Business Law

Law can be defined as rules set by society to govern behavior; thus, business law refers to those rules of behavior that govern business. To govern behavior efficiently, law must be both predictable and flexible. It must be predictable so that people can plan their behavior, and it must be flexible so that it can be applied in a wide variety of different situations.

Law is directly related to ethics, especially in a business context: Much of business law amounts to the formalization of “good business practices” or ethics, and neither ethics nor law can be meaningful without each other. Ethics without the authority and enforcement of law is a mere aspiration. The reverse is also true: Mere law, if it does not mirror societal expectations of behavior at least to some extent, is not likely to be enforced. For example, although there was contract law in place shortly after the dissolution of the former Soviet Union, that law was often not effective because post-Soviet society was not used to expecting people to keep their promises.

When a community is appalled by an ethical violation, that violation may drive the development of law, whether through legislation, judicial decision, or both. For example, the Enron and WorldCom scandals of 2001 to 2002, which involved deceptive and fraudulent accounting practices, led to the prosecution of those involved and also led directly to the SarbanesOxley Act (SOX), which created new duties and accountability for corporate officers and accounting firms. Much of the unethical behavior involved, however, was illegal before both these scandals and the act. Thus, the ultimate lesson of those scandals may well be that law alone cannot prevent such acts. In these cases, short-term business pressures led companies first to stretch the laws of accounting practice and then violate them in an effort to present a positive picture and preserve the stock market value of the companies involved. The legal scandals that developed from these dishonest acts ultimately resulted in the demise of those companies. In the aftermath, it has been posited that law by itself is an insufficient deterrent for unethical practice, because under pressure of competition, companies will continue to look for ways to abide by the letter, rather than the spirit, of the law. Businesspeople must not only abide by the law, but they must also realize that unethical behavior ultimately leads to the destruction of a business, and they must be aware of the business virtue of absolute moral conviction.

To make the relationship between law, business, and ethics still more complex, while there are times when societal mores and ethics lead to the enactment of law, there are also times when morality and business law diverge. For example, it is a long-standing principle of common law that there is no duty to rescue, so that if you see a man about to step in front of a fast-moving car, you have no legal obligation to reach out and stop him—though most of us would feel we had a moral obligation to do so. To begin with, enforcing a duty to rescue would be contrary to a free society and the principle that individuals have the freedom to pursue their own individual good as long as they do not attempt to deprive others of theirs or impede their effort to obtain it. Creating a legal duty to rescue would imply a society that focuses on a group good rather than individual good. Moreover, creating a legal duty to rescue would be impractical. When would such a duty arise? How would it be enforced? If there were a crowd of people, on whom would the duty fall?

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