Legal Considerations When Making Business Decisions

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  • 0:02 Legal & Ethical…
  • 1:12 Is It Competition or…
  • 2:12 Bribes & Truth in Advertising
  • 3:09 Sarbanes-Oxley Act & the EEOC
  • 4:32 Codes & Ethics
  • 5:17 Lesson Summary
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Lesson Transcript
Instructor: Kat Kadian-Baumeyer

Kat has a Master of Science in Organizational Leadership and Management and teaches Business courses.

When it comes to making decisions for a business, many hold both legal and ethical consequences.There are several important things to consider, including customers, shareholders, employees and even society.

Legal & Ethical Business Decisions

Big or small, every business decision carries consequences. Making a bad decision can land a business owner in hot water. So, when working through an issue, it's always a good idea to think in terms of its legal and ethical ramifications.

Let's say a business owner discriminates against a certain protected class of employees, an extreme example of a very poor legal decision. In doing so, the business owner might not have considered, or even ignored, laws and statutes that apply to his choice. Now he runs the risk of being sued by the government, as well as potential or existing employees who were fired, or not hired, due to discriminatory practices.

Ethical decisions are similar in that they also carry a consequence. However, this consequence comes in the form of how people perceive the company. Even though laws may not have been broken, reputations were likely harmed. For example, if an employer decided to hire a friend who needed a job over a more experienced worker, it might not seem nice or fair, but it also wouldn't be illegal.

Let's look at some common business decisions and their legal considerations.

Is It Competition or Collusion?

When two or more companies get together to set prices or manipulate supply and demand with the intention of gaining market share, we call it collusion. This means competing companies form a secret partnership with the intent to regulate prices to maximize profits.

Let's say that there are two companies that supply all of the coconuts to the beach bars in Miami: Jammin' Jack's Coconuts and Kaleb's Coconuts. To increase their profits, the companies decide to form a secret partnership and raise the price of a single coconut from $2.00 to $4.00. As a result, the bars in Miami have to either pay up or stop selling a high-demand drink. Chances are, the bar owners will cough up the cash because so many of their customers enjoy tasty libations in a coconut shell.

In most cases, these partnerships are illegal because they act as deterrents to natural competition. The colluders win, while the businesses are strong-armed to paying higher-than-normal prices for goods and services.

Bribes & Truth in Advertising

Another way businesses might find themselves in deep water is by taking bribes, which means accepting payments in exchange for favors. Let's go back to the coconut conundrum. Say Jammin' Jack approached every bar in Miami and offered the purchasing agent a $1,000 gift card for each order placed. Unscrupulous agents with the power to purchase might buy from Jack, leaving Kaleb in the dust, even though it's illegal to both offer and accept a bribe.

Businesses can also get into trouble if they don't use truth in advertising. A company that lies about the ingredients in its products is subject to severe legal action. For instance, in 2009, PepsiCo's Naked Juice came under fire for claiming to be 100% natural. As it turned out, the juice contained ingredients like genetically altered soy. The company was forced to pull the product, change the label and shell out $9 million to settle a class action lawsuit.

Sarbanes-Oxley Act & the EEOC

One of the most common ways businesses find themselves behind the eight ball is in their accounting practices. Businesses that don't report their income accurately, or falsely document losses to make their company seem more attractive, are actually committing a crime. The penalty for a violation can be as easy as fixing errors or as serious as spending time in federal prison.

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