Assessing Legal Forces

Assessing Legal Forces

Within the confines of organizational ecosystems, a combination of legally binding obligations and behavioral norms gives rise to stakeholder group specific expectations, perhaps best illustrated by organization-shareholder dyads. The US federal securities laws guarantee shareholders of business firms traded on public US exchanges the legal right to expect managers of those companies to timely, completely, and accurately disclosure details of those companies’ financial performance.3 Those clearly stated and binding obligations are examples of ‘black letter law’, a broad category encompassing the basic standard elements or principles of law which are generally known and free from doubt or dispute (in American legal system, well-established case law also falls within the domain of black letter law).

Shareholder rights, however, are not limited to provisions emanating from black letter law. A distinct, though conceptually related expectation-shaping influence takes the form of judicial decisions, especially those made within the context of torts, or civil wrongs (as opposed to criminal transgressions, which fall outside the scope of this overview). As a common law country, the US derives many of its legal standards from judicial decisions which tend to fill the legal void in matters not expressly addressed by existing legislative acts or other black letter law standards. It is worth mentioning that in everyday business vernacular, legislative and judicial forces are often lumped together under a single ‘legal requirements’ umbrella – though in some situations such a generalization may be warranted, it is important to note that the two are separate and distinct. The legislative aspect of shareholder rights is largely driven by the ever-changing political sentiments producing new legislative acts, which can be seen as manifestations of changing societal priorities, whereas the judicial aspect is shaped by evolving interpretations of already existing legislative acts and legal standards.

Of particular interest to company-shareholders dyadic interactions are the concepts of business judgment rule and the duty of care. The former is a corporate law notion which states that directors of a corporation are clothed with the presumption, which the law accords to them, of being motivated in their conduct by a bona fide regard for the interests of the corporation whose affairs the shareholders have committed to their charge. Stated differently, business judgment rule extends a certain degree of immunity to corporate managers, so long as they manage the organization to the best of their abilities. The duty of care, on the other hand, captures the legal responsibility placed upon corporate directors and officers, which demands adherence to a standard of reasonable care while engaging in behaviors that could foreseeably harm the constituents of companies they govern. There are numerous manifestations of the duty of care that relate to executive actions, with one of the most visible ones being that of public disclosures: As custodians of organizations, corporate managers are responsible for the accuracy of oral and written statements (as in general communications and casual comments, as well as the formal financial reporting discussed earlier) that reflect their companies’ performance, prospects, and the overall well-being. Furthermore, it is instructive to note that in the wake of high-profile corporate governance scandals (e.g., Enron, Tyco International, Bank of America Merrill Lynch), the scope of directors’ and officers’ duty of care has been expanding, especially in the area of expected prudence and competence. Lastly, it is also important to note that the disclosure accuracy is an absolute requirement, which means that it makes no distinction between intentional and unintended errors or misstatements (in legal terms, it does not require a discernible intent to deceive).

Although dyadic interaction between a business organization and its outside shareholders is only one of numerous potential organizational ecosystem interdependencies, it is nonetheless illustrative of the importance of focusing on applicable norms and standards when assessing the potential impact of broadly defined legal and political forces on the decision at hand.