Chapter One

Law, Value Creation, and Risk Management

A Manager’s Dilemma: Putting It into Practice

Guanxi: Networking or Bribery?

Issue Presented: Should a business leader in China encourage a manager to run for office? Engage in guanxi lobbying to encourage district leaders to impose stiffer emissions and mileage requirements for heavy trucks? Hire the son of a prominent local official?

Whenever engaging in international business development, managers are expected to exercise their responsibilities according to the laws and practices of the countries where they conduct business. However, a manager should also consider the ethical standards in the home country, where the firm is headquartered and where the board of directors will review his or her performance, as well as what the shareholders would consider ethically acceptable.

In China, companies have a long history of engaging in political activities. Chinese executives are frequently elected to local or national government to engage in guanxi lobbying, where they are permitted to make charitable contributions and report issues relevant to their corporation to the government. The Election Act of China permits the local manager of Dexter’s affiliate to seek election as a congressperson while remaining on Dexter’s payroll. In light of this legislation, the manager could run for office and, if elected, lobby to persuade district leaders to impose stiffer emissions and mileage requirements for heavy trucks. Such legislation would help Dexter Motors, a producer of fuel-efficient, low-emission engines, and might even have favorable consequences for China’s environment and long-term economic prosperity.

There are several caveats, however. First, the Criminal Law of China’s prohibit businesses from paying bribes to government officials. Lu must consider whether Dexter’s local manager could be considered a government official if elected to the local or national congress. If so, would his salary amount to a bribe? Is there any ethical difference between bribing an elected official to advocate on behalf of your corporation, and electing an employee to the government as a corporate advocate?

Second, both Lu and the local manager must comply with the U.S. Foreign Corrupt Practices Act, which is discussed in Chapter 25. Providing engineering advice on ways to reduce pollution from heavy trucks would most likely be legal; hiring the son of a prominent local official to work for the Chinese state automotive company is a closer case. This activity would encourage local officials to be more sympathetic to Dexter and its interests, paving the way for beneficial legislation or regulatory decisions in the future. If the son is not qualified for the job, then hiring the son is an illegal bribe. If he is qualified and given the same compensation as other workers doing a similar job, then the hiring should be legal. However, Lu should consider the drawbacks of such a hiring decision. For instance, Dexter’s local manager might find it difficult to reprimand or dismiss a strategic hire for fear of resultant damage to the company’s reputation and relationship with the government.

Lu should first consult with qualified counsel to ensure that she complies with both U.S. and Chinese law. She must then carefully weigh common business practice in China against American expectations of ethical business conduct. Although it is essential that Lu work cooperatively with Chinese government officials in order to compete with officers at rival companies, she should not sacrifice her personal integrity or elicit criticism from stakeholders outside of China. She should review her firm’s code of conduct and take full advantage of any ombudsperson available. Although some firms apply different ethical standards depending on the country in which they are doing business, others (such as General Electric) have uniform global standards they apply to all their operations.

Questions and Case Problems

Question 1

Issue Presented: What are the “moral aspects of choice” implicated by the conduct at issue?

The systems approach to business and society recognizes that “business decisions consist of continuous, interrelated economic and moral components” and that “moral aspects of choice” are the “final component of strategy.” It also builds on stakeholder theory’s insight that firms have relationships with many constituent groups, which both affect and are affected by the actions of the firm.

Question 2

Issue Presented: What effect does this body of law or legal tool have on the competitive environment and the firm’s resources?

Law helps shape the competitive environment and affects each of the five forces that determine the attractiveness of an industry (buyer power, supplier power, the competitive threat posed by current rivals, the availability of substitutes, and the threat of new entrants). Law also affects the allocation, marshaling, value, and distinctiveness of the firm’s resources. Under the resource-based view (RBV) of the firm, a firm’s resources can be a source of sustained competitive advantage if they are valuable, rare, and imperfectly imitable by competitors and have no strategically equivalent substitutes. Conversely, failure to integrate law into the development of strategy and of action plans can place a firm at a competitive disadvantage and imperil its economic viability.

Question 3

Issues Presented: Where does this body of law or legal tool fit in the value chain?

Each activity in the value chain has legal aspects. From a firm’s choice of business entity to the warranties it offers and the contracts it negotiates, law pervades the activities of the firm, affecting both its internal organization and its external relationships with customers, suppliers, and competitors.

Question 4

Issues Presented: What public policies are furthered by this law? To what extent are there conflicts among the policies served and how will they affect the way the law in this area is interpreted, applied, and changed?

The laws and regulations applicable to U.S. business in the early twenty-first century further four primary public objectives: promoting economic growth, protecting workers, promoting consumer welfare, and promoting public welfare. Other major economic powers tend to have laws that further these same objectives, albeit with varying degrees of emphasis on the different objectives and varying ways of furthering them. Indeed, much of the current debate on what constitutes good corporate governance turns on how much weight each country gives to the interests of shareholders, debtholders, employees, customers, and suppliers and to the protection of the environment.

Sometimes those objectives may conflict. For example, intellectual property protection may promote economic growth by giving incentives to innovate but may also create barriers to entry and increase the likelihood of monopoly pricing, to the detriment of consumers.

Question 5

Issue Presented: Does this conduct meet societal expectations? If not, what new laws would be likely to result if a substantial number of firms acted this way?

Legally astute management teams appreciate the importance of meeting society’s expectations of appropriate behavior and of treating stakeholders fairly. They accept responsibility for managing the legal dimensions of business and recognize that it is the job of the general manager, not the lawyer, to decide which allocation of resources and rewards makes the most business sense. Complying with the law is just the baseline for determining what course of action to follow. As Ben Heineman, former general counsel of General Electric, put it: “If the first question is, ‘What is legal?’ than the last should be ‘What is right?’” The Foreign Corrupt Practices Act, the Sarbanes-Oxley Act, and the calls for further regulation in the wake of the subprime mortgage crisis are just several examples of how society responds to ethical behavior.

Question 6

Issue Presented: How can managers responsibly help shape the legal environment in which they do business?

Managers can responsibly help shape the legal environment in which they do business by promoting economic growth, protecting workers, promoting consumer welfare, and promoting public welfare. They can also lobby for stricter laws that raise ethical standards rather than lower them. For example, rather than try to water down the U.S. ban on bribes, a group of firms created Transparency International and fought for international conventions to ban bribery. (This is discussed further in Chapter 2.)

Question 7

Issue Presented: Did the manager in this situation exemplify the four components of legal astuteness? If not, what could the manager have done differently?

The four components of legal astuteness are: (1) a set of value-laden attitudes about the importance of law to the firm’s success, (2) a proactive approach to regulation, (3) the ability to exercise informed judgment when managing the legal aspects of business, and (4) context-specific knowledge of the law and the appropriate use of legal tools. Legally astute managers recognize that compliance failures are what Max Bazerman and Michael Watkins call “predictable surprises” and constantly evaluate their products, processes, and business relationships to manage the risk of legal liability.

Question 8

Issue Presented: How could the managers in this case have avoided the litigation that ensued?

At its core, legal astuteness is the ability of the manager to communicate with counsel and to work together to solve complex problems. For example, legally astute managers can (1) negotiate contracts as complements to trust building and other relational governance techniques to define and strengthen relationships and reduce transaction costs, (2) protect and enhance the realizable value of the firm’s resources, (3) create options through contracts and other legal tools, and (4) convert regulatory constraints into opportunities. Court cases are akin to autopsy reports on transactions gone bad. When reading cases, students should be encouraged to ask how the managers involved could have avoided the dispute or resolved it without resort to litigation.

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