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Business Ethics and Government Regulations

Abstract

This paper describes why businesses must be regulated by the government and provides examples of governmental regulations to ensure ethical practices on the part of companies functioning to achieve profit maximization.

Businesses are not charities set up to produce goods to be distributed freely or to provide services for free.  Rather, maximization of profits is the goal of all producers.  In point of fact, for-profit businesses are only established to make profits.  Depending on the moralities of their owners and managers, they may or may not believe in the need to behave ethically.  Unfortunately, many for-profit businesses around the globe are known to engage in unethical practices, which is the reason why the government must step in to regulate markets and the practices of various business ventures when it is believed that doing so would be of benefit to society.

As an example of government regulation for the corporation that may or may not believe in the importance of ethics in business, the Sarbanes-Oxley Corporate Reform statute was passed by the United States Congress in the year 2002 before the midterm elections, the principal goal of the Act being to rebuild investor confidence and to protect capital markets at a time when

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huge corporate governance debacles plagued America.

The front page headlines around the nation were reading that firms such as Worldcom, Enron, Global Crossing and Arthur Anderson had failed to meet their investors’ expectations of straightforward transparency in financial affairs.  The Sarbanes-Oxley Act specifically empowered the Securities Exchange Commission, IRS, and the Public Company Accounting Oversight Board to handle the problem (“The Sarbanes-Oxley Act and Implications for Nonprofit Organizations,” 2009).

To counter fraudulent accounting practices and executives’ self-dealing transactions the dramatic likes of which were discovered in the cases of Enron and Worldcom, the Sarbanes-Oxley Act was a necessary step taken by the government.  In order to increase the accurateness as well as reliability of auditing practices, accounting, and corporate reporting, one of the provisions of the Act is for financial reports to be certified by chief executive officers and chief financial officers of the corporation.  In other words, the law holds chief executive officers and chief financial officers directly accountable for mismanagement in financial matters.

The validity of a company’s financial statements is the responsibility of these chiefs.  In effect, the Act makes them legally accountable for their firm’s financial practices.  This means that there are no grounds any longer for excuse-making or claiming ignorance when disaster strikes, as in the circumstances of Enron and Worldcom that entered bankruptcy proceedings (“The Sarbanes-Oxley Act and Implications for Nonprofit Organizations”).  What is more, for organizations that are determined about fair dealing to begin with, the Act is a blessing for it allows the chiefs to check managerial fraud better than before.

The anti-trust case of the government against Microsoft is another illustration of how the regulation attempts to control the power of the big corporation.  The United States Justice Department had presented an antitrust case against Microsoft with the argument that the company had used “its near monopoly position in the operating system market” in order to “gain an unfair advantage in the browser market” (“Microsoft: Is the Company Too Big,” 2000).

In a perfectly competitive market there are many firms supplying a good or service.  A monopoly, on the other hand, is the only firm in a certain market.  The market price in the industry is determined by the supply and demand for the product or service in question.  As the market supply is decreased, the price of the product must increase.  Hence, a monopoly is in a perfect position to decrease supply and thereby increase the price that it charges for the product or service that it supplies.

Since it has no competitors, there is no compulsion to decrease the price in order to beat competition.  All the same, the monopolist faces a loss because now there are fewer buyers for its products or services, given that the price has increased.  So as to offset the decrease in profits, the monopolist would decide on a price that is higher than its marginal cost.  If the marginal cost is represented by the supply curve, the monopolist would decide to produce a quantity that is less than the quantity at the intersection of the demand and supply curves, that is, the quantity produced in a state of perfect competition (“Microsoft”).

According to economists, the Dead Weight Loss of a monopoly must be borne by the entire economy seeing as the monopoly is charging a price that is higher than the price at the intersection of the demand and supply curves in a state of perfect competition, and also producing a quantity that is lower than the quantity produced in a state of perfect competition.  The monopolist may decide to continue increasing the price by reducing the quantity that it supplies, and thereby increase the Dead Weight Loss to society (“Microsoft”).

This is exactly why the U.S. Justice Department or the EU anti-trust chief must intervene to put an end to monopolistic practices or market failure in favor of pure or perfect competition.  In other words, the government must represent societal interests when it regulates governments thus.

As anticipated, the government is also responsible for introducing regulations to answer environmental concerns on behalf of the people that elect it.  As an example, the predicted, disastrous effects of global warming demand of the beverage industry to recycle its plastic bottles instead of producing disposable bottles that are eventually dumped to turn into contributors to further warming of the world.

Thus, the beverage industry is facing a change in its marketing environment.  The change requires a response, which Coca-Cola Co., with a commanding market share in the nonalcoholic beverage industry, has already made by means of its new strategic plan.  This plan requires the company to create a new actual product, that is, Coca-Cola in recycled bottles (McKay, 2007, p. B1).

Indeed, the market environment of Coca-Cola products has changed with reference to social and regulatory forces.  The dramatic effects of global warming are making consumers wary of harmful practices with respect to the global environment.  Thanks to the media, countless people are now aware that recycled plastic bottles are more environmentally friendly than dumped bottles.  Hence, Coca-Cola has to engage in social marketing, keeping in view that it would be able to maintain and increase the number of its consumers with ethical and socially responsible behavior.

In fact, both Coca-Cola and rival, PepsiCo Inc., have decided that they would be supporting environmental stewardship by recycling their plastic bottles.  What is more, new regulations may soon require the beverage industry to boost its recycling efforts while reducing the number of plastic bottles that are simply wasted (McKay, p. B1).  After all, there may be firms in the beverage industry that would not be willing to take responsibility for ethical production practices with reference to the environment in the absence of regulation.

On a similar note, the United States government has developed a strategy to enforce regulations on Chinese businesses selling food products or drugs to customers in the United States.  Consumers in the U.S. have recently dealt with health-related threats owing to international sales and marketing, for example, “contaminated blood thinners manufactured in China and salmonella-tainted peppers imported from Mexico” (“FDA to Open Inspection Office in China This Year,” 2008).

It is for this reason that the Food and Drug Administration of the United States also wants to institute its safety laws for foods and medical products sold to the U.S. consumer by the Indian, the Latin American, and the Middle Eastern organization. Products sold by the developing countries are of particular concern (“FDA to Open Inspection Office”).  In these poor nations, businesses may not consider ethics as they seek to increase their revenues, and there may be weak or no governmental checks on the quality of products.  From the viewpoint of the FDA, however, the U.S. consumer is the biggest stakeholder as far as international marketing and sales of foods and medical products are concerned.

Seeing that markets in the United States are among the biggest in the world for goods produced in developing countries, it is in the best interest of the Chinese organization to allow the Food and Drug Administration of the United States to assure that its foods and medical products are safe for the U.S. consumer.  As a matter of fact, this is the best business strategy for the Chinese organization to adopt, given the fact that the growth of its business is intimately linked to the U.S. consumer at this point in time.

By refusing to allow the FDA to check on its foods and medical products before they reach the United States, the Chinese organization would only lose in terms of international sales revenue.  The Food and Drug Administration acknowledges the fact that it would be virtually impossible to check on every food and medical product that is brought from a developing country to the United States (“FDA to Open Inspection Office”).

Hence, a superior business strategy would be for the Chinese organization to contact the FDA on its own so as to verify that its products meet U.S. standards.  In fact, any organization in the developing world that wishes to continue conducting business in the U.S. market should adopt this business strategy – at least as far as food and medical products are concerned.

It is unfortunate but true that countless businesses around the world would like to make profits even if it means that they must do so at the expense of the consumer.  Seeing that consumer satisfaction is a necessary condition for a successful business deal, organizations around the world must become conscientious enough to produce and sell goods that meet quality standards consonant with the price they charge for their products.  If all that an organization cares about is increasing its revenues, it may turn a blind eye to consumer satisfaction.

In this case, the organization should expect failure in the long run.  Fortunately, however, the government is aware that organizational failures accompany economic downturns.  Organizations must be saved from suicidal, unethical behavior patterns through regulations.  Hence, the government ensures that the organization neither unlawfully harms its employees through discrimination nor its customers through poor production practices.

After all, employees, too, are essential stakeholders of a business.  The protection provided to them with ADA and other statutes against unethical behavior in the workplace must be considered necessary.  In fact, all governmental regulations are necessary for ethical business practices given that all proprietors and managers of corporations may or may not have the best interests of society at heart, as does the government.

References

FDA to Open Inspection Office in China This Year. (2008, Oct 16). USA Today. Retrieved Mar

8, 2009, from http://www.usatoday.com/money/industries/food/2008-10-16-FDA-

china_N.htm.

McKay, B. (2007, Aug 30). Message in the Drink Bottle: Recycle. The Wall Street Journal, p.

B1.

Microsoft: Is The Company Too Big? (2000). Retrieved Mar 8, 2009, from

http://www.humboldt.edu/~ee3/econ104/topics/monopoly.

The Sarbanes-Oxley Act and Implications for Nonprofit Organizations. (2009). GuideStar.

Retrieved Mar 8, 2009, from http://www.guidestar.org/DisplayArticle.do?articleId=883.

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