies.

Information Technology LawsMany laws, rules, and regulations exist in the information technology (IT) field, as it pervades all parts of public and private sector organizations and affects all citizens of a country and all regions of the world.    IT laws are intended to protect information assets (data, information, and computer programs), physical assets (buildings, facilities, and machinery), and human assets (employees, customers, contractors, and suppliers) while using or accessing computer systems. The goal is also to protect from outside threats, such as hackers.     Examples of major laws, rules, and regulations affecting the IT function include the Computer Security Act, Computer Fraud and Abuse Act, and various Acts related to computer crime and fraud.

For additional information regarding the evolution of IT-related governmental acts, please visit the following link: http://www.pbs.org/wgbh/pages/frontline/shows/hackers/blame/crimelaws.html

Q&A: Information Technology LawsRead the questions below and click the orange buttons to reveal the answers. Q: What is the Computer Fraud and Abuse Act? A: The Computer Fraud and Abuse Act deals with computers used in interstate commerce and makes altering, damaging, or destroying information; stealing passwords; and introducing viruses and worms into computers crimes (and potentially fraud). It covers classified defense information or foreign relations information, records of financial institutions or credit reporting agencies, and government computers.  

The Act is applicable to the following computer crimes: Denial-of-service attacks Substitution or redirection of a website Online extortion Internet fraud dealing with shipping defective products Credit card and identity fraud Password fraud Interception of electronic communications or invasion of privacy Electronic espionage for obtaining security information about trade secrets and disclosing classified information

Q: What is the Electronic Communications Privacy Act?

A: The Electronic Communications Privacy Act (ECPA) regulates how the government can obtain stored account information from network service providers, such as Internet service providers (ISPs), telephone companies, cell phone service providers, and satellite services. Whenever the government agents or prosecutors seek stored email, account records, or subscriber information from a network service provider, they must comply with the requirements of the ECPA. The agents or prosecutors need a search warrant from the courts before contacting the ISPs, telephone companies, and others.

Q: What is the Safe Web Act?

A: The purpose of the US SAFE WEB Act is to protect consumers from spam, spyware, and Internet fraud and deception. This Act gives powers to the FTC to protect the United States and foreign consumers from cross-border fraud and deception, which requires working with foreign law enforcers.

Q: What is the Identity Theft and Assumption Deterrence Act? 

A: The Identity Theft and Assumption Deterrence Act criminalizes identity fraud, making it a federal felony punishable with prison sentences ranging from 3 to 25 years. The FTC helps victims restore their credit and erase the impact of the imposter.

Q: What is the CAN-SPAM Act?  

A: The Controlling the Assault of Non-Solicited Pornography and Marketing Act (CAN-SPAM Act) regulates the amount of unsolicited commercial emails and applies to marketers using emails as a marketing medium. The Act prohibits false or misleading subject lines and requires that “from” lines identify the message initiator.

Roles of Regulators and Cost of ComplianceThe roles of government regulators and the compliance managers at the affected organizations are different and opposite in that regulators issue laws, rules, and regulations (LRR) while compliance managers implement those LRRs. Government has the constitutional power and the legal right to fine and punish business organizations for failing to comply with the required LRRs.   Corporate management says it costs a significant amount of resources to comply with the often confusing and duplicating LRRs in terms of record-keeping and monitoring activities. Management doesn't readily see a direct and positive benefit from compliance.  

On the other hand, regulators say these LRRs are developed with a purpose for the benefit of the entire society. Regulators say that the cost of compliance should be treated as a cost of doing business. This is a never-ending debate, but in the end the government wins due to its constitutional power and legal authority.  The total cost of compliance includes both compliance costs and non-compliance costs.

Compliance costs are a combination of cost of planning, cost of hiring, cost of training, cost of subject matter expert consulting, cost of implementation, cost of reporting, and cost of continuous monitoring.Non-compliance costs are a combination of government fines and penalties; legal fees; court filing costs; case preparation costs; legal expert consulting fees; non-quantified loss of image and reputation costs resulting from negative publicity in news media and the public’s rejection of purchase and use of the affected company’s products and services (lost sales); and imprisonment of officers involved in criminal acts.

SECTION 5.2

IntroductionIn Section 5.2, you will learn about business law, ethics, and the responsibilities of organizations and their leaders. Understanding these principles provides additional context for how organizations operate and affect their stakeholders. Section 5.2 Features Describe the principles of business law Compare and contrast principles and agents Discuss the elements of a contract and the damages available to breach of contract Examine business ethics and how ethical programs are implemented in organizations Explain the elements of corporate social responsibility Discuss the scope and nature of corporate controls, audits, and fraud schemes as they relate to corporate risk and governance

Business Law DefinedLaw has been defined as the body of principles and rules that courts apply in deciding controversial issues and matters that occur between individuals and between organizations. The body of law by which people and organizations are governed comes from four basic sources.

The Constitution, as part of the judicial branch--called constitutional law  Legislations passed by the US Congress of the legislative branch--called written law (These include various official laws, statutes, ordinances, and codes.)  Judicial rulings and court decisions made by court judges--called common law (These are the rules of law announced by the courts when deciding cases. Note that the common law can modify or overturn other sources of law. Common law is based on preceding cases, where courts "make law.")  The rules, regulations, and directives by governmental agencies—called administrative law

Example 1: An example of constitutional law is freedom of speech protected by the First Amendment.  Example 2: An example of legislations that greatly affected publicly-held corporations is the Sarbanes-Oxley Act of 2002 in the areas of internal controls, certifying financial statements by the CEO and CFO, and corporate governance activities.  Example 3: An example of common law is the law of contracts.  Example 4: Examples of administrative laws include creating several governmental agencies such as the Federal Communications Commission (FCC), the Environmental Protection Agency (EPA), the Internal Revenue Service (IRS), and the Equal Employment Opportunity Commission (EEOC).

Classification of LawsThe law is classified into matters of public law and matters of private law.  Click or tap on each type of law to learn more about public law and private law. Public law includes constitutional law, administrative law, and criminal law. Constitutional law involves the interpretation and application of either the federal or a state constitution (such as freedom of speech protected by the First Amendment).  Administrative law describes the legal principles that apply to government agencies, bureaus, boards, and regulatory commissions.    Criminal law encompasses all legal aspects of crime. In each of these areas, society, or “the people,” is directly involved in the issues. Societal interests are represented by a governmental agency whose obligation it is to see that justice is accomplished and the ends of society achieved.  Public law provides a major portion of the legal environment of business.

Private law encompasses those legal problems and relationships that exist between individuals, as contrasted with those in which society is involved. Private law is traditionally separated into the law of contracts, the law of torts, and the law of property.  Contract law addresses agreements between two parties (such as sales of goods and consumer protection).  Tort law addresses wrongs other than a breach of contract, by which one party injures another (such as slander, libel, and product liability).  Property law deals with all aspects of ownership and possession of both tangible things and intangible rights (such as leases and mortgages).

Principles of Business LawSeveral legal principles were developed to guide the conduct of employees, managers, executives, officers, and directors of a corporation.  

These legal principles includeDue CareDue care means reasonable care that promotes the common good. It involves maintaining minimal and customary practices. Due care implies reasonable care and competence, not infallibility or extraordinary performance.  Corporate directors and officers of a corporation must perform their duties in good faith and in a non-negligent manner.   Example 1: Training all employees in their jobs is needed to show that a standard of due care has been taken in developing employees.   Example 2: Signed conflict-of-interest statements and code of ethics documents are required from employees. This ensures that employees have read and understood the documents.

Due DiligenceDue diligence requires organizations to implement an effective system of controls, policies, and procedures to prevent and detect violation of policies and laws. Often a due diligence review is conducted when one company acquires or merges with another firm.   Example: Todd is selling his restaurant. A prospective buyer may review the restaurant’s financial statements, payroll documents, and vendor agreements as part of its due diligence to better understand how Todd operated the restaurant and to ensure the restaurant is worth buying.

Due ProcessDue process means following rules and principles so that an individual is treated fairly and uniformly at all times with basic rights protected. It also means fair and equitable treatment to all concerned parties so that no person is deprived of life, liberty, or property without due process of the law, which is the right to notice and a hearing. Due process requires due care and due diligence.  Example: Due process allows a reasonable amount of time for one party to prepare and respond to another party’s questions and requests. This also assumes that everyone will have the ability to represent themselves should they need to appear in court.

Duty of LoyaltyDuty of loyalty is expected of the board of directors and officers of a corporation; they have a duty not to act adversely to the interests of the corporation and to subordinate their personal interests to those of the corporation and its shareholders. These adverse actions include self-dealing, taking personal advantage of a corporate opportunity, and competing with the corporation, thus creating conflict-of-interest situations. Under the duty of loyalty, a corporation can sue a director or an officer to recover the secret profit made on a business transaction.

Business LawAs a part of both public and private laws, the scope of business law includes the discussion of basic legal principles applied to business, such as  Law of agency (agency law) Law of sale (the Uniform Commercial Code)

Law of contracts (general contract laws applied to business contracts)

Law of AgencyThe law of agency or agency law deals with business duties, relationships, and obligations between a principal and his agent. A principal is an individual, a group of individuals, or a company that hires an individual (agent) to sell the principal’s goods or services to customers with a fully executed contract. Acting on the behalf of the principal, the work of the agent is to sell goods and services to clients and customers. During this work, the agent is authorized to develop, execute, or terminate a contract for another person or a company.   The following are examples of principal/agent relationships:

Authorities and Duties of Principals and AgentsThree types of authority can exist between a principal and an agent:  Actual authority comes from the fully executed contract between the principal and the agent. The principal is bound to this authority.  Example: KBX Insurance Company (principal) hires John (agent) to sell property insurance coverage to potential customers in the Northwest Region.

Express authority comes from the actual authority through a written job appointment of an agent by a principal. This appointment document details the agent’s duties and responsibilities. The principal is bound to this authority.  Example: KBX sent a written job appointment letter to John describing that he can sell property insurance coverage to residential and commercial customers only in the Northwest Region.   Apparent authority occurs based on the principal’s words or conduct, not by contract. This authority cannot be denied if third parties relied on it. Apparent authority is based on impressions of the third parties.  Example: KBX manager Tom gave the impression to customers that John can sell insurance in a different region. Tom later denied the insurance coverage since John didn’t have authority to sell such

insurance. Tom would still have to honor the contract because of the apparent authority he demonstrated that John had

Duties of a Principal and an Agent   Duties of a principal require duty to compensate an agent, duty to reimburse the agent, duty to indemnify the agent, and duty to cooperate with the agent.   Duties of an agent require duty of performance to a principal, duty of notification to the principal, and duty of accountability to the principal. In addition, an agent should not involve in self-dealing, compete with the principal, or misuse confidential information.

Law of SaleA sale consists of the passing of title to goods from seller to buyer for a price. A contract for sale includes both a present sale of goods and a contract to sell goods at a future time. The Uniform Commercial Code (the Code, or UCC) essentially defines goods and products as tangible personal property. Personal property is any property other than an interest in real property (land and any attachments to it such as buildings).  The sale of personal property is a large part of commercial activity. Article 2 of the UCC governs such sales in all states except Louisiana. The Code has its own contract law. Common law governs all general contracts outside the scope of the UCC‘s contract law.  Example 1: Examples of personal property covered by the UCC include the purchase of a television set, an automobile, or a textbook because they represent a sale of goods.   Example 2: The UCC does not apply to employment contracts, service contracts, insurance contracts, contracts involving real property (land and anything attached to it, including buildings), and contracts for the sale of intangibles (such as trademarks, patents, and copyrights). These transactions continue to be governed by general contract law.  

Law of ContractsEvery business enterprise, whether large or small, will enter into contracts with its employees, its suppliers of goods and services, and its customers in order to conduct its business operations. Thus, contract law is an important subject for the business manager.  A contract is a binding agreement between two or more parties that the courts will enforce.  It is a promise or a set of promises for the breach of which the law gives a remedy, cure, relief, or the performance of which the law in some way recognizes a duty. A promise manifests or demonstrates the intention to act or to refrain from acting in a specified manner. In other words, all contracts are promises, but not all promises are contracts.  Law of contracts or general contract laws can be applied to business contracts where they are governed by state common law.

Damages Related to Business ContractsCourts award various damages, mostly monetary in nature, to an injured claimant (plaintiff) from suffering caused by another party (defendant) that breached any contractual terms and conditions. These damages are paid to an individual or organization for loss or injury.  Click or tap each of the orange buttons below to learn more about compensatory, consequential, liquidating, and punitive damages.  

A compensatory damage is a direct and actual damage paid to compensate the claimant (victim) for loss suffered as a result of another party’s breach of duty. The goal is to make the victim whole.

A consequential damage is an indirect and special damage awarded due to loss of product or service, loss of profits, or loss of operating revenue if the court decides that such damages are reasonable, foreseeable, or expected of the parties at the time of contract formation.

A liquidating damage is an estimate of damage stated in advance in a contract in case of a breach as long as the damage amount was estimated in good faith. Otherwise, courts will consider liquidating damages as a penal damage

A punitive damage is a non- compensatory damage that may be awarded to a plaintiff in order to deter a defendant. Punitive damages are awarded that are over and above the compensatory damages and may be awarded in the case of fraud and product liability cases.

Business Ethics DefinedEthics is the study of what actions are acceptable and unacceptable to a society. Applied to business, ethics determines how a company should set up and apply its business practices.   The topic of ethics can be presented from two perspectives: personal ethics at the individual level and business ethics at the company level.

Sources of personal ethics include a person’s beliefs and values, ethical decision framework, and moral development. Personal ethics addresses how an individual working for a company behaves, based on his or her upbringing from childhood, moral reasoning and principles, beliefs, values, family and religious background, and formal education.   Sources of business ethics include organization culture, which shapes the overall framework of values within the organization. Corporate culture can embrace the ethical values needed for business success.

Example: In 2009, Bernard Madoff in New York City pleaded guilty to 11 federal felonies and admitted to turning his wealth management business into a massive financial fraud. The Madoff investment scandal defrauded thousands of investors of billions of dollars. He was sentenced to 150 years in prison.  Example: In 2012, JP Morgan Chase Bank agreed to pay $110 million to settle claims that it overcharged its customers for overdraft fees. Chase Bank was also found guilty of other fraudulent and illegal practices in the past and paid big fines to government and large settlement amounts to its customers.    Example: Some websites are selling inexpensive prescription drugs with cheap and harmful fillers and poor quality ingredients. This practice is highly unethical because human life is at risk here, since these drugs could kill people or damage their health.

On the Job: Ethical Lapses and DilemmasThe supervisor of a travel agency was aware that she and her travel agents could receive large bonuses for booking one hundred or more clients each month with a particular auto rental firm which had the highest cost. Clients typically wanted to rent from the auto rental firm with the lowest cost. The supervisor

The executive in charge of a parts distribution facility told employees to tell phone customers that inventory was in stock even if it was not. Replenishing the item only took one to two days, no one was hurt by the delay, and the business was kept from competitors. pushed her team to be aggressive so that

The project manager for a consulting project wondered whether some facts should be left out of a report because the marketing executives paying for the report would look bad if the facts were reported.

A North American manufacturer operating abroad was asked to make cash payments (a bribe) to government officials and was told it was consistent with local customs, despite being illegal in North Questions:

Are the situations above ethical lapses? Why or why not?Have you been in an ethical dilemma? Why do you think it was an ethical dilemma? What, if anything, did you do about it? What did you learn from the ethical dilemma?America. can receive the additional bonus.

Implementing Ethics ProgramsA set of tools is available for managers and leaders to shape cultural and ethical values:

Codes of conduct or code of ethics documents state the values or behaviors that are expected as well as those that will not be tolerated. A code of ethics is an important tool when managing organizational values.   Example: Unethical conduct in organizations is surprisingly widespread. More than 54 percent of human resource professionals polled by the Society for Human Resource Management and the Ethics Resource Center reported observing employees lying to supervisors or coworkers, falsifying reports or records, or abusing drugs or alcohol while on the job. Fact: A study by the Center for Business Ethics found that 90 percent of Fortune 500 companies and almost half of all other companies have developed a corporate code of ethics. The code clarifies company expectations of employee conduct and makes clear that the company expects its personnel to recognize the ethical dimensions of corporate behavior.

Full Financial Disclosure Executives, directors, consultants, and contractors working in private and public sectors are required to disclose their full financial information when they are applying for a higher office. This information includes reporting on stocks and bonds that they hold in the company. They also need to disclose any other conflicts of interest that can impair their independence and objectivity, such as working for a competing firm.

Ethics Committee/Ethics Office Establish an ethics committee, which is a group of executives appointed to oversee company ethics. The committee provides rulings on questionable ethical issues and assumes responsibility for disciplining wrongdoers. Many companies are setting up ethics offices that go beyond a “police” mentality to act more as counseling centers.   Ethics Ombudsperson Establish an ethics ombudsperson, who is a manager serving as the corporate conscience. This manager will listen to employee grievances, investigate ethical complaints, and point out employee concerns and possible ethical abuses to top management.   Training Programs To ensure that ethical issues are considered in daily decision making, companies can supplement a written code of ethics with employee training programs. Sensitivity training programs or diversity training programs are examples of ethical training programs.

Whistle-Blowing Protection Whistle-blowing is employee disclosure of illegal, immoral, or illegitimate practices on the part of the organization. A policy is needed to protect whistleblowers so they will not be transferred to lower-level positions or fired when voicing their ethical concerns. A policy can also encourage whistleblowers to stay within the organization—for instance, to

quietly blow the whistle to responsible managers. Whistleblowers have the option to stop organizational activities by going to newspaper or television reporters, but as a last resort. When there are no protective measures, such as a policy and procedure, whistleblowers suffer, and the company may continue its unethical or illegal practices.  Fact: The US federal government issued the Whistleblower Protection Act in 1989 and amended it in 1994 to ensure that all federal agencies inform their employees about the rights and remedies concerning whistleblower protection.

All these measures provide mechanisms for employees to voice their concerns about unethical or illegal practices occurring in their organization

Key Ethical PrinciplesThe following principles are guiding ethical principles governing many business practices:  The Golden Rule advocates putting oneself in others’ shoes. It includes not knowingly doing harm to others.   The Professional Principle states that a true professional will do things in such a way that he can explain them before a committee of peer professionals.   The Goal Congruence Principle states that the employee needs should be subordinated to the greater good of the employer. An employee should ask himself whether his goals are consistent with the organization’s goals.  The Prudent Person Concept states that a prudent person, who is not infallible or perfect, has the ability to govern and discipline himself by the use of reason, does not neglect his duty, and applies his knowledge, skills, and sound judgment in the use of the organization’s resources.  The following two principles are generally considered unethical, but they may also be used to guide business practices:  The Means-End Cycle states that when the end result is of greatest importance, unscrupulous means might be used to reach the end result.   The Might-Equals-Right Principle states that justice is defined as the interest of the stronger, meaning that stronger people have an upper hand over the weaker people.

Law vs. EthicsEthics are different from laws, because ethical behavior isn't governed by law. The rule of law arises from a set of codified principles and regulations that describe how people are required to act, that are generally accepted in society, and that are enforceable in the courts.   Ethical standards for the most part apply to behavior not covered by the law, and the rule of law covers behaviors not necessarily covered by ethical standards. Many people believe that if you are not breaking the law, then you are behaving in an ethical manner. Ethics often go far beyond the law.  

Unlike legal analyses, analyses of ethics have no central authority, such as courts or legislatures, upon which to rely; nor do they follow clear-cut, universal standards. Nonetheless, despite these inherent limitations, it is still possible to make meaningful ethical judgments.

Corporate Social Responsibility DefinedThe essence of social responsibility is that business organizations should become good community citizens by improving health, safety, poverty, education, and the environment. This social responsibility is in addition to making profits, not as a substitution for making profits.  According to social responsibility professor and expert Archie B. Carroll, business organizations have four responsibilities to society.  A socially responsible company should strive to balance the following four responsibilities simultaneously: Be profitable (make money, the baseline) Be ethical (do the right things and all good things) Be legal (obey the law) Be a good corporate citizen (donate money)

Examples of Corporate Social ResponsibilitiesClick or tap each of the orange buttons below to see examples of economic, legal, ethical, and philanthropic responsibilities.Economic responsibilities include things such as be profitable; maximize sales; minimize costs; make sound strategic decisions; and be attentive to dividend policy.

Legal responsibilities include things such as obey all laws and adhere to all regulations; obey the US Foreign Corrupt Practices Act; fulfill all contractual obligations; and honor all warranties and guarantees.

Ethical responsibilities include things such as avoid questionable practices (such as bribes and kickbacks); respond to the spirit as well as the letter of law; assume law is a floor on behavior; operate above the minimum required; do what is right, fair, and just; and assert ethical leadership.

Philanthropic responsibilities include things such as be a good corporate citizen; make corporate contributions; provide programs supporting the community (for example, education, health and human services, culture, arts, and civic duties); and provide for community development and betterment on a voluntary basis.

Corporate Control DefinedControl is any positive or negative action taken by management that would result in accomplishment of the organization’s goals, objectives, and mission.  Controls should be seen as beneficial since they facilitate the achievement of employees and organizational goals and objectives. In other words, any control that does not help or promote in achieving goals and objectives should not be implemented.   Controls should be effective and efficient. Controls should not cost more than the benefits derived. When properly implemented, controls reduce risks.

 Controls can be classified into four major categories:Management Controls   Management controls include the plan of organization, methods, and procedures adopted by management to ensure that its goals and objectives are met.    Example 1: Examples of management control practices include periodic staff meetings, quarterly management reviews, budget planning and execution, and variance analysis.     Example 2: Examples of management controls include the process for planning, organizing, directing, and controlling the entity’s operations. They include the management control systems for measuring, reporting, and monitoring operations. Specifically, they include automated and manual systems, policies and procedures, rules of behavior, individual roles and responsibilities, and other ongoing management activities that help ensure risks are managed and controlled.

Accounting and Administrative Controls   Accounting controls are defined with a body of professional standards published by accounting authorities. They help ensure there's full accountability for physical assets and that all financial transactions are recorded and reported in a timely and accurate manner.   Example: Examples of accounting controls focus on transaction accuracy and authorization controls, addressing checks and balances.   Administrative controls help ensure resources are safeguarded against waste, loss, fraud, abuse, and misappropriation, and support the accomplishment of an organization’s goals and objectives.   Example: Examples of administrative controls include accurate and timely management information and processes for planning, quality control, regulatory compliance, and improving the efficiency of operations.   

Operational Controls   Operational controls are the day-to-day procedures and mechanisms used to control operational activities to ensure that they are carried out effectively and efficiently. They also address computer security methods focusing on mechanisms primarily implemented and executed by people and computer systems. These controls are put in place to improve the security of a particular computer system or group of systems. They often require technical or specialized expertise and often rely upon management controls and technical controls.   Example: Examples of operational controls include controls over job/machine scheduling, shipping, and billing activities. They also include technical controls over computer systems, software, and data; and routines to maintain machinery and equipment in working order.

Internal Controls Internal control is a people process within an organization designed to provide reasonable assurance regarding the following: Utilization of all resources Reliability of information presented, both financial and operational type Compliance with laws, rules, regulations, and contracts  

Achievement of goals and objectives of the organization Example: Security controls in accessing computer files and programs are an example of internal controls.

The reason for classifying controls in different ways is that different controls work best in different departments or functions.

Corporate Audits DefinedAuditing is a management control mechanism that examines and verifies evidence to reach conclusions and issue a professional opinion. The output of the audit work is reports, which are used by management (internal stakeholders) and investors and creditors (external stakeholders).  Audit work is conducted by two types of individuals, external auditors primarily performing financial and IT audits, and internal auditors primarily performing operational and IT audits.  Internal auditors work for an organization as a separate function from other business functions and provide operational information through their operational audits. They sometimes act as internal consultants, helping management improve the way the company operates.   External auditors work for public accounting (CPA) firms and play an important role in capital markets by providing financial information through financial audits.

Types of audits include financial audits, operational audits, and information technology (IT) audits. A financial audit examines the reliability and integrity of accounting records, financial records, and operational records to express a professional opinion on the financial condition of a firm. An operational audit is concerned with the economical and efficient use of an organization’s resources and the accomplishment of goals and objectives. Operational audits include construction audits, quality audits, due diligence audits, security audits, safety audits, privacy audits, and performance audits. An IT audit includes the review of controls in computer systems and operations to comply with internal control policies and procedures as well as IT's effectiveness in safeguarding an organization’s technology assets.

Corporate Fraud DefinedFraud is a deception, misstatement, or falsehood used to cheat another party.  Elements of Fraud There are three elements of fraud: An intent to defraud The commission of a fraudulent act The accomplishment of the fraud Degree of Fraud The degree of fraud can be linked to the control environment of an organization, as described below.   A high-fraud environment is linked to low management integrity, a poor control environment, loose accountability, and high pressure for results.   A low-fraud environment is linked to a culture of honesty; management openness; employee assistance programs in health (wellness), substance misuse, and education; and implementing total quality management principles.

Types of Fraud  Example 1: Theft of assets includes property such as cash, tools, supplies, equipment, inventory (such as finished goods and raw materials), and intellectual property (such as software and music piracy).    Example 2: Examples of specialized fraud include embezzlement of assets entrusted by depositors to financial institutions (for example, banks, savings and loans, credit unions, and pension funds), and false insurance claims for life, health, auto, and property coverage.   Example 3: Examples of generalized fraud include kickbacks, bribes, corruption and collusion, deceptive pricing, unbalanced contracts or purchase orders, reopening the completed contracts, duplicate payments, unauthorized payments to suppliers, shell (fake) payments, and delivery of defective products.  

On the Job:Corporate Fraud ExamplesRead the following examples of corporate fraud so that you're aware of the various types of fraud. Red flags do not signal that a fraud has occurred, but rather that the opportunity for a fraud exists. Some examples of red flags are Concealed assets Missing or destroyed records and documents Split purchases—means one big purchase amount is spread over several purchases to avoid a higher-level manager’s approval Excessive “voids” or “refunds” in a retail store Excessive product returns from the same customers Rapid turnover of financial managers and executives

Fraud by Higher-Level Managers Early booking of sales (overstatement of sales) Expense deferrals (late booking of expenses or understatement of expenses) Inventory overstatement (phony recording of assets or overstatement of assets) Disguising big amounts of personal expenses as business expenses Padding of expense account reports 

Fraud by Lower-Level Employees Cash embezzlement and corruption Phony vendor invoices through collusion Phony benefit payment claims (such as food stamps and welfare) Phony customer returns documented and processed as normal False insurance claims filed and paid to a friend’s bank account Padding of expense account reports

Corporate Risk DefinedRisk is the possibility of something adverse happening to an organization. Risk management is the process of assessing risk, taking steps to reduce risk to an acceptable level, and maintaining that level of risk.

 Minimizing negative impacts on an organization and the need for a sound baseline in decision-making are the fundamental reasons for organizations to implement a risk management process.  A risk management process encompasses three steps:

Risk Assessment  Risk assessment is the first step in the risk management process. Organizations use risk assessment to determine the extent of potential threats and the risk associated with these threats. The output of the process helps to identify appropriate controls for reducing or eliminating risk during the risk mitigation process.  Companies do an analysis of threats and vulnerabilities to determine their impact on the organization.

Risk Mitigation  Risk mitigation refers to prioritizing, implementing, and maintaining the appropriate risk-reducing measures recommended from the risk assessment process. Risk mitigation methods include risk rejection, risk acceptance, risk avoidance, risk reduction, and risk transfer.   Example: Buying an insurance policy from an insurance company is an example of risk transfer because the insurance company now assumes the risk and any accompanying losses up to a limit.

Risk Monitoring  Risk monitoring is the third and final step of the risk management process. It is a continual evaluation process since change is constant in most organizations. Risk monitoring is ongoing and evolving.  Example: Collecting business intelligence information and staying in connection with social media networks are some ways to monitor risks.

Corporate Governance DefinedCorporate governance refers to the method by which a firm is being governed, directed, administered, or controlled and to the goals for which it is being governed. It is concerned with the relative roles, rights, and accountability of owners, boards of directors, managers, executives, employees, and others who assert to be stakeholders.  Click to learn more about the roles of the board of directors and the CEO. Board Of Director (BOD)The shareholders of a corporation elect the BOD to govern the company which, in turn, hires managers, executives, and officers to run the day-to-day business. The BOD represents the highest level in the management hierarchy of a company. The BOD governs the corporation to ensure that all employees perform their job duties in a legal, ethical, and controlled manner to achieve the organization's mission and vision.  The BOD has four duties:  Duty of care (business judgment rule)  No self-dealing (maintaining fairness to the company's business)  Exploring corporate opportunities (such as mergers, acquisitions, and divestitures)  No conflicts of interest (such as the use of company insider information for personal gain)

Chief executive officer (CEO)

The CEO reports to the BOD. The CEO, in turn, hires his or her own management team consisting of executives and managers. The CEO gets his thing done through the management team. The CEO fulfills his job duties with various roles such as a leader, mentor, facilitator, motivator, communicator, and more.

  The CEO's management style, tone, and leadership skills set the stage for the entire corporation, which determines the ultimate success or failure of the organization (this is known as setting the tone at the top). The CEO is the linchpin to the strategic management process in setting the overall direction for the organization and mobilizing resources to accomplish the organization mission, vision, goals, and objectives.   The CEO possesses more soft skills than hard skills. The other senior executives' management style and leadership skills should be compatible with that of the CEO's style to ensure goal congruence.