For business to thrive it needs to be underpinned by a strong legal framework based on four key principles: simplicity, transparency, fairness and accountability
This article was first published in the May 2017 international edition of Accounting and Business magazine.
Business law is one of those things that we tend to take for granted until something goes wrong; it is part of the fabric of a successful economy. But what makes for a strong and successful business law framework? What are the essential elements that encourage the right behaviours and economic success? A new report from ACCA strips business law back to its fundamental framework in order to answer these questions.
Tenets of Business Law is the latest in a series of policy papers on key issues affecting the accountancy profession, building on ACCA’s 12 tenets of tax, published in 2011. This latest paper attempts to identify the key principles in business law that underpin a good environment in which to do business. These cover the three aspects of business law: the form of the business (its legal personality, in other words); the regulation of internal decision-making and conduct; and the relationship between the business and external stakeholders – anyone affected by the business’s activities.
The report begins by identifying four key principles that are essential to a good legal environment for business.
Aim for simplicity
The laws that govern businesses should be stringent but not complex. The report argues that simpler rules governing business structures (meaning they are limited in scope and easy to understand and explain) are easier to administer and therefore do not impose a substantial cost burden on businesses. They are also, the report continues, more difficult to break undetected. Over the past century, though, the regulatory burden on businesses has grown significantly. The report puts forward some suggestions that might help to tackle this problem.
‘As a matter of expediency,’ say the authors, ‘policymakers may consider adopting a one-minus-two approach, whereby for every new business law adopted, two unnecessary laws are removed.’ They also suggest the use of ‘sunset clauses’ in business law, under which a law expires automatically at a certain date if it is not renewed: ‘In many cases socially undesirable business outcomes can be traced back to outdated and inappropriate business forms being used. Revision of the regulations can help to ensure that they remain up to date and appropriate for society’s current needs.’
Be open and transparent
The second principle identified in the report is that lawmakers should be open and transparent with businesses during the development and implementation of business law. For the good of society, business needs a predictable environment in which to prosper, says the report; government should indicate as far as possible the direction in which it intends to steer the business environment to allow business to plan for the long term. In practice this means consultation with stakeholders before new business laws are implemented, and a ‘reasonable time frame’ in which to implement new laws.
The report stresses that business law must be applied consistently and equally among business enterprises. This is important for the effective application of law – because the perception that regulation is designed exclusively for one group will dissuade others from engaging with it – and also to avoid protectionism and abuse of competition. ‘Governments should be ready to step in where it becomes clear that legitimate exploitation of competitive advantage has become an abuse,’ says the report, ‘and especially so where such activity is coordinated between interests to create an impression of acceptability.’ Governments should also take care that the application of uniform laws does not disadvantage particular groups, it adds. ‘It may well be that elements designed to deal with the affairs of large or complex businesses should be specifically disapplied for smaller businesses for which they have no direct relevance, especially where smaller businesses may not have the resources to deal with such burdens and society would derive no benefit from them.’
Prepare to be accountable
The accountability of business fosters trust, argues the report, and business law should facilitate this. ‘Business should be prepared and able to explain their actions and strategies to stakeholders,’ it says. ‘The legal framework within which business operates should be designed so as to enable that openness, and at the same time give stakeholders confidence that the disclosures presented by business are complete, comparable and reliable.’
While these four principles are clear, they must have meaning in practice to be effective. So how can this be achieved? The report identifies a number of critical elements.
First, the law should provide a framework to resolve disputes between businesses, in a fair and transparent way. Disputes are inevitable and there are many ways of resolving them, from mediation to formal court proceedings. Each of these mechanisms should provide a reasonably rapid, cost-effective and confidential resolution process. The report also suggests that arbitration bodies should consider publishing the principles of their decisions, which may over time reduce the need for formal processes. ‘In jurisdictions where arbitration clauses are compulsory in commercial agreements, recourse to the courts is comparatively rare, reducing the burden on society of regulating private disputes,’ it adds.
Second, the report argues that the business law framework should establish a system that encourages entrepreneurship and enterprise. The most successful entrepreneurs are not simply those that take risks but those that are able to manage risks sensibly. The challenge is to balance the encouragement of risk-taking against the risks of something going wrong. The report makes a number of suggestions for achieving this, including a limited liability corporate structure to reduce entrepreneurs’ exposure to risk, combined with systems to encourage sensible risk-taking, or ‘generous’ limits around personal bankruptcy.
Third, the business law framework should foster an ethical approach, which might take the form of a voluntary code. ‘Encouraging businesses to adopt corporate social responsibility principles is likely to encourage ethical business,’ the report adds.
Fourth, government should aim to establish a stable environment for business. This includes instilling a degree of confidence in the market and emphasising that it is supportive of business, by acting against unfairness in the market, consistently applying business laws, and encouraging regular communication between government and business.
Finally, the report says that lawmakers should create a framework in which business success makes a net positive contribution to the prosperity of society. In practice, it adds, this means acting to reduce bribery, encouraging business to engage positively with its social environment, and supporting SMEs, which employ the majority of workers in most jurisdictions.
By stripping back the complexity of business law to its essential ingredients and purpose, the report lays bare the requirements of a strong and successful legal framework.
Liz Fisher, journalist
"The perception that regulation is designed exclusively for one group will dissuade others from engaging with it"