LAW, VALUE CREATION, AND RISK MANAGEMENT

1

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

CHAPTER 1

LAW, VALUE CREATION, AND RISK MANAGEMENT

This first chapter lays the foundation for the modern corporate manager who is swimming in a “sea of law.” It sets forth a framework for the legally astute manager to better understand the intersection between law and management, while introducing a systems approach to business, law, and society. And finally, this chapter, can help managers become more legally astute by understanding how to legally protect a company’s value, while managing legal risks.

1-1 THE SYSTEMS APPROACH TO BUSINESS AND SOCIETY

Because we live in a social system, managers must anticipate, understand, and respond to changing policy and social perceptions of ethical management.

1-1a Meeting Societal Expectations Business decisions are a series of interrelated economic and moral components, as well as systems of shareholders and community stakeholders.

1-1b Effect of Law on the Competitive Environment and Firm’s Resources

(i) Law shapes competitive environment with five forces that determine a

company’s attractiveness to customers: (1) buyer power, (2) supplier

power, (3) the competitive threat posed by current rivals, (4) the availability of substitutes, and (5) the threat of new entrants.

(ii) Resource-based view (RBV): firm’s resources can sustain competitive

advantage if they are valuable, rare, and hard or expensive to imitate by competitors.

(iii) Consider the corporate scandals beginning in 2000 with Enron, and continuing to the recent JP Morgan “London Whale Trades.”

(iv) Legally astute management teams are proactive, and practice strategic compliance management.

1-1c Law and the Value Chain

Each activity in the value chain has legal aspects: design, manufacturing,

distribution, sales and warranties.

1-1d Law Is Dynamic Systems approach recognizes that the law is not static and changes based on court decisions, federal, or state laws. Managers should be proactively involved in (Managers and the Legal Environment Strategies for the 21st Century, 8e Constance Bagley) (Solution Manual Latest Edition 2023-24, Grade A+, 100% Verified) 1 / 4

BAGLEY, MANAGERS AND THE LEGAL ENVIRONMENT, 8

TH

ED.—INSTRUCTOR'S MANUAL

2

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.lobbying for law that gives them competitive advantage, and be self-policing to avoid unnecessary regulations.

1-2 LAW AND PUBLIC POLICY

American law seeks to enhance economic activity, commerce, and for-profit corporations

through the pursuit of four key public policy objectives:

1-2a Promoting Economic Growth Protects and enforces private property rights, enforces contracts, and develops incentives.

1-2b Protecting Workers

1-2c Promoting Consumer Welfare

1-2d Promoting Public Welfare

1-2e Policy Conflicts

CASE 1.1 Sorrell v. IMS Health, Inc., 131 S. Ct. 2653 (2011).Vermont statute prohibited pharmacies from selling prescriber- identifying information for marketing prescription drugs without the prescriber’s consent. Vermont data miners and others challenged the statute as a violation of their free-speech rights under the First Amendment.

HELD: For the data miners. The statute violated the First

Amendment because it was too broad and engaged in “content- based discrimination.”

1-3 THE LEGALLY ASTUTE MANAGER

Legally astute managers (LAMs) know how to communicate and work with counsel to solve legally complex problems. LAMs know how to: (1) negotiate contracts, (2) protect and enhance the firm’s value (3) create legal options, and (4) convert regulatory barriers into value.

* * * * *

• / 4

CHAPTER 1 LAW, VALUE CREATION, AND RISK MANAGEMENT

3

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE RESPONSIBLE MANAGER: Teaching Suggestions

• How should the legally astute manager deal with gossip circulating around the company via

emails about possible legal or ethical wrongdoing?

• Discuss the cultural dilemmas that face managers in the global economy: Are gifts of money

or services illegal or unethical, or culturally neutral? Discuss, for example, in China whether Guanxi is social networking, or is it mere bribery. Or, in Latin America, whether paying officials directly is a way to “expedite” service, or whether it is bribery.

• Discuss the possible conflicts between legally doing business and selling fast-food, given the

increasing evidence of how it is a significant contributing factor in public health, obesity, and diabetes facing many Americans. Do you agree with how McDonalds and the Disney Company are handling the issue? What ethical obligations, if any, do fast food companies have to consumers?

• / 4

1

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

CHAPTER 2

ETHICS AND THE LAW

This chapter explains the basic concepts and dilemmas of the application of business ethics and social responsibility in business. The goal of the chapter is to provide the manager with an ethical framework to evaluate business decisions in the global legal environment.

2-1 THE RELATIONSHIP BETWEEN LAW AND ETHICS

Law and ethics are interrelated. Creating a “good” organizational culture that strives to have the highest ethical standards will ultimately make it more financial healthy. But the law does not—indeed cannot—prohibit all “bad” behavior. In fact, unethical conduct can lead to more onerous regulation. See the Enron accounting scandal, which was a primary factor in the enactment of the Sarbanes-Oxley Act of 2002.

2-2 THE ETHICAL TONE IS SET AT THE TOP

The chief officer has the most important role in instilling ethics in the organization. Pay disparities and the wealth gap between corporate executives compared to average workers and public scandals reduce public faith in the business community.

2-2a The Imperial CEO As of 2013, the average CEO in Standard and Poors’ 500 Index was paid $11.7 million, more than 331 times what the average worker was paid. Consider Dennis Kozlowski, CEO, Tyco International. In 2005, Kozlowski was convicted of grand larceny, conspiracy, and fraud. He was sentenced up to 25 years in prison.

2-3 ETHICAL BUSINESS LEADER'S DECISION TREE

See Exhibit 2.1. To ensure success, managers must create a culture of socially

responsibility by asking a series of questions:

2-3a Is the Action Legal?

2-3b Would It Maximize Shareholder Value?Maximization of shareholder value (shareholder primacy) is generally not legally required.

• / 4