Management 320 Lecture Notes PDF

1 Management 320: Lecture Notes Oct 31, 2024 Ethics - At the 2007 Tour de France, multiple cyclists were accused of taking performance-enhancing drugs and were dismissed from the race. - In 2014, multiple teachers and principals in Atlanta were arrested for h...

1 Management 320: Lecture Notes Oct 31, 2024 Ethics - At the 2007 Tour de France, multiple cyclists were accused of taking performance-enhancing drugs and were dismissed from the race. - In 2014, multiple teachers and principals in Atlanta were arrested for helping students cheat on tests. - In 2022, Ernst & Young paid $100 million for its employees cheating on the CPA Ethics Exam. - In 2023, U.S. Congressman George Santos was accused of lying about his education and employment history. In addition, he was found guilty of stealing campaign money for personal spending. - Ethics refers to the concept of right and wrong conduct. - Business ethics is the application of ethical principles to business behavior. - There are two theories about how businesses should approach ethics: the theory of amorality and the theory of moral unity. 1. The theory of amorality argues that businesses should be conducted without reference to the full range of ethical standards, restraints, and ideals in society. - With the conventionalist ethic, businesses can operate with morally gray behavior if they do not break the law. - Business is a game where lower ethics are permissible. - U.S. Section 230 protects social media platforms from being held liable for user-generated content, even defamation. - In 2018, Section 230 was amended to create an exception for the exploitation of children. - If businesses operate with this theory, they should be mindful that the public will retaliate. 2. The theory of moral unity holds that businesses must follow the same ethical considerations that apply throughout society. - Ethical relativism argues that ethical rules are not fixed and are dependent on time, place, and other considerations (when in Rome, do as the Romans do). - If companies with supply chains in foreign countries simply do what is legal there, there might be backlash domestically. - In 1996, a magazine published a picture of a 12-year-old Pakistani boy sewing a Nike football. - Due to public outrage, Nike apologized for using child labor and began auditing its factories for occupational health and safety. - Why should businesses behave ethically? 1. To enhance performance - Since reputation provides a competitive advantage, behaving ethically increases performance. - The financial cost of reputational damage usually exceeds the cost of fines. - In 2015, Volkswagen admitted that it equipped certain diesel models with defeat devices that allowed the vehicles to cheat emission tests. - To advertise the models, Volkswagen launched the “Clean Diesel” campaign to counteract the stigma that conscious consumers have against diesel engines. - Volkswagen agreed to purchase vehicles for their pre-scandal value or terminate their leases without penalty. By 2020, the scandal cost the company $35 billion globally. 2. To comply with legal requirements  2 - The U.S. Corporate Sentencing Guidelines determine how companies should be sentenced for federal felonies or class A misdemeanors. - To compute a culpability score, a judge measures a company’s proficiency in seven factors: 1. Established standards and procedures to reduce criminal conduct 2. Assigned high-level officers responsibility for compliance 3. Not assigned discretionary authority to “risky” individuals 4. Effectively communicated standards and procedures through training 5. Taken reasonable steps to ensure compliance—monitor and audit systems, maintain and publicize reporting system 6. Enforced standards and procedures through disciplinary mechanisms 7. Following detection of the offense, responded appropriately and prevented reoccurrence 3. To minimize harm 4. To meet the demands of stakeholders - Customers are market stakeholders who usually prefer to do business with ethical companies. 5. To promote personal morality - Kohlberg’s stages of moral development: 1. To avoid punishment 2. To satisfy self-centered needs and create a positive external response 3. To conform to group interest 4. To accept legal restrictions that are in the best interest of society 5. To understand legal restrictions should be balanced with the individual rights of society 6. To derive personal satisfaction from being an ethical person - Why do ethical problems occur in business? 1. Personal gain and selfish interest - People behave in their own self-interest, sometimes at the expense of other entities to which they owe a greater legal obligation. Greed comprises our ethics. The MBA Oath: “I will manage my enterprise with loyalty and care, and will not advance my personal interests at the expense of my enterprise or society.” - When properly harnessed, self-interest is the engine of individual and collective success. But left unchecked, it can be dangerous. - In 2013, Microsoft senior manager Brian Jorgenson was found guilty of insider training. - When Jorgenson became privy to Microsoft investing in Barnes & Noble, he notified a friend to invest in B&N stock. Nov 5, 2024 2. Culture - Whether it is the culture of a country, business, or community, culture affects how people behave. - New York City hosts the United States Nations. Certain foreign diplomats were more likely to accumulate parking violations. - Of Wall Street high earners, one in 10 have felt pressure to “compromise ethical standards.” - The danger is twofold: 1. The first group of people are crossing lines.  3 2. The second group of people see the first group crossing lines, assuming that they should follow to keep up. To rationalize ethical conduct, they use the first group as a benchmark and do not consider the standard. - People usually take cues from the people around them. If someone sees people around them cheating, they are more likely to cheat. - In 2016, 5,300 Wells Fargo employees were fired for opening millions of unauthorized deposit accounts to qualify for bonuses. - A clawback provision facilitates that money paid out to an employee be returned to the employer. 3. Competitive pressure - When companies are squeezed for profit, they sometimes engage in unethical behavior. - Firms in first-world countries sometimes subcontract with firms in developing economies. To obtain the contract, subcontractors might use child labor and unsafe working conditions. 4. Conflicts of interest - Conflicts of interest occur when an individual is incentivized to compromise their objectivity in regard to another party. - In 2008, two judges were found guilty of receiving judicial kickbacks in return for imposing harsh adjudications on juveniles to increase occupancy at a for-profit prison. - For people with blocked coronary arteries, they can decide between drugs, bypass surgery, or angioplasties. In 2006, it was discovered that patients in Elyria were four times more likely to receive angioplasties. Out of all options, angioplasties were the most profitable. - Some accounting firms audit companies that they also consult for, which compromises their objectivity (Deloitte and PwC). - When you trust another individual to make decisions that involve your money, you encounter certain risks. - The fiduciary rule requires financial advisors to behave in their clients’ best interests. It is a part of the Employee Retirement Income Security Act (ERISA) of 1974, which protects the interests of employees in retirement and healthcare plans. - Under the rule, advisors should give advice that is prudent and avoid misleading statements about conflicts of interests. - In contrast to the fiduciary rule, the suitability rule simply requires financial advisors to make recommendations that are suitable for their clients. 5. Cross-cultural contradictions - When managers and firms are unaware of cultural differences, unethical behavior can occur. - In the 1994 World Cup, Heineken printed flags of countries on beer bottles, which included the Saudi Arabian flag. Since the Quran forbids alcohol, Muslims complained. Nov 7, 2024 6. Rationalization - Ethical failures can be justified with rationalization. - “The end justifies the means.” - White-collar crime is non-violent financial crimes and includes public corruption, healthcare fraud, mortgage fraud, and money laundering. - In comparison to blue-collar criminals, white-collar criminals are removed from victims.  4 - For most white-collar crimes, the victim is amorphous. - When tempted, people are willing to be dishonest, regardless of risks. - The more time you spend considering if your actions are honest or not, the greater the chance you will rationalize the dishonest conduct. - The ethical tone of a business is usually set by management. When management is ethical, employees are more likely to also be ethical. - Uber: “Don’t ask for permission, ask for forgiveness.” - When it was a start-up company, Uber was subjected to the same regulations that taxi drivers did. It branded itself as a technology company. - Facebook’s early culture: “Move fast and break things.” - In the infancy phase, most companies focus on economic efficiency (egoism). - As companies grow, they usually become more benevolent. 1. Through compliance-based programs, companies can evade legal sanctions through detection and discipline. 2. Integrity-based programs combine a concern for laws and regulations with personal integrity. - The UW Test: 1. Identify the important facts and ethical issues (what is going on here?). 2. Who are the key stakeholders, and how will they be affected? How do things subjectively appear from their perspectives? 3. What are the utilitarian trade-offs among the affected parties (who are the winners and losers?). 4. Articulate how different moral principles apply and recognize how various justice and fairness models might yield different results. 5. Recognize and articulate personal biases that can influence your evaluation (conflicts of interest). - Ethics models can be classified as duty-based (deontological) or result-oriented (consequentialist). 1. In duty-based models, pre-existing rules guide you to determining what is ethical. - The strengths of duty-based models are a strong foundation for which to guide people. - The weaknesses are that they can be difficult to consistently apply. - The Ten Commandments are a set of rules for how followers of God should behave in Judaism, Christianity, and Islam. - The Golden Rule: “Do unto others as you would have them do unto you.” The issue with the rule is that people do not practice what they preach. - Strategic defaults refer to when a homeowner stops making payments on their mortgage. When a homeowner is underwater, they owe more than their house’s current value. - This decision is not because the homeowner cannot afford it. It is just financially smarter to walk away. - The consequences of strategic defaults: 1. Foreclosures depress neighborhoods and drive down prices. 2. A default can debase the character of the debtor. - Immanuel Kant’s categorical imperative is the rule of conduct that any ethical principles should apply both universally and conditionally. - “If I were to do this, how would the world change if everyone did this?” Categorical imperative: “Act only according to that maxim whereby you can at the same time will that it should become a universal law.” - In business, virtue ethics can distract from earning profits and put emphasis on other qualities.  5 1. Honesty and truthfulness 2. Generosity and charity 3. Humility and modesty 4. Justice (what is right and wrong) 5. Prudence (to be cautious) 6. Courage (the ability to stand up for what is right) 7. Trust (to honor one’s word) 2. To determine what is ethical, result-oriented models focus on the consequences. - Jeremy Bentham and John Stuart Mill developed utilitarianism, in which the right thing to do is what provides the greatest good to the greatest number of people. - In modern businesses, utilitarianism has become cost–benefit analysis (CBA). - The Ford Pinto was a subcompact car manufactured in the 1970s that burst into flames in rear-end collisions. - For Ford, the cost to recall and repair vehicles was a total of $137 million (cost). - Ford could also silently settle lawsuits and pay about $49.5 million (benefit). - With CBA, Ford did not recall the Pinto. - In 2001, Philip Morris International used CBA to propose to the Czech government that smoking was beneficial to their economy. - Since smokers have shorter lifespans, there would be less state-provided care for the elderly. - With utilitarianism, people could justify the violation of basic human rights for the greater good. - During WWII, the United States relocated and incarcerated Japanese Americans for the apparent greater good of White Americans. - Managers use CBA to compare the short-term and long-term consequences of their decisions. - The issue with utilitarianism is that you usually do not know what the consequences of a decision will be. - To properly use utilitarianism, you should: 1. Identify who will be affected 2. Assess the positive and negative impact on these people with CBA 3. Decide to pursue the greatest good for the greatest number of people - The rights model is duty-based and supports the right to life, safety, free speech, property, and due process. - With the Americans with Disabilities Act (ADA) of 1990, businesses should make reasonable accommodations for disabled workers. - As a country, we have not fully answered what will happen when two rights clash. - In 2018, the Supreme Court upheld a bakery owner’s right to exercise their religion and refuse to bake a cake for a same-sex couple (Masterpiece Cakeshop v. Colorado Civil Rights Commission). - There are three justice models. 1. Procedural justice is duty-based and not concerned with the end result. If we follow pre-existing rules, the result is just. 2. Distributive justice is a form of consequentialism, which focuses on how fair the end results are. - During the first round of COVID-19 vaccines, the government had to decide who to distribute the first couple thousand doses to.  6 - Treating people equally might not necessarily be equitable. - In 2015, the poorest fifth of Americans paid 10.9% of their income on state and local taxes. - The middle fifth of Americans paid 9.4% of their income, and the top 1% paid just 5.4%. - Lower-income people pay a higher percentage of their earnings in taxes than people with higher incomes. - John Rawls’ theory of justice is that a person can only make a fair decision about distributive justice if they have no stake in the outcome. - The veil of ignorance refers to a thought experiment where people choose principles of justice without being aware of their own social position. 3. Compensatory justice is the provision of resources to those who have been wronged in the past with the goal of minimizing these wrongs. - In tort law, compensatory damages should be equivalent to the loss that a party suffered. - Comparative negligence is a legal principle that reduces the amount of damages a plaintiff can recover in a negligence-based claim. - In Washington State, if a party is partially at fault, their compensation will be reduced by their percentage of fault (e.g., a jaywalker hit by a car). - In Florida, for a plaintiff to earn compensation, the defendant must be more than 50% at fault. - In contract law, compensatory damages should cover the direct losses incurred by the injured party. - Affirmative action refers to a set of policies that remedy the impact of discrimination against marginalized groups in the United States. - In 2023, the Supreme Court reversed affirmative action policies in higher education. - The disclosure rule is efficient in curbing conflicts of interest. - To limit bribery, doctors and pharmaceutical companies must disclose their exchanges of money. - Through the Dollars for Docs database, we can determine how much money doctors receive from pharmaceutical companies. - Moral intensity is the degree to which a person perceives the significance of an ethical issue. - The factors that affect how people prioritize moral issues: 1. The magnitude of consequences 2. Proximity 3. Social consensus 4. The likelihood of consequences 5. Temporal immediacy  7 - Root cause analysis is a problem-solving technique that identifies the underlying cause of a problem and develops a solution to address it (five whys). - In 2005, people began to connect football and chronic traumatic encephalopathy, a degenerative brain disease from repeated head injuries. - Identifying that the kickoff caused the most injuries, the NFL reduced the number of high-impact collisions in kickoffs. Nov 19, 2024 Sustainability - For human society to prosper over time, it must operate sustainably and not deplete natural resources. - Sustainability asserts the importance of meeting the needs of the present without compromising the ability of future generations to meet their own needs. - Sustainability is about fairness between: 1. The current benefits and costs from our use of natural resources across various countries 2. The current benefits and costs from our use of natural resources across generations - The tragedy of the commons refers to when people behave in their own self-interest and overexploit shared resources. - If everyone attempts to maximize their resources in the short term, the commons will be depleted, and all present and future users will lose. - In Seattle’s Ballard Locks, we will all lose if we overfish salmon and threaten their populations. - To address the tragedy of the commons, we all must exercise restraint. - Developed countries (the United States, Western Europe, Japan) account for only 12% of the world’s population but 50% of total carbon dioxide emissions. - In 2021, Seattle experienced the Heat Dome, a record-breaking heat wave that reached temperatures of 108°F. - The heat wave hindered the growth of oysters, increasing their prices. - As a rich country, the U.S. uses a disproportionate amount of energy. - Climate refugees are people who are displaced from their home countries due to climate change. - Most climate refugees come from developing countries like Honduras, Guatemala, and Somalia. - Climate change also affects productivity. As the temperature increases, human productivity decreases. - To combat climate change, we have had some success. 1. To repair the ozone layer, we successfully limited the use of Chlorofluorocarbon chemicals. 2. In 1995, the United States banned leaded gasoline. - Lead poisoning is extremely harmful to society, causing brain damage and lowered IQ. 3. In 2007, Congress passed legislation that required the U.S. to transition to energy-efficient lights. - Some Americans protested against the government regulating what light bulbs they can use. - The Anthropocene is a proposed geological era where human activity significantly affects the Earth’s environment and ecosystems. - In the world’s population, there has been an unequal distribution of growth. - Developed countries have experienced static population growth (the United States and Japan). - In developing countries, population growth continues to increase. - Poorer people in developing countries contribute to climate change through coal and wood fires. - In King County, we have a world-class waste management system. Developing countries cannot afford these systems.  8 - The U.S. did not recognize the consequences of industrialization until the late 1960s and early 1970s. - In 1969, the Cuyahoga River in Ohio caught on fire and sparked an environmental revolution. - The carrying capacity is the maximum population size that can be sustained in a given environment. - On a global scale, ecological footprint measures how much of the environment is required to support the world’s population. - In 2024, humanity’s ecological footprint exceeded the Earth’s biocapacity by about 75%. - Two common environmental issues are declines in biodiversity and threats to marine ecosystems. - In Australia, there are tensions between the coal industry and the tourism sector, which is threatened by the environmental impact of burning coal. - KPMG instructs clients that sustainable business practices are beneficial because: 1. They can improve the bottom line. 2. They are moral. 3. Without them, the planet will be irreparably harmed. - The triple bottom line measures a company’s performance in three areas: people, planet, and profit. 1. Social results (people) 2. Environmental results (planet) 3. Financial results (profit) Upside Revenue Intangibles Production innovation Product differentiation Increased market share Customer loyalty More Higher prices Talent attraction and retention Less certain Costs Risks certain Eco-efficiency Supply chain reliability Asset efficiency Lower vitality in input prices Insurance costs Business continuity and resilience Downside Nov 21, 2024 - Life-cycle analysis involves collecting information on a product’s environmental impact, from the extraction of raw materials to disposal (cradle to grave). - With extended producer responsibility, companies are responsible for the environmental impact of their sold products and services (cradle to cradle). - If businesses are responsible for the impact of their products, they will manufacture products that can be efficiently disposed of. - The European Union was the first to implement extended producer responsibility legislation, and the United States followed suit. - As we assess how businesses become more sustainable, we should consider how they might game the system. - Greenwashing is a deceptive practice where companies mislead consumers about their sustainability. - Companies might use labels like “green” and “eco-friendly” but provide no evidence. - In 2022, the Sydney Opera House banned single-use plastic straws. - In the United States, environmental regulations began in the late 1960s and early 1970s.  9 - The Natural Environmental Political Act (NEPA) imposed environmental responsibility on all levels of the federal government in 1969. - With NEPA, the government required environmental impact statements (EIS) to determine the positive and negative environmental effects of programs (e.g., roads and dams). - EIS are an example of cost–benefit analysis (CBA). - Founded in 1970, the Environmental Protection Agency (EPA) uses four points to evaluate risks. 1. Hazard assessment estimates the links between a substance and human disease. 2. Dose-response assessment estimates how toxic a substance is to humans. 3. Exposure assessment examines how much of a substance humans absorb. 4. Risk characterization concludes how dangerous a substance is. Risk management (HTED): 1. Is a substance harmful to people? 2. How toxic is the substance? 3. How are people exposed to the substance? 4. How dangerous is the substance? - With CBA, the costs of regulations are $34 to $39 billion. The benefits are $38 to $132 billion. The spectrum of available policy options Command and Flexible Market incentives Required Voluntary control regulations enforcement disclosure compliance Most strict Least strict - Command and control regulations impose standardized rules that apply to all industries. - The issue is that not all industries are the same, so regulations should not be standardized. - Market incentives encourage businesses to improve their environmental performance. - Cap-and-trade systems set a cap on greenhouse gas emissions, allowing businesses to exchange emission allowances (the right to pollute). - The government can impose taxes on businesses to encourage them to become more sustainable. - Individual fishing quotas refer to “maximum shares” on fishing, limiting self-interest and the tragedy of the commons. - Similar to cap-and-trade systems, fishermen can buy and sell shares. Through these systems, the government evades the tragedy of the commons. Globalization - Globalization is the process of international trade and financial flows integrating the world economy. - According to columnist Tom Friedman, there are three stages of globalization. 1. Commerce 1.0: Countries are globalizing (1492–early 1800s) 2. Commerce 2.0: Companies are globalizing (early 1800s–2000) 3. Commerce 3.0: Individuals and small groups are globalizing (2000–present) - Businesspeople must consider the major types of political and economic systems that they operate in. - In particular, they must consider geopolitical risks. - If businesses operate overseas, they need to respect the laws and customs of these countries. - Commodity futures prices are what people agree to pay now for a good that will be delivered later. - Greater risk and uncertainty cause future prices to be more expensive. - When Russia invaded Ukraine in 2022, the cost of bread spiked.  10 - In response to the election of Donald Trump, companies are importing more goods from China ahead of any possible tariffs. - Free press is the press’ ability to investigate and publish articles about public officials. - In 2018, Stormy Daniels claimed that she had sexual relations with Donald Trump, who was married at the time. - In 2012, the New York Times (NYT) investigated how the families of high-ranking members of the Chinese Communist Party were exceedingly wealthy. - China blocked web access to NYT. - While the United States champions free press, more restrictive countries censor the media. - In recent years, there have been five trends that impede globalization. 1. COVID-19 2. Russian invasion of Ukraine 3. Friendshoring: Countries sourcing from their geopolitical allies 4. Climate change: Disrupting supply chains and affecting the cost of moving goods 5. Trump’s trade wars - For decades, the U.S. has worked to make Free Trade Agreements (FTAs). - With FTAs, the U.S. can receive the best imports with the best possible prices. - Historically, Democrats and Republicans have both been in favor of free trade and opposed tariffs. - Tariffs are taxes on foreign goods. - Comparative advantage is countries specializing in what they produce most efficiently, relative to what they also produce. - “Given our country’s resources, what do we produce most efficiently?” - “What products can we produce more efficiently, relative to the costs of other countries that produce the same products?” - In a free trade system, goods and services are produced most efficiently when the prices of materials and labor are the lowest. - Using a utilitarian approach, free trade is favorable. It provides the greatest good for the greatest number of people. - Consumers usually favor competition and free trade, since they contribute to lower prices. - The benefits of free trade are diffuse, while the costs are highly focused and acute. - When Americans lose their jobs to foreign labor, it is catastrophic. - Free trade can also cause countries to lose entire industries. - The U.S. government has yet to compensate Americans who have lost their jobs to free trade. Nov 26, 2024 - The three purposes of tariffs: 1. Protect domestic industries and jobs from less costly foreign competition 2. Punish foreign producers when their governments subsidize them to sell goods below the price of production (anti-dumping tariffs) - While the intention of anti-dumping tariffs is to protect domestic jobs, they can also raise the cost of goods. 3. Offset foreign government subsidies to protect domestic industries (countervailing tariffs) - Import quotas are trade restrictions that limit the amount of products that are imported into a country in a given year.  11 - The U.S. has quotas that limit the amount of textiles that can be imported. If not, cheaper textiles from developing countries would phase out domestic production. - When gas prices doubled in the late 1970s, U.S. demand for fuel-efficient Japanese cars increased. In response, the U.S. imposed a 1.68 million quota on Japanese cars. - As a result, the cost of Japanese cars in the U.S. increased by at least $1,000. - The three sectors of international relations: 1. State actors (governments) 2. Private-sector actors (businesses) 3. Civil society (educational institutions, charitable organizations, NGOs) - The challenges of multinational corporations (MNCs): 1. The lack of predictability - There are higher costs associated with business operations in unstable countries. - In 2016, businesses did not expect the United Kingdom to exit the European Union (Brexit). 2. The lack of independent judiciary - For U.S. businesses, legal contracts are always enforceable domestically. - In other countries, the judicial system might be less fair to international businesses. 3. Corruption - Under the Foreign Corrupt Practices Act (FCPA) of 1977, it is illegal for U.S. companies to bribe foreign officials. - The FCPA applies to the agents of U.S. businesses, even if they are not from the states. - In other countries, bribes are more acceptable. Low-wage countries are more open to bribery. - In Mexico, a Walmart agent bribed zoning officials to build stores near cultural landmarks. In response, the U.S. government fined the company $282 million. - The FCPA does not cover bribes to private-sector actors and individuals. 4. The domestic country’s laws - The European Union’s strict data privacy and security laws have caused issues for American technology companies, like Google and Facebook. 5. Business capital - Foreign countries might have: 1. High tax rates 2. Poorly trained workforce 3. Inadequate infrastructure 6. The environment 7. Forced technology transfers - Forced technology transfers (FTTs) refer to when a government requires foreign businesses to share their technology in exchange for market access. - Historically, China has imposed FTTs on American companies. - In response, the U.S. government has imposed tariffs on Chinese goods. - Some American companies, like PACCAR, limit manufacturing operations in China to avoid FTTs. - From the perspective of developing countries, there are pros and cons of international relations. - The pros of international relations: 1. Employment 2. Fair share of profits  12 3. Educated workforce 4. Protection of the environment 5. Social and political stability - The cons of international relations: 1. Destruction of the environment 2. Political interference - In foreign countries, MNCs can interfere with the legal system to impose legislation in their favor. 3. Exploitation of local regulations - The Rana Plaza collapse occurred in 2013, when an eight-story building collapsed and killed over 1,100 garment workers. - In the building, the workers were producing garments for multiple American companies. Shareholders - Corporate governance refers to how businesses run, their relationships with stakeholders, and how they are conducted. - In the aftermath of multiple financial scandals, the U.S. government implemented legislation to protect investors. - Fiduciary refers to trust between two parties. If you have a fiduciary obligation to another party, you need to operate in that party’s best interest. - The board of directors (BOD) and management of a corporation have a fiduciary obligation to their shareholders. - Certified public accountants (CPAs) should not entirely trust the board of directors to operate in good faith (Trust, but verify). - Corporate government has two purposes: 1. Provide reasonable protections for shareholders 2. Organize the rights and responsibilities of those who manage a corporation - In all public corporations (C corps), the BOD and management should operate in the best interest of their shareholders. - The government set up the U.S. Securities and Exchange Commission (SEC) in the aftermath of the Wall Street Crash of 1929. - The Department of Justice (DOJ) is the only government agency that can bring criminal charges that can result in jail time. - However, the SEC can bring civil charges to corporations, possibly including monetary damages or civil penalties. - The SEC can bring civil charges against corporations and corporate officers if they: 1. Make materially false or misleading statements to shareholders (Rule 10b-5) 2. Engage in insider trading - Since 2000, there have been two financial crises: the dot-com boom and the 2007 financial crisis. 1. In 2002, the government passed the Sarbanes–Oxley Act (SOX) to address the collapse of Enron and the dot-com boom. - In the early 2000s, multiple financial scandals occurred, primarily involving the misreporting of financial statements to shareholders. - What SOX does: 1. Impose accounting standards to prevent financial statement fraud  13 2. Require lead audit partner to rotate every five years 3. Hold management responsible for accurate financial reports - A corporation’s CEO and CFO must sign and certify the accuracy of quarterly and annual financial reports. 4. Demand corporate executives to return bonuses that arise from financial statement fraud - Clawback provisions are contractual agreements that require an employee to return money to their employer. - For a company to be on the New York Stock Exchange and Nasdaq, they must have compliance programs with clawback provisions. 5. Strengthen the power and responsibility of board audit committees 6. Place heavy criminal penalties for SOX violations 7. Prohibit audit firms from consulting companies while auditing them 2. Due to the 2007 financial crisis, the government passed the Dodd–Frank Act. - With Dodd–Frank, the Consumer Financial Protection Bureau (CFPB) was founded. - What Dodd–Frank does: 1. Impose say-on-pay votes every three years - Say-on-pay votes are when shareholders vote on the compensations of a company’s executives. - The BOD does not have to follow what shareholders determine. - However, to maintain their position in the board, they are compelled to do so. 2. Require the disclosure of the CEO and other C-suites’ salaries and the median employee salary - A few years ago, C-suite members could sell their stock if they announced it in advance. However, to game the system, they could change their plans. - In response, the SEC imposed a four-month window between announcement and sale of stocks. - C-suite members can also no longer have multiple plans for the sale of the same shares. - The government and main shareholders have three tools to incentivize the BOD and management to operate in good faith: 1. The Sentencing Reform Act of 1984 (the government) 2. Shareholder derivative suits (main shareholders) 3. Securities regulations (the government and main shareholders) Dec 3, 2024 - Through the Sentencing Reform Act of 1984, the U.S. government set up the Federal Sentencing Guidelines. - Federal Sentencing Guidelines are a uniform policy for sentencing individuals and organizations convicted of felonies and serious (Class A) misdemeanors. - For corporations, sentencing guidelines incentivize BOD and management to follow fiduciary obligations. - The goal is to minimize fines, providing more money to shareholders. - The government reduces financial penalties when corporate defendants: 1. Demonstrate that a reasonable compliance plan was in place before any misconduct - With compliance plans, companies can prevent corporate misconduct. If misconduct does occur, these internal controls should discover it and fix it.  14 2. Disclose voluntarily misconduct to the government when it is internally discovered - By reducing fines, sentencing guidelines reward firms that voluntarily confess misconduct to the government. - When a company discovers misconduct, it is faced with a choice: 1. Fix the problem quietly, hoping the government does not learn about misconduct 2. Confess to the government, pay a fine, and fix the problem - When a new plane is certified, there is a decision to be made about whether or not pilots need to be trained on a flight simulator. - Flight simulators are extremely expensive for airlines. - In 2011, Boeing announced the 737 MAX plane to compete with the Airbus A320neo family. - Due to its engine position, the 737 MAX’s nose could point too far upward and stall. - Instead of redesigning the plane, Boeing developed the Maneuvering Characteristics Augmentation System (MCAS). - However, Boeing sold the 737 MAX as mostly identical to the previous generation, so pilots did not have to do simulator training. - The training material did not mention the MCAS. - After two 737 MAX planes crashed in 2018 and 2019, the DOJ filed a lawsuit and fined Boeing for over $240 million. 3. Identify specific individuals who engaged in misconduct - Boeing disclosed to the DOJ’s Fraud Section the relevant facts, including the individuals who requested the omission of the MCAS in training material. - Shareholder derivative suits are brought by shareholders against an insider in a corporation, usually an executive officer or director. - Securities regulations are administrative rules that govern the buying and selling of stocks, as well as the companies that trade them. - If a corporation gives false information or withholds relevant information from stockholders, they could be violating the law. - Investors can sue all parties involved with the disclosure of false information, including the BOD, management, and accounting firms. - To win a civil lawsuit, the plaintiff (stockholder) needs to prove that the defendant (corporation) intentionally disclosed false information. - In addition, the plaintiff should prove that they relied upon this false information, resulting in financial loss. - If a statement has a cautionary warning, the defendant has a safe harbor against any penalties. - Since both planes that crashed took off from international airports, Boeing claimed that pilots in other countries do not get the same training. - By omitting their structural failures, Boeing committed a 10b-5 violation. Technology - In London, “The Knowledge” is a rigorous exam that evaluates drivers on the city’s topography. - Like the Bar Exam for lawyers, the exam was a barrier to entry for people to drive taxicabs. - To earn a badge, cabbies spent years memorizing 25,000 streets and 100,000 landmarks. - In 2012, Uber launched in London. Since drivers use satellite navigation, they do not need to take the exam. - The seven broad phases of technology:  15 1. Nomadic 2. Agrarian 3. Industrial 4. Service 5. Information 6. Semantic 7. Biotechnology - We will focus on the sixth phase, semantic technology. - Technology is generally, but not always, sequential. - As of 2024, two-thirds of the world population have access to the internet. - While the internet is globalized, the laws of host countries prevail. - There are two host countries online: 1. Where platforms are based in (e.g., Facebook in the United States) 2. Where platforms operate in - Internet-based companies are required to comply with the regulations in each country that they operate in. - Who should regulate online content: the government, private companies, or a combination of both? - In the United States, there is minimal regulation. - In the European Union, there is heavy regulation to protect individuals - In restrictive countries like China and Russia, there is heavy regulation and censorship to protect the government. - For the past decade, internet freedom has been declining. - In Thailand, a man was arrested and sentenced to 50 years in prison for criticizing the monarchy on social media. - With the European Union's right to be forgotten, individuals can request that search engines remove certain results about them. - The right to be forgotten is not absolute, and companies can refuse to remove information. - Companies might refuse to remove information if: 1. The information is still relevant 2. There is public interest in keeping the information available - The U.S. generally evaluates online and offline speech the same way. - The First Amendment makes it difficult, but not impossible, for the government to regulate speech. - When speech can be criminalized: 1. True threats 2. Libel and slander 3. Obscene material 4. Commercial speech - By limiting commercial speech, the government is regulating deceptive advertising. - Social media advertisements and false online reviews can both be examples of deceptive advertising. - The Federal Trade Commission (FTC) requires social media influencers to: 1. Be honest 2. Not make false claims 3. Disclose that they are being paid to promote a product  16 - Sunday Riley is a skincare brand. In 2019, the FTC found Sunday Riley guilty of making employees write fake Sephora reviews. - To prevent deceptive advertising, the FDA and FTC regulate what companies can claim about their products. - However, companies continue to use scientific-sounding buzzwords like “probiotic” and “immunity support” to entice customers. Dec 5, 2024 - For legitimate reviews of products and services, U.S. federal law provides protections for consumers to post their opinions. - A non-disparagement clause is a contractual agreement that prohibits a party from making negative statements about another party. - If you post a statement that is factually incorrect, a business could sue you for libel. - Section 230 of the 1996 Communications Decency Act protects online platforms from being sued for user-generated content. - In 2024, the CEO of the Telegram messaging service Pavel Durov was arrested in France. - The French government accused the service of not regulating criminal activity, specifically gang transactions and trafficking. - The First Amendment only applies to the government, not private conduct. - Online platforms create their own terms and conditions, rejecting user-generated content at their own discretion. - When the U.S. government attempts to regulate private conduct, it is considered to be viewpoint discrimination (content-based regulation). - Content-based regulation of speech is usually illegal, with the exception of true threats, libel and slander, obscene material, and commercial speech. - In 2010, Christian pastor Terry Jones declared to burn 200 Qurans on the nine-year anniversary of the September 11 attacks. - With the First Amendment, the U.S. government could not limit the pastor from burning the texts. - Terms and conditions are contracts and a form of self-regulation. - When we use Google, we enter a contract. We access their platform. In exchange, they get access to and can monetize our information. - If an online platform does not follow the conduct that is promised its terms and conditions, it can be accused of unfair trade practices. - In 2011, Facebook promised to protect user information. In 2019, the Federal Trade Commission fined Facebook $5 billion for violating this promise. - Regulating online content requires companies to make normative decisions about how open they will let their platform be. - For online platforms, there is a conflict of interest about censorship: controversy contributes to higher engagement and more time spent on the platform. - Where self-regulation has worked: 1. Revenge porn 2. Fake users 3. Drug addiction treatment  17 - In 2017, Google put restrictions on advertisements from rehabilitation treatment centers who were misleading drug addicts. - Tripadvisor is an example of self-regulation that initially failed, then eventually worked. - Tripadvisor hosts user-generated reviews and profits from advertisements on their website. - Despite people expecting unbiased reviews, Tripadvisor could censor and delete negative reviews about sponsored hotels, resorts, and restaurants. - In 2017, Tripadvisor deleted a review from a woman after she was assaulted at a resort in Mexico. - The next two cases are examples of how self-regulation fails. - During the run-up of the 2016 presidential election, there was a range of social media advertisements for both Trump and Clinton. - To incite division, Russian intelligence funneled money into Facebook to disperse advertisements that disparaged both candidates. - The advertisements pulled from many groups: Muslim Americans, police officers, and veterans. - The Christian Times is an online “newspaper” that published that there were thousands of fraudulent Clinton ballots found in Ohio. - Despite being viewed by six million people and shared by multiple Congressmen, the article and its attached image was fraudulent. - The publisher, 22-year-old Cameron Harris, earned $22,000 from Google advertisements.