CHAPTER 4

Legal, Regulatory, and Political Issues

Governments Influence on
Business

A. The Rationale for Regulation

.Many

of the issues used to rationalize

business regulation can be categorized as
economic or social.

Economic and Competitive Reasons for

Regulation

A great number of regulations have been passed over the last

century in an effort to level the playing field on which
businesses operate.
a. Trusts are organizations generally established to gain
control of a product market or industry by eliminating
competition. If successful, a monopoly can result.
b. A monopoly occurs when just one business provides a
good or service in a given market.

c.

Because trusts and monopolies lack serious

competition, there are concerns that they may either
exploit their market dominance to restrict their output
and raise prices or lower quality in order to gain
greater profits.
d. Society desires to restrict destructive or unfair
competition such as conspiring to fix prices, stealing
trade secrets, trademark and copyright infringement,
false advertising, and deceptive selling methods.
e. These economically based regulations allow the
government to punish firms that engage in
anticompetitive practices.

Social Reasons for Regulation

Regulation may also occur when marketing
activities result in undesirable consequences for
society.
a.

Regulation is necessary in manufacturing

industries to ensure that all firms within an
industry do their part to minimize the costs of
contamination caused by pollution and to pay
their fair share of these costs.
b. Regulations have come about in response to
social demands for equality in the workplace.

c.

Regulations have resulted from specialinterest group crusades for safer products.
d. Issues arising from the increasing use
of the Internet have led to demands for
new laws protecting consumers and
business.

Laws and Regulations

The federal government has passed many laws to regulate
business conduct.

Sherman Antitrust Act. The Sherman

Antitrust Act, passed in 1890, is the
principal tool employed by the federal
government to prevent businesses from
restraining trade and monopolizing
markets.

Clayton Antitrust Act. Congress enacted

the Clayton Antitrust Act in 1914 to limit
mergers and acquisitions that have the
potential to stifle competition.

Federal Trade Commission Act. Congress also

enacted the Federal Trade Commission Act in 1914
to further strengthen the antitrust provisions of
the Sherman Act and to create the Federal Trade
Commission (FTC) to protect consumers and
businesses from unfair competition.
a. The FTC has the greatest influence on business
activities of all federal regulatory agencies.
b. The FTC has the power to issue cease-anddesist orders, require companies to air corrective
advertising, resolve disputes, and seek monetary
penalties.

Enforcement of the Laws. These laws are

enforced by state and federal authorities
and through lawsuits by private citizens,
competitors, and special-interest groups.

Global Regulation

1.
A company that engages in commerce
beyond its own countrys borders must
contend with the potentially complex
relationship among the laws of its own
nation, international laws, and the laws of
the nation in which it will be trading, as well
as various trade restrictions imposed on
international trade.

2. Although there is considerable variation

and focus among different nations laws,
many countries have antitrust laws that are
quite similar to those in the United States.

3. The North American Free Trade

Agreement (NAFTA), which eliminates
virtually all tariffs on goods produced and
traded among the United States, Canada,
and Mexico, makes it easier for businesses
of each country to make investments in the
other countries.

4.
The European Union (EU), established
in 1958 to promote free trade among its
members, now includes fifteen European
nations.

Costs and Benefits of Regulation

Costs of Regulations
a. Regulation has numerous costs for
businesses, consumers, and society at large.
b. It is difficult to find an accurate measuring
tool of these costs.
c. The cost of administrative spending of
federal regulatory agencies, the cost of agency
staffing, and the costs incurred by businesses
in complying with the regulations have all been
used to measure the costs of regulation.

Benefits of Regulation
a. Despite business complaints about the
costs of regulation, it provides many
benefits to business, consumers, and
society as a whole.
Regulatory Reform
a. Many businesses and individuals believe
that the costs of regulation outweigh its
benefits and desire deregulation, or
removal of all regulatory authority.

Self-Regulation
a.

Many companies attempt to regulate themselves in

an effort to demonstrate social responsibility and to
preclude further regulation by federal or state
government.
b. In addition to complying with all relevant laws and
regulations, many firms choose to join trade
associations that have self-regulatory programs.
c. A well known self-regulatory association is the Better
Business Bureau (BBB), a local organization supported
by local member businesses.
d. Although self-regulatory programs are usually less
costly than government programs and are able to
reduce the need to expand government bureaucracy,
these programs are limited by their lack of authority
over nonmembers and lack of tools to enforce their
guidelines.

Businesss Influence on Government and Politics

A. The Contemporary Political Environment

1. Many factors have helped to shape the political environment
over the past forty years.
2.

Changes in Congress. Changes in Congress during these

years include eroding influence of the political environment.

a. The committee process was opened to public scrutiny, and

the power of senior members and committee leaders was
reduced.

b. Other changes ultimately had the effect of reducing the

importance of political parties by decreasing members
dependence on their parties.
3.

Rise of Special-Interest Groups. The success of activists

efforts in the 1960s and 1970s spawned the rise of specialinterest groups, which began to focus on getting candidates
elected who could further the groups own political agendas.

B.

Corporate Approaches to Influencing

Government

.1. Lobbying.

Lobbying is the process of working to

persuade public and/or government officials to favor
a particular position in decision making.
a. Many companies concerned about the threat of
legislation or regulation that may negatively affect
their operations employ lobbyists to communicate
their concerns to officials on their behalf.
b. Companies may attempt to influence the
legislative or regulatory process more indirectly
through trade associations and umbrella organizations
that represent collective business interests of many
firms.

2.

Political Action Committees. Political Action

Committees (PACs) are organizations that
solicit donations from individuals and then
contribute these funds to candidates running
for political office.

3.

Campaign Contributions. Corporate

campaign contributions exist, although federal
laws restrict direct corporate contributions to
candidates electoral campaigns. However,
donations from businesses and other
organizations are frequently made to political
parties.

The Governments Approach for

Legal and Ethical Compliance

A.

Although legal and regulatory forces have a strong

influence on business operations, businesses can
affect these forces through the political process.

B.

The most effective way for businesses to manage the

legal and regulatory environment is to establish
values and policies that communicate and reward
appropriate conduct.

C. Federal Sentencing Guidelines for Organizations. The

Federal Sentencing Guidelines for Organizations (FSGO)
were established by the United States Sentencing
Commission in 1991 not only to streamline the
sentencing and punishment for organizational crimes,
but also to hold companies, as well as their employees,
responsible for misconduct.

1.

Companies also have legal incentives for

establishing compliance programs.

a. If a court determines that a companys

organizational culture rewarded or otherwise
created opportunities that encouraged wrongdoing,
the firm may be subject to stiff penalties in the
event that one of its employees breaks the law.
b. The underlying assumption is that good
corporate citizens maintain compliance systems
and internal governance controls that deter mis
conduct by their employees.