Tenets of business law: A framework for the future

Business law needs to encourage ethical behaviour to help build better Covid-19 recovery.

Image on the cover of the report, which shows a glass building.

October 21 marks Global Ethics Day this year, and 2020 has thrown the issue of ethics in business into sharp focus. Even before the short term impact of the pandemic, businesses and consumers have been adapting to long term shifts in demographics, in climate, and the digitalisation of the economy. Now, with some of those shifts accelerated and others masked or superseded by the COVID19 fallout, the impetus for change has become irresistible.

The English 1267 Marlborough Statute of Waste is probably the oldest piece of secular statute law still in force anywhere in the world. Although most clauses of the Marlborough statute have been repealed, many in the past 150 years, the provisions of Chapter 23, headed ‘Remedy against accountants’ were still held to be relevant when reviewed in 2015.

Over the last 750 years the principles of the law, and of human nature, haven’t changed, but the English language has. An ‘accountant’ in 1267 meant someone held to account for their actions (specifically, how they managed farmland owned by someone else). But that underlying principle of accountability is as true today as it was then – and maybe even more so as we enter into agreements with people we’ve never met in countries we’ve never visited, to buy and sell products and services that may be intangible.

Human society comprises individuals who are judged on, and held to account for, their past actions. Trust, the most fundamental element in building trading relationships and with them a functioning society, is based on integrity.

Society depends upon business, and business depends upon trust. Buyers and sellers need to trust one another, and owners need to trust managers. People affected by decisions that they cannot control need to trust the people taking those decisions. Integrity is essential.

Governments, businesses and societies around the world are facing unprecedented challenges. The impact of the digitalising economy combined with demographic and social change, climate change and resource scarcity have driven a reappraisal of business models that has gathered pace since the global financial crisis of 2008–9.

Recently, the impact of the COVID-19 pandemic has highlighted the importance of resilient business models and cooperative action. The application of clear and effective business laws to underpin a sustainable economy for the future is more important than ever.

Every major economy is experiencing or facing the threat of economic depression, and many face existential threats to some of their most important sectors. The challenges and opportunities facing policymakers and entrepreneurs alike are almost entirely novel, and yet the success of responses to them will depend on timeless concepts, one of the most important being integrity.

A shared value of ‘integrity’ is all well and good, but in the online world of digital transactions how can we measure trustworthiness? We need common legal frameworks and standards against which trustworthiness can be assessed. The accountant has for centuries acted as one of the gatekeepers of trust. Legal frameworks applied by accountants in preparing, reviewing and providing assurance on the financial measures of others’ businesses engender trust in the integrity of these businesses. This fosters effective trade.

Accountants’ shared framework of rules and standards is designed to allow individuals to make informed decisions about businesses and activities with which they have no direct contact. Business law acts not simply as a restrictive list of prohibitions but rather as an enabling framework. The common understanding of what each party is trying to achieve and how it plans to do this bypasses the need for negotiating from first principles.

Beyond this, though, how business decision makers have accounted for their past behaviours is set down in the records of their business vehicles. As disclosures increase in complexity, so attitudes to human rights, environmental concerns and tax planning can be tracked alongside the simple financial returns on a business. Investors, creditors and customers can build a picture of the character of the entrepreneur.

But how does this work, and why does it matter?

Building better economies and better societies cannot rely on the enforcement of punitive laws to ensure that people do the right thing. Ability to trust the counterparty to act in the joint best interest is central to any decision to invest time, money or effort in relationships and joint ventures of whatever form. Much of business law is designed to ease and encourage the making of such decisions.

The common frameworks that allow trade and business to flourish, not just between friends and peers but also between strangers, across distance and across national boundaries, are fundamental to economic activity and growth. Common concepts, such as the limited liability company or accounting standards, allow people to proceed with business ventures confident in the common understanding of rights and responsibilities.

Beyond the necessities of trade, however, social cohesion requires business partners, owners and managers, customers and suppliers, taxpayers and governments to have faith in each other’s commitment to the common good. Failures of ethical behaviour have consequences far beyond the specific transactions and individuals affected. The collapse of Enron showed what happens when businesses do not act ethically. Corruption in public procurement processes damages trust in governments’ decision making.

Now, when rebuilding both individual businesses and the frameworks and societies in which they operate is going to be vital to economic recovery, the integrity of partners and decision makers will be a key element in driving sustainable economic activity. Accountants, working to strict ethical standards, can provide assurance of that integrity and facilitate the trust essential to rebuilding economies and societies.