Concept of Law in Business
Law is a formal system of rules created and enforced by institutions—like governments and courts—to regulate human behavior. In the context of business, law provides a framework that ensures fairness, protects rights, and maintains order in commercial activities. It defines what is legally acceptable and sets boundaries for how businesses should operate. Without law, business transactions would be chaotic, prone to abuse, and lacking accountability.
Types of Law in Business
1. Commercial Law
This branch governs trade, contracts, and business transactions. It ensures that agreements between buyers and sellers are legally binding and enforceable. Commercial law covers areas like sales of goods, negotiable instruments, and consumer protection. It helps resolve disputes and promotes trust in the marketplace.
2. Corporate Law
Corporate law deals with the formation, structure, and functioning of companies. It defines how companies are registered, how boards operate, and how shareholders are protected. It also governs mergers, acquisitions, and corporate governance. This law ensures that companies act responsibly and transparently.
3. Employment Law
Employment law protects the rights of workers. It regulates wages, working hours, safety standards, and issues like discrimination and harassment. It ensures fair treatment of employees and promotes a healthy work environment. Businesses must comply with labor laws to avoid legal penalties and maintain ethical standards.
4. Intellectual Property Law
This law safeguards creations of the mind—such as inventions, designs, trademarks, and copyrights. It gives creators exclusive rights and prevents unauthorized use. For businesses, it protects brand identity, innovation, and competitive advantage.
5. Tax Law
Tax law governs how businesses pay taxes to the government. It includes rules on income tax, VAT, customs duties, and corporate tax. Proper compliance ensures that businesses contribute to national development and avoid legal trouble.
6. Environmental Law
Environmental law regulates how businesses interact with nature. It sets standards for pollution control, waste management, and sustainable resource use. Companies must follow these laws to minimize environmental damage and promote sustainability.
Importance of Law in Business Ethics
Law and ethics are closely connected in business. While ethics guide what is morally right, law enforces minimum standards of behavior. Together, they create a responsible and trustworthy business environment.
Sets Boundaries for Ethical Behavior Law defines what is acceptable and unacceptable, helping businesses avoid unethical practices.
Protects Stakeholders Laws safeguard the rights of employees, customers, investors, and the environment.
Promotes Justice and Accountability Legal systems hold businesses accountable for their actions, ensuring fairness and transparency.
Prevents Exploitation and Corruption Laws deter fraud, abuse of power, and unethical conduct in business dealings.
Builds Public Trust When businesses follow the law, they earn credibility and trust from society, customers, and investors.
Concept of Business Ethics
Business ethics refers to the set of moral values and principles that guide how a business behaves—not just what is legally required, but what is morally right. It’s about making decisions that are fair, honest, and responsible. While laws set the minimum standard, ethics go beyond that to promote integrity, respect, and social responsibility in business operations.
For example, a company may legally be allowed to lay off workers, but ethically, it should ensure fair compensation and transparent communication. Ethics help businesses balance profit-making with doing good.
Principles of Business Ethics
Integrity Always act with honesty and consistency. Whether dealing with customers, employees, or partners, ethical businesses don’t manipulate or deceive.
Fairness Treat all stakeholders—employees, customers, suppliers, and shareholders—equally and without bias. Avoid favoritism, discrimination, or exploitation.
Transparency Share accurate and timely information. Ethical companies disclose financial data, risks, and decisions openly, building trust with stakeholders.
Accountability Take responsibility for your actions and decisions. If mistakes happen, ethical businesses admit them and take corrective steps.
Respect Value people’s dignity, rights, and contributions. This includes respecting diversity, listening to feedback, and ensuring safe workplaces.
Sustainability Make decisions that protect the environment and future generations. Ethical businesses avoid harmful practices and invest in long-term well-being.
Importance of Business Ethics
Builds Trust and Reputation Ethical behavior earns public confidence. Customers prefer brands they can trust, and reputation becomes a long-term asset.
Reduces Legal Risks Companies that follow ethical practices are less likely to face lawsuits, penalties, or regulatory issues.
Enhances Employee Morale Employees feel proud and motivated when working in a fair and respectful environment. Ethics improve loyalty and productivity.
Attracts Ethical Investors Investors increasingly look for companies with strong governance and ethical standards. It signals stability and long-term value.
Supports Long-Term Success Ethics create a strong foundation for sustainable growth. Businesses that prioritize ethics are more resilient and respected in the market.
Corporate Governance
Corporate governance refers to the system, rules, and processes by which companies are directed and controlled. It defines how decisions are made, who holds responsibility, and how power is distributed among shareholders, board members, and management. Good governance ensures that companies operate ethically, transparently, and in the best interest of all stakeholders.
Principles of Corporate Governance
Accountability Clear roles and responsibilities must be assigned to directors, executives, and managers. Each must be answerable for their decisions and actions.
Transparency Companies should disclose accurate and timely information—financial reports, board decisions, and risks—so stakeholders can make informed judgments.
Fairness All shareholders, especially minority ones, must be treated equally. No favoritism or insider advantage should exist.
Responsibility Leadership must act ethically and comply with laws, regulations, and internal policies. They should prioritize long-term sustainability over short-term gains.
Risk Management Companies must identify potential threats—financial, operational, reputational—and take steps to mitigate them through proper systems and oversight.
Importance of Corporate Governance
Prevents fraud and mismanagement Strong governance reduces the chances of corruption, embezzlement, and unethical behavior.
Protects investor interests Investors feel safer when companies are transparent and accountable, encouraging more investment.
Enhances decision-making Structured governance leads to better strategic planning and operational efficiency.
Promotes ethical leadership It sets a tone from the top, encouraging integrity and professionalism throughout the organization.
Example: Nepal Rastra Bank requires banks to appoint independent directors, form audit and risk committees, and conduct governance training to ensure ethical and professional oversight.
Corporate Social Responsibility (CSR)
CSR is a company’s voluntary commitment to contribute positively to society and the environment—beyond just making profits. It reflects how businesses integrate social, environmental, and ethical concerns into their operations and interactions with stakeholders.
Principles of CSR
Accountability Companies must take ownership of their social and environmental impact—both positive and negative.
Transparency CSR activities should be reported openly, showing how funds are used and what outcomes are achieved.
Ethical Behavior Businesses must treat employees, customers, suppliers, and communities fairly and respectfully.
Respect for Law CSR must comply with national laws and international standards—especially in labor, environment, and human rights.
Human Rights Companies should uphold dignity, equality, and safety for all—especially vulnerable groups.
Stakeholder Engagement CSR should involve dialogue and collaboration with local communities, NGOs, and government bodies.
Importance of CSR
Improves brand image Companies known for social responsibility earn public trust and loyalty.
Builds community trust CSR strengthens relationships with local communities, reducing conflict and enhancing cooperation.
Attracts talent and investors Ethical companies appeal to socially conscious employees and investors.
Supports sustainable development CSR contributes to long-term goals like education, health, and environmental protection.
Differences: Law, Ethics, Governance, CSR
Aspect | Law | Business Ethics | Corporate Governance | CSR |
Nature | Mandatory | Voluntary but expected | Structural & procedural | Voluntary with legal elements |
Focus | Legal compliance | Moral conduct | Accountability & control | Social/environmental contribution |
Enforcement | Courts, regulators | Internal culture, norms | Board, regulators | Company-led or regulated |
Scope | Minimum standards | Higher moral standards | Internal systems | External community impact |
Example (Nepal) | Labor Act, Tax Act | Fair hiring, no bribery | NRB directives, audit committee | CSR spending under IEA |
Major Theoretical Perspectives on CSR
Friedman’s Shareholder Theory
Core Idea: Milton Friedman argued that the only social responsibility of business is to increase profits for its shareholders—within legal and ethical boundaries. According to him, spending company resources on social causes is a misuse of shareholder money unless it directly benefits the business.
Implications:
CSR is seen as a distraction from the primary goal: profit maximization
Social issues should be handled by governments or individuals, not corporations
Businesses should focus on efficiency, competition, and legal compliance
Criticism: This view is considered narrow in today’s context, as it ignores broader stakeholder interests and long-term sustainability.
Freeman’s Stakeholder Theory
Core Idea: R. Edward Freeman proposed that businesses should serve the interests of all stakeholders—not just shareholders. Stakeholders include employees, customers, suppliers, communities, and even the environment.
Implications:
CSR becomes a strategic tool to balance stakeholder needs
Ethical treatment of all parties builds trust and long-term success
Decision-making must consider social, environmental, and economic impacts
Strength: This theory is widely accepted today and forms the basis of modern CSR and corporate governance frameworks.
Carroll’s CSR Pyramid
Core Idea: Archie Carroll introduced a four-layered pyramid to explain CSR responsibilities:
Economic – Be profitable
Legal – Obey the law
Ethical – Do what is right
Philanthropic – Be a good corporate citizen
Implications:
CSR is multi-dimensional, not just about charity
Businesses must fulfill all four layers to be socially responsible
Ethical and philanthropic actions go beyond legal obligations
Application: Useful for teaching and structuring CSR programs in companies and universities.
Triple Bottom Line (TBL) Approach
Core Idea: Developed by John Elkington, the TBL approach argues that companies should measure success using three bottom lines:
Profit (economic)
People (social)
Planet (environmental)
Implications:
CSR is integrated into business performance metrics
Sustainability becomes a core business goal
Encourages eco-friendly practices and social equity
Strength: Widely used in sustainability reporting and ESG (Environmental, Social, Governance) frameworks.
Porter & Kramer’s Creating Shared Value (CSV)
Core Idea: Michael Porter and Mark Kramer proposed that businesses can create economic value by addressing social problems. CSV is not charity—it’s about aligning business success with societal progress.
Implications:
Companies innovate by solving community issues (e.g., health, education, environment)
CSR becomes part of competitive strategy
Shared value benefits both business and society
Example: A food company improving farmer productivity while securing better supply chains.
Strength: CSV bridges the gap between profit and purpose, making CSR more strategic and scalable.
Summary Table
Theory | Focus | CSR Role | Nepali Example |
Friedman | Shareholders | Minimize CSR | Hydropower firm ignoring local impact |
Freeman | Stakeholders | Strategic CSR | Bank supporting community lending |
Carroll | Layered duties | Holistic CSR | Company donating while obeying law |
TBL | People, Planet, Profit | Integrated CSR | Organic tea firm |
CSV | Strategy + Social Impact | Competitive CSR | Dairy firm boosting farmer productivity |
Legal Provisions Governing CSR in Nepal
1. Basic Understanding of CSR
CSR (Corporate Social Responsibility) refers to the ethical and legal responsibility of businesses to contribute to society beyond profit-making. It includes activities that promote social welfare, environmental sustainability, and community development.
2. Obligatory Parties
CSR is mandatory for:
Medium and large industries (as per Industrial Enterprise Act, 2020)
Cottage/small industries with annual turnover above NPR 15 crore
Banks and Financial Institutions (as per NRB Circular No. 11/073/74)
CSR is not mandatory for:
Insurance companies
Non-industrial sectors (e.g., trading businesses)
3. Governing Laws of CSR in Nepal
CSR obligations are governed by:
Industrial Enterprise Act, 2020
Industrial Enterprise Rules, 2022
NRB Circular No. 11/073/74 for banks and financial institutions
SEBON Guidelines for listed companies (CSR disclosure)
4. Applicability of CSR in Nepal
CSR applies to:
Medium industries: Fixed capital between NPR 15–50 crore
Large industries: Fixed capital above NPR 50 crore
Small/cottage industries: If annual turnover exceeds NPR 15 crore These entities must allocate at least 1% of annual net profit for CSR.
5. Designated Sectors to Execute CSR Funds
As per Rule 43 of Industrial Enterprise Rules, CSR funds must be used in coordination with local governments in these sectors:
Disaster prevention and rescue
Education and skill development
Health and sanitation
Environmental protection
Infrastructure support
Promotion of local culture
Employment generation
Community welfare
6. Utilization of CSR Funds in Nepal
CSR funds must be:
Used according to an annual CSR plan and program
Directed toward designated sectors
Coordinated with local level authorities
Transparent and traceable
7. Tax Deductions
CSR spending in approved sectors may qualify for tax deductions under Nepal’s tax laws. Examples: Donations to education, health, or disaster relief may be deductible.
8. Submission of CSR Report
Industries must:
Submit CSR transaction details and progress report
Within 3 months of fiscal year end
To the concerned government authority or registrar
9. Punishment for Not Fulfilling CSR
While specific penalties are not clearly defined, failure to comply may result in:
Regulatory scrutiny
Loss of tax benefits
Reputational damage
Possible non-renewal of licenses or government incentives
10. CSR Laws for Banks and Financial Institutions
As per NRB Circular No. 11/073/74:
BFIs must allocate part of their profit for CSR
Activities must align with national development goals
Annual CSR reports must be submitted to Nepal Rastra Bank
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