Government Role in Business (Encyclopedia of Business and Finance)
Government regulation at the federal and state levels has a major impact on how businesses operate in the United States. In order to manage business activities in a complex society and to help respond to changing societal needs, governments at all levels have created numerous regulatory agencies. Although the duties and functions of each agency vary, all influence the day-to-day business activities that take place within the United States. Businesses that take a proactive stance toward understanding and complying with federal regulatory agencies will minimize their chance of fines, prosecution, or other regulatory action. Therefore, it is in the best interest of businesses to maintain healthy relationships with regulatory agencies at all levels of government. Among the business activities regulated by government are competitive practices, industry-specific activities, general issues of concern, and monetary regulations.
A number of laws have been passed to protect competitive practices. Among these laws are the Sherman Antitrust Act of 1890, the Federal Trade Commission Act of 1914, and the Wheeler-Lea Act of 1938.
Sherman Antitrust Act of 1890. One of the earliest pieces of legislation that had a critical effect on the business sector was the Sherman Antitrust Act of 1890, passed by Congress in response to public outrage over a few large companies that were forcing their smaller competitors out of business and becoming monopolies. Since there was no competition, consumers were left with higher prices and usually a lower-quality product. The act had two main sections attempting to prevent the formation of monopolies. Specifically, section one maintained that forming a trust or a conspiracy resulting in the restraint of trade was illegal. Section two provided that persons monopolizing or attempting to monopolize trade were guilty of a misdemeanor. Basically, the federal government was (and is) looking for companies engaging in price fixing, in dividing up the market share among different companies to control the market, or in other business practices that may create a monopoly.
The Justice Department is the federal agency responsible for enforcing the act. By prosecuting individuals and companies violating provisions of the law, imposing fines and jail time, or calling for injunctions, the Justice Department prevents monopolies from forming. The act also allows injured parties, usually other businesses, to file suit and get relief from the federal courts for infractions of the law. The Justice Department also reviews almost every large merger or acquisition that affects the U.S. marketplace. If the Justice Department opposes a proposed merger, companies involved in the transaction can try to work out an agreement to allay the government's concerns or oppose the Justice Department in federal court, asking a judge to rule on the merits of the case. Most companies planning a merger or takeover normally have their legal departments conduct exhaustive research in order to answer potential questions from the Justice Department. The primary reason for this research is to avoid a long legal fight with the government that is expensive and can cause significant delays in the proposed merger or takeover.
Federal Trade Commission Act of 1914. The Federal Trade Commission Act of 1914 created the Federal Trade Commission (FTC), which consists of five members with staggered terms of seven years each. Board members are nominated by the president and confirmed or rejected by the Senate. One person serves as the chairperson of the commission and guides the agency's daily operations. The FTC was originally created to enforce the provisions of the Sherman Antitrust and Clayton Acts. The FTC has the power to investigate unfair competitive practices on its own. Firms may also petition the FTC to investigate alleged unfair competitive practices of which it might otherwise be unaware. The agency can hold public hearings to investigate the alleged infractions, and it may also issue cease-and-desist orders when it believes unfair competitive business practices are being used. Since the enforcement powers of the FTC and Justice Department overlap, the two agencies often work together to solve problems.
Wheeler-Lea Act of 1938. Congress responded to public complaints about improper and deceptive advertising by passing the Wheeler-Lea Act of 1938, which empowered the FTC to investigate businesses that engage in deceptive business activities or companies that use misleading or less than truthful advertising to entice consumers into their stores. A common deceptive practice that some companies have used in the past is called "bait and switch." This practice refers to advertising a product at an extremely low price to draw customers into a store but in reality having very little or none of the product available. Store employees then attempt to sell customers a more expensive product. This is but one example of what the FTC may investigate.
INDUSTRY-SPECIFIC FEDERAL AGENCIES
Federal legislation has created agencies to monitor and regulate particular industries because of concern over industry-specific practices, among them the Interstate Commerce Commission, the Federal Communications Commission, and the Food and Drug Administration.
Interstate Commerce Commission (ICC). In 1887, Congress passed legislation creating the Interstate Commerce Commission. Originally, only railroads were regulated, but as modern transportation methods developed, other transportation modes were added to its list of responsibilities. The primary purpose of the ICC was to monitor railroad companies (prices charged) that may have had a monopoly in some parts of the country. The commission could take corrective action, such as price modification, if it found that a railroad or other interstate business was engaging in monopolistic business activities and charging high prices for its services. Since this act applied to a limited number of industries, Congress later passed the Sherman Antitrust Act of 1890 (discussed earlier) to provide a much broader coverage of monopolies regardless of industry.
Federal Communications Commission (FCC). The FCC monitors and regulates CB radio, radio, telegraph, telephone, and television operations. It has broad powers to set acceptable standards for television regarding language, nudity, violence, or other material that may be perceived as inappropriate by the general public. For example, television shows that are adult-oriented or contain violence are typically on late in the evening so that children are less likely to see them. In addition, television shows often warn viewers about their content through a rating system; since the rating is displayed on the screen, viewers can make an informed decision before watching a particular program.
The FCC also has the power to fine broadcast companies that use inappropriate language in their programming. Since most television and radio stations know what are considered acceptable standards, fines are rarely issued. When fines are issued, however, a television or radio station may take the FTC to federal court to appeal the decision. Broadcast companies that fight the FCC over a show's content normally argue that the First Amendment gives them the right to broadcast the contested material.
Food and Drug Administration (FDA). The FDA is responsible for ensuring the safety of cosmetics, drugs, and food. One of the most important functions of the agency is new drug approval. The FDA requires pharmaceutical companies to provide detailed scientific data regarding new drugs prior to approval. Specifically, the FDA will review the potential benefits and negative side effects of all proposed drugs. The agency reviews the information submitted by the pharmaceutical company and may also conduct its own tests if additional study is deemed needed. The FDA is extremely important to the business community because if it rejects a new drug, the pharmaceutical company developing it cannot sell it. FDA regulators must balance the interests of the general public with those of the pharmaceutical company. The FDA does not endorse new drugs; rather, it approves them, stating that they are thought to be safe.
GENERAL FEDERAL REGULATORY AGENCIES
Federal legislation has also created agencies addressing a broad range of issues, including the Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, the Environmental Protection Agency, and the Consumer Product Safety Commission.
Equal Employment Opportunity Commission (EEOC). The Civil Rights Act of 1964 prohibits discrimination on the basis of race, color, creed, sex, or national origin. This law applies to almost every private company, nonprofit organization, and government employer, although some exceptions were granted to religious corporations, Indian tribes, and private-membership clubs. The Civil Rights Act also created the Equal Employment Opportunity Commission.
The original purpose of the EEOC was to monitor and enforce the provisions of the Civil Rights Act. Its powers were enhanced in 1972 with passage of the Equal Employment Act, which gave the EEOC the power to file civil lawsuits in federal court and to represent a person filing a grievance. Prior to filing the suit in federal court, the EEOC must first try to settle the case out of court with the alleged offending companyn attempt to promote a more conciliatory approach to solving discrimination problems and to reduce the number of court cases. The company could agree, for example, to settle the complaint by paying a fine, ordering remedial steps to prevent further discrimination, and/or working out the problem for the original complainant. In large cases, the EEOC may work with the Civil Rights Division of the Justice Department in order to settle the problem.
Occupational Safety and Health Administration (OSHA). Enacted in 1970, the Occupational Safety and Health Administration, was designed to ensure safe and healthy working conditions in nearly every environment. OSHA's basic premise is that employers must provide a work environment that is safe and free from hazards that may cause harm or death to their employees. In addition, employers are obligated to follow occupational safety and health standards that are ordered by the secretary of labor (OSHA falls under this department). Employers are given written guidelines so they know specific OSHA rules and regulations.
In order to verify that organizations are complying with these regulations, OSHA can conduct surprise inspections. Technically, employers can ask OSHA to show a search warrant before the search is executed, but this is not normally done because OSHA can get a warrant relatively quickly. OSHA investigators may inspect the building, but an employer has the right to have a representative accompany the regulators during the tour. The investigators review accident records and other documents to verify that compliance has been maintained. OSHA investigators also observe employees to verify that guidelines set by the agency are followed (e.g., wearing eye protection). If OSHA investigators believe that violations have occurred, they can issue citations against the employer. If the employer agrees to pay a fine, OSHA will normally inspect the building at a later date to ensure compliance. If an employer believes that the fine or other sanction is inappropriate, a court order can be sought seeking relief from the fine or sanction. In rare instances, the secretary of labor may ask for an injunction against an employer. Injunctions are only sought in the most serious cases, such as those in which there is imminent danger to employees.
Environmental Protection Agency (EPA). One of the most pressing issues in the United States is protecting the environment. A combination of pressure from consumer groups, news media, and voters encouraged Congress to pass legislation creating the Environmental Protection Agency in 1972. Prior to the creation of the EPA, no single federal agency had control over environmental issues, resulting in fragmented enforcement and confusing or conflicting codes. The EPA was created to act as the focal point regarding all pollution issues (air, noise, water, etc.).
In recent years, Congress has passed several laws addressing a host of environmental issues (e.g., noise, pesticide, radiation, and water pollution). When Congress passes a new law regarding the environment, it is the EPA's job to enforce its provisions with the powers contained in the legislation. One example of the EPA's power is that it can set acceptable air-quality standards for a state. If air-quality standards are not met within a specified frame of time, fines or other punitive measures may be imposed on the offending state.
Consumer Product Safety Commission (CPSC). Another powerful federal agency was created in 1972 under the Consumer Product Safety Act. The law created the Consumer Product Safety Commission, which was intended to protect consumers from defective and dangerous products. In addition, Congress also wanted to unify the majority of laws regarding product safety (except food, automobiles, and other products already regulated by federal agencies) so that they would be effective and clear. The CPSC is very powerful; it can ban products without a court hearing if they are deemed dangerous and can order recalls, product redesigns, and the inspection of production plants. In more severe cases, the CPSC may also charge officers, managers, and/or supervisors with criminal offenses.
FEDERAL MONETARY REGULATORY AGENCIES
Several federal agencies have been established to monitor monetary practices in the United States, including the Securities and Exchange Commission, the Federal Reserve Board, and the Federal Deposit Insurance Corporation.
Securities and Exchange Commission (SEC). The SEC was established to regulate the securities industries in the United States. A quasi-regulatory and judicial agency, the SEC regulates publicly traded stock-offering companies by requiring them to issue annual and other financial reports. In addition, the SEC regulates the stock market, brokers who sell securities, and large investment firms. The SEC also looks for insider trading, such as trading on secret knowledge about a company, other white-collar crime that may affect a company's stock price, and securities fraud by stockbrokers. The agency can initiate civil or criminal action against the individual or firms charged with securities violations. Depending on the circumstances, the penalties levied by the SEC can be severe, with large fines and long jail terms being the norm. The SEC normally works closely with the Justice Department when criminal prosecution is involved. As always, the SEC's actions can be appealed to the federal courts if the individual or firm believes the charges are inaccurate or unjust.
Federal Reserve Board As the United States grew, the nation's banking system became more complex and subject to greater fluctuations without government regulation. The United States experienced an acute money panic in 1907 that put a severe strain on the banking system. As a result of the financial panic, a National Monetary Commission was established by Congress to study how the United States could protect the banking system and, in turn, the money supply. National Monetary Commission recommendations were implemented by Congress in 1913 when the Federal Reserve Act was passed and the Federal Reserve Board was established. The primary purpose of the Federal Reserve Board is to function as a semi-independent board designed to protect the banking system in the United States.
Federal Reserve Board activities are guided by a board of governors. The board has seven members, all of whom are nominated by the president and confirmed or rejected by the Senate. Each member is appointed to a fourteen-year term, with vacancies occurring about every two years. To be nominated to the Federal Reserve Board, an individual must possess excellent academic credentials, be an established leader in the financial world, and have achieved an impeccable business reputation. In order to separate the Board from political influences and to ensure that all decisions are based on economic rather than political issues, Board members are appointed and will likely serve through several presidential administrations. The Board is headed by the chairperson, who is considered to be the most powerful banker in the world. As such, the chairperson directs the overall mission of the Board and consults regularly with the president, secretary of the treasury, banking executives, stock market representatives, and top banking regulators from other countries to coordinate financial policy.
Federal Deposit Insurance Corporation (FDIC). Created after the Great Depression of the 1930s, the FDIC insures each account up to $100,000 in the event of a bank failure. In return for this protection, participating banks, credit unions, and other financial institutions must pay premiums, which the FDIC uses to build up funds for any future bailouts.
Government regulations and agencies at all levels of government have had a major impact on how businesses operate. In order to manage business activities in a complex, ever-changing society, governments at all levels have created numerous regulatory agencies through the legislative process. Although the duties and function of agencies vary, all influence day-to-day business practices. Frequently regulated business activities include competitive practices, industry specific activities, general issues of concern, and monetary regulations.
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