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Chapter 01 - Law as a Foundation for Business
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Review the Concept Summary pertaining to Legal Sanctions.
V. A Property-Based Legal System and Corporate Governance
Emphasize:
That under the rule of law in a property-based legal system, all persons have an equal right
to their resources.
That corporations are owned by shareholders but controlled by the boards they elect and
the managers that the boards appoint.
A. The Specific Sense of Corporate Governance
Emphasize:
That corporate governance defines the legal relationship between corporate agents like
managers or boards of directors and the shareholder owners of the corporation.
That due to the complexity of modern corporations, there are sometimes breakdowns in
corporate governance.
That corporate governance can fail even when corporate managers do nothing illegal.
B .The General Sense of Corporate Governance
Emphasize:
That in a larger sense corporate governance includes the legal property relations that
large businesses have with each other, with their customers, and with society.
That most chapters of the text deal with corporate governance, at least in the larger
sense.
How the economic crash of 2008 was in part caused by lack of adequate corporate
governance.
Additional Matter for Discussion:
That corporate governance will be discussed in detail in chapter 14.
1. Why Nations are Weak or Strong?
Chapter 01 - Law as a Foundation for Business
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b. A “proper” legal system that is adequately enforced.
Law, the Rule of Law, and Property
2. Law
a. Law is a series of rules laid down by the state and backed up by enforcement. Both
3. The Rule of Law
a. A system of law defined by generally and equally applicable rules. The general and
4. Property
a. Either a “bundle of rights,” or a single right to exclude others from one’s resources.
5. Property in its Broadest Sense
a. The right to exclude others from one’s resources and to keep them from infringing on
what is one’s resources pervades Western legal systems. If the right of property is at
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
the state, from one’s resources.
6. Jurisprudence
a. The definition should discuss the philosophy of law and natural law, positive law,
7. Common Law and Civil Law
a. The common law legal system emphasizes the role of judges in determining the
8. Public and Private Law
a. Public law involves the regulation of society by the state. Criminal law, constitutional
9. Civil Law and Criminal Law
a. Civil law does not apply imprisonment to punish its violation, and criminal law, which
10. Substantive Law and Procedural Law
a. Substantive law regulates the rights and relationships between people or people and
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Sources of Law
11. Federal Law
12. State Law
a. Acts and statutes are two additional terms for legislation.
b. Uniformity of law is important to business because it adds certainty, stability, and
13. Judicial Decisions or Case Law
a. Stare decisis includes the doctrine of prior precedents. It provides certainty, stability,
and predictability. There are often conflicting precedents in multiple jurisdictions and,
14. Sources of Law Hierarchy in Review
15. Legal Sanctions
a. Legal sanctions are important in a property-based legal system because law is enforced
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
by taking a person’s life, freedom, or the resources that he or she owns.
b. A sanction is a method or means that encourages or forces compliance to the law. A
remedy rectifies a wrong.
16. Sanctions for Criminal Conduct
a. The sanctions for criminal conduct include death, fine, imprisonment, removal from
17. Sanctions for Breach of Contract
a. Compensatory damages are designed to place the non-breaching party in the same
18. Sanctions for Tortious Conduct
19. Sanctions for Violating Statutes and Regulations
a. The types of sanctions used for the violation of statutes and regulations include fines,
20. The Specific Sense of Corporate Governance
a. In a “specific” sense, corporate governance refers to the rules regulating the legal
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
situation is disclosed. Other ways include managers’ engaging in insider trading of
stock, running up stock prices in order to exercise stock options, and taking advantage
of business opportunities that rightfully belong to the corporation and its shareholders.
21. The General Sense of Corporate Governance
a. In a “general” sense, corporate governance refers to the regulation of business
activities as they might harm public resources like the air and water or the private
resources of others.
b. Effective corporate governance contributes to the creation of economic wealth by
encouraging investment in corporate ownership in spite of the fact that corporate
owners have little control over corporate assets.
Business Discussion #1
1. Do you know everything you need to make an investment decision?
No, there is a lack of fundamental information critical to understanding the risk and likely
chance of success if the company invests in Russia. How will the investment profits be taxed,
2. If not, what else do you need to know about investment in foreign countries?
One needs to understand whether or not the country has legal institutions conducive to
successful business investment such as whether the country has adequately enforced legal
3. What does it mean to say that law is the foundation of the private enterprise system?
It means that the private market in modern nations depends on the state’s protection of
Chapter 01 - Law as a Foundation for Business
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Business Discussion #2
1. What is law?
2. What does it mean to say that Darden has “property” in the land? That the hunter has
“property” in himself?
Section 4 asserts that the essence of property is the right to exclude others, including the
3. What sources of law will the attorney have to understand in order to advise Darden about
the proposed greenway? The company’s potential responsibility to the hunter?
