Thread: Managers and the Legal Environment: Strategies for the 21st Century

It is hard to imagine a time when law was more important to managers. The rapid growth of unregulated subprime mortgages and financial derivatives fueled a real estate bubble from 2001 through 2006, during which time executive compensation in the financial services companies soared. When the bubble burst in 2007, many executives of these companies walked away unscathed, leaving employees, stockholders, and taxpayers holding the bag. For example, Countrywide Financial Corporation CEO Angelo Mozilo sold almost $200 million of Countrywide stock while overseeing layoffs of more than 10,000 Countrywide employees and a loss of more than $20 billion in shareholder equity. The subsequent distress sale of Bear Stearns, the bankruptcy of Lehman Brothers, the government takeover of Fannie Mae and Freddie Mac, and the enactment of the Emergency Economic Stabilization Act of 2008, which gave the U.S. Treasury Secretary unprecedented discretion to spend $700 billion in federal funds to purchase troubled assets from financial institutions and to make capital investments in financial companies, led to calls for greater regulation of the financial markets and limits on executive compensation.
During this same time period, 200 public companies in a variety of industries were subject to SEC investigation or were required to restate earnings as a result of illicit stock option backdating. Top executives at companies, ranging from Comverse Technology and Monster Worldwide to Broadcom, have been criminally prosecuted for their activities related to option backdating.
In 2007 and 2008, a record number of recalls of defective products, ranging from lead-tainted toys to unsafe drugs, shook consumer confidence and prompted the most dramatic changes in U.S. consumer protection law since the creation of the Consumer Product Safety Commission in 1972. Meanwhile, the states have enacted a flurry of laws designed to protect their citizens from cyber attacks, invasions of privacy, and identity theft.
Clearly, no business curriculum today would be complete without an overview of the legal environment in which business takes place. Yet, staying out of trouble is only part of the picture. Law not only regulates, it also enables and facilitates.1 From the outset, Managers and the Legal Environment: Strategies for the 21st Century has sought to reframe the relationship of law to business by addressing topics not traditionally covered, such as strategies for capturing the value of human capital and corporate governance. Rather than viewing law and ethics purely as constraints to be complied with and reacted to, we focus on the ability of legally astute managers to practice strategic compliance management and to pursue opportunities to use the law and legal tools to increase both the total value created and the share of that value captured by the firm.2 A key objective of the sixth edition of Managers and the Legal Environment: Strategies for the 21st Century, co-authored by Constance E. Bagley from the Yale School of Management and Diane W. Savage from the Stanford Graduate School of Business and the law firm of Cooley Godward Kronish LLP, is to help future managers develop this managerial capability of legal astuteness. To achieve legal astuteness, managers must learn to bridge the communications gaps that can occur when they work with attorneys. They need to develop a common language. Managers and the Legal Environment: Strategies for the 21st Century will help future managers develop legal literacy and an appreciation of the role of law in the effective and ethical management of their businesses.
As its title implies, the text is designed as a “hands-on,” transactional guide for future and current business managers and leaders, including entrepreneurs. It provides a broad and detailed understanding of how law impacts daily management decisions and business strategies and offers tools that managers can use to manage more effectively. The text also highlights traps for the unwary so managers can both spot legal issues before they become legal problems and effectively handle the inevitable legal disputes that will arise in the course of doing business. No manager operating in the complex and ever-changing global business environment of the early twenty-first century can compete successfully without such knowledge.
The text tightly integrates the treatment of law and management and helps students develop the ability to exercise informed judgment when managing the legal dimensions of business. Law is not presented in a vacuum. Instead, its Pedagogical Features Each chapter of Managers and the Legal Environment: Strategies for the 21st Century employs a wide array of effective teaching devices that reinforce the goals of the text.
CONCEPTUAL FRAMEWORKS The sixth edition presents several conceptual frameworks to help students better understand the intersection of law, management, and ethics. Exhibit 1.1 presents the systems approach to business and society. The model explains how public law and societal expectations affect a firm’s competitive environment and the value and uniqueness of its resources and capabilities. It also shows how firm action prompts changes in the public rules and how managers can use the law and the tools it offers to pursue opportunity and capture value while managing the attendant risks. Exhibit 1.2 shows how the law affects each activity in the value chain.
Based on Professor Bagley’s analysis of literally thousands of cases, statutes, and regulations, she has created a typology of the underlying rationales of the U.S. public law governing businesses, which is presented in Exhibits 1.3 through 1.7. As Chapter 1 points out, other countries tend to have laws that further many of these same objectives, albeit with varying degrees of emphasis on the different objectives and varying ways of furthering them.
Exhibit 1.8 summarizes a variety of legal tools available during various stages of business development (ranging from evaluating the opportunity and defining the value proposition to harvest) to further the managerial objectives of creating realizable value and managing risk. By mapping legal tools against these key managerial objectives, Exhibit 1.8 seeks to frame the legal aspects of management in terms more readily accessible to students of business. Exhibit 2.1 presents the Ethical Business Leader’s Decision Tree,3 which is a tool that managers and their counsel can use to evaluate the legal and ethical aspects of their strategy and its implementation. The In Brief in Chapter 21 presents a decision tree for understanding how the business judgment rule is applied to board decisions.
A CASE IN POINT Each chapter presents two to six cases, set off from the body of the text, as examples of business law in action. These cases represent crucial court decisions that have shaped important business law concepts or present key legal conflicts that managers will address in their careers. Included are many 3. This first appeared in Constance E. Bagley, The Ethical Leader’s Decision Tree, 81 Harv. Bus. Rev. 18 (Feb. 2003).
relevance to management is made explicit at the beginning of every chapter. Court cases are chosen for their managerial relevance. Each chapter ends not with a summary of black-letter law but with a discussion of ways managers can use the laws and legal tools discussed in the chapter to create value, marshal resources, and manage risk.
The text provides practical examples of how managers can use the law strategically and tactically to craft solutions that make it possible to attain the core business objectives without incurring undue legal risk or forgoing the capture of value. For example, the chapter on intellectual property explains how firms can use copyrights, patents, and trade-secret protection to capture the value of the intellectual capital they create.