By George J. Siedel, Willisom Family Professor of Business Administration, Ross School of Business, University of Michigan
March 15, 2017
Most business school administrators instinctively understand that familiarity with business law is essential for their graduates. But sometimes administrators don’t have a clear framework for thinking through how important legal courses are to the business curriculum—and they might not realize that their graduates will need to draw on their legal knowledge every day. To clarify the issue, I’ve formulated eight questions and answers designed to demonstrate why law is such an integral part of business and how it is incorporated into business school programs.
1. What are the key functions that contribute to business success?
Law is one of a handful of functions that over time have enabled business success. As the opening sentence of a Harvard Business Review article put it: “Business units come and go, but finance, HR, IT, marketing, legal, and R&D are forever.” That’s true whether companies are just starting out or enjoying decades of success, because they always will face legal questions. For instance, when entrepreneurs launch businesses, their top concerns include accounting, financing, marketing, operations, staffing, strategy—and related legal issues.
2. What accounts for the growth in the importance of law in business decision-making?
Various factors have made an understanding of the law essential in decision-making, including increased governmental regulation, more frequent litigation by a wide range of stakeholders, and the globalization of business. For example, as companies expand overseas, leaders need to understand the rule of law and the legal ground rules for international transactions. As Babson dean Carolyn Hotchkiss has observed, an understanding of the law enables “managers to compete successfully in the most competitive global markets.”
3. What are some legal issues business leaders must address every day?
Management scholar Henry Mintzberg describes four roles that a manager must play as a decision-maker: entrepreneur, resource allocator, disturbance handler, and negotiator. Mintzberg’s examples illustrate why an understanding of legal issues is essential in all four roles—whether a manager is launching a new product, considering a merger or acquisition, handling a contract dispute with a supplier, or handling an employee grievance. At the same time, managers must be prepared to discuss legal matters with all stakeholders—including investors, creditors, customers, employees, suppliers, and government regulators—and these conversations become more important as managers move up the ranks.
Even small-business owners and new entrepreneurs must make decisions on a host of legal issues: incorporating their businesses, following government regulations, understanding liability risks, protecting intellectual property, contracting with customers and suppliers, and hiring employees.
4. Are recent corporate meltdowns due to poor ethical judgment or illegal behavior?
Although scandals at Enron, WorldCom, ImClone, etc., are examples of ethical lapses, they also involved violations of the law. In a New York Times article, Robert Prentice of the McCombs School of Business at the University of Texas notes that these events occurred “because their participants had an insufficient knowledge of, appreciation for and, yes, fear of the law.”
5. What role does law play in risk management?
Legal risk is emerging as an especially important category of business risk. In a recent Travelers Business Risk Index survey of more than 1,200 business risk managers, only two categories were among the top ten risks in every industry: legal liability and medical cost inflation. Another category of legal risk, complying with laws, was in the top ten for nine of the ten industries studied. Other studies return similar results.
Henry Lowenstein of Coastal Carolina University, former dean at California State University at Bakersfield, concludes that legal risk has a major impact on a company’s bottom line. As he notes, “As a practical matter for businesses today, the legal expense line is now a significant factor on company balance sheets.”
6. What role does law play in value creation?
Knowledge of the law enables savvy businesspeople to create new opportunities. For instance, Southwest Airlines and Uber have successfully used a “Regulatory Gap Strategy.” Southwest Airlines was born in the 1960s after two entrepreneurs realized that by limiting their flights to Texas, they could bypass federal regulation and charge cheaper fares. More recently, Uber has operated on the premise that taxi regulations do not cover transportation services that merely connect passengers to drivers. In the words of Joan Gabel, provost at the University of South Carolina and former dean at the University of Missouri’s Trulaske College of Business, opportunities created by the legal environment can result in a “huge competitive advantage.”
Jack Wroldsen of Oklahoma State University has observed that the disruptive innovation that accompanies “sharing economy” business models has changed the role of attorneys from transaction cost engineers to business disruption framers. This new role requires business leaders and their lawyers to work together closely in developing strategic plans for new business models.
7. Do managers at every level make decisions that have legal implications?
Yes. A recent Corporate Executive Board Legal Leadership Council survey concluded that middle managers make 75 percent of legal decisions and that almost “80 percent of corporate employees made a decision or completed an activity with a significant legal implication in the past year.” These middle-management decisions involved, for example, signing contracts, developing new products, creating intellectual property, interacting with government officials, entering new markets, creating marketing materials, establishing product safety standards, and executing acquisition agreements. Fewer than one-third of these middle managers consulted the legal department when making their decisions. In other words, they relied on their own knowledge of the law when making everyday business decisions, which are usually intertwined with legal concerns.
8. How can business school students become legally savvy?
In AACSB International’s latest accreditation standards, it’s clear that the association expects schools to develop learning goals related to the legal and regulatory “contexts of organizations in a global society.” At a minimum, students should graduate from business school understanding these six legal topics that are highlighted in surveys of business leaders: contracts, employment law, government regulation, torts, intellectual property, and the legal process.
Just as important as these substantive topics, students should develop the law-related management skills that enable business success. These skills include the ability to recognize and decide the legal issues that arise on a daily basis, determine which legal issues require them to seek professional advice, communicate effectively with lawyers when they do seek legal advice, evaluate that advice before making a decision, successfully implement their law-related management decisions, discuss legal issues with stakeholders, and play a leadership role in emphasizing legal responsibilities to everyone in their organizations.
How can business schools embed these substantive areas and management skills into their curricula? As a starting point, schools should include them in their learning goals. For example, the five learning goals for the Full-Time MBA program at Indiana University’s Kelley School of Business include the ability to identify and consider legal challenges when making business decisions.
When selecting courses that implement their learning goals, business schools should consider two basic models. First, the traditional model includes a required course on the legal environment of business that ideally covers the six legal topics that business leaders consider most important—contracts, employment law, and so on.
Second, a menu model enables students to select a legal environment course aligned with their career interests. For example, following Wharton’s latest curriculum review, MBAs select one of two versions of the required business law course: (1) Responsibility in Business or (2) Responsibility in Global Management. These courses cover broad themes such as contract law, regulatory law, fraud, fiduciary duties, and insider trading.
Regardless of whether business schools select a traditional or a menu model, the courses should emphasize how businesses can achieve a competitive edge by balancing the twin functions of law: risk management and value creation. For instance, how can business processes that are designed to prevent product liability be used to identify new product opportunities? How can companies use the law to protect intellectual property while also maximizing IP asset value? How can managers use contract law both to protect against liability risks and create value through lean contracting?
When business school administrators ask themselves these eight questions, they’ll see that it’s absolutely essential for them to incorporate a robust understanding of the law into their business programs. Their graduates will need that knowledge every day for every business endeavor they launch, reorganize, or lead—for the entirety of their careers.
George J. Siedel is the Williamson Family Professor of Business Administration at the University of Michigan’s Ross School of Business in Ann Arbor. The eight questions in this article were adapted from his 2016 book, The Three Pillar Model for Business Decisions: Strategy, Law & Ethics.