final paper

Running head: THE LEGAL AND ETHICAL IMPLICATIONS 1

The Legal and Ethical Implications

Of An Independent Management Consulting

Robert Haskins

BUS 670: Legal Environment

Peter McCann, JD

11 November 2013

THE LEGAL AND ETHICAL IMPLICATIONS 2

The Legal and Ethical Implications

Of An Independent Management Consulting

“…there is nothing more difficult to take in hand, more perilous to conduct, or more

uncertain in its success, than to take the lead in the introduction of a new order of things”

Niccoló Machiavelli

This report begins with this quote because it emphasizes a fundamental philosophy of

management consulting, to identify a problem and issue a solution that its clients most often will

object but knows it needs. Consulting services is common in 2013; the industry including human

resources, information technology, strategy, operations management, and business advisory

services will exceed $415 billion (Plunkett Research, Ltd., 2013, para. 1). Moreover, the

booming economies of Latin America and Asia have created higher demand for specialist with

the talent to advise in financial, strategy, and process efficiency (Plunkett Research, Ltd., 2013,

para. 5). With this growing demand for management consulting professionals, more emphasis on

the legal and ethical implications placed on the industry needs to be done to keep the integrity of

the profession and protect the individual and their clients.

To achieve the task of illuminating the important issues of legal and ethical standards

upon an industry that rightfully require the professionals adhere to will call for an investigat ion

into what exactly is independent management consulting and how it relates to legal and ethical

issues. An ethical analysis of the philosophical theories on ethics will offer greater

comprehension of just some of the issues consultants face every day. A look at two of the

philosophies, utilitarianism, and deontology will give specific references towards consulting to

help determine the preferred ethical philosophy to generate the optimal legal outcome for a firm.

Common law dictates the uniformity and legal principles in consulting and this report will


examine three areas of law pertaining to the independent professional, contract law, tort law, and

criminal law. Furthermore, investigating the liability exposure and overall ethical standards of

the independent management consultant industry will assess the type of business entities and the

policies to improve the ethical environment for the individual, the company, and/or industry as a

whole. Legal and ethical issues initiates the motives of an independent management consultant

because using philosophical theories of ethics creates a foundation for legal decisions and using

common law practices formulates the environment as an independent management consultant.

Independent Management Consulting 101

Consultants are a multifaceted profession that appears across diverse industries. “A

consultant is simply anyone who gives advice or performs other services of a professional or

semiprofessional nature in return for compensation” (Cohen, 2001, p. 2). Part of the difficulty in

defining a consultant is determining whether they ought to be called employees of a firm

contracted to work on-site (the client’s premises) or in office, or an independently contracted

consultant working at home, in an office, or on-site. One significant way to distinguish between

the two is by how the Internal Revenue Service recognizes the relationship with the client. “The

individual on an agency’s payroll but assigned to work for the agency’s client and the individual

contracting directly with a client or with a prime contractor is drawn by identifying the first one

as a W2 consultant, and the second one as a 1099 consultant” (Holtz, 1999, p. 12). Although the

legal and ethical issues will not differ dramatically between the two types of consultants, this

report, as previously noted, will examine those issues of the independent management

consultant.

Management consultants are hired to identify a problem and issue a solution to improve

efficiency and profitability. However, many times the problem perceived by the client is only a


symptom of the real problem. “The need to spend time at the beginning doing research,

identifying areas of concern, and mapping out how the different areas of a business affect one

another is often a difficult sell to clients who want immediate results” (The Princeton Review,

2013, para. 1). The characteristics of a good consultant are good listeners, honest, resourceful,

analytical, problem solvers that know how to tactfully communicate how to implement a plan.

The typical consultant will often work 50 or 60 hours a week and travel often to domestic and

international clients. However, compensation is good and greater increases of pay and benefits

come with experience.

The independence in independent management consultant is not only a title but it is also a

noticeable feature of consulting. The position requires an unbiased assessment of the client’s

situation without any afterthoughts of the consultant’s own interest or repercussions from the

client. The consultant will need to have five types of independence to accomplish their goals,

technical, financial, administrative, political, and emotional independence. Technical

independence is to “Formulate a technical opinion and provide advice independently of what the

client believes” (Kubr, 2002, p. 8). The consultant with financial independence will commit to

giving advice with no financial interest in the clients decisions. The consultant shall have

administrative independence when they are not affected by the administrative decisions of the

client. Consultant’s cannot be influenced by the client’s management and/or employees and will

need political independence to keep from making biased decisions (Kubr, 2002, p. 8). These

characteristics and features of independent management consultants are all valuable components

that are all based on legal and ethical principles.

The Ethical Implications on Independent Management Consultants


An analysis of business ethics. One significant attribute of an independent consultant is

integrity because the position requires the person to be in a leadership role influencing

executives, managers, and employees. Therefore, this powerful role demands the consultant to

oblige with strict ethical standards. Carlo Vallini (2007) described ethics as “An expression of

thought rather than instinct in doing…pursuing of our own interests to a self-controlled extent; it

is responsibility in the relationships that includes…the interests of those whose interests are at

stake, loyalty of information and action, respect of super partes interests” (p. 27). Giving advice

will naturally involve the implications of ethics and established moral standards. Having the

obligation to give advice will necessitate the consultant, the person, to have an explicit moral

compass. Those seeking advice will expect this unordinary abundance of moral standards to

withstand the temptations of an independent possibly reaping putative personal gains from the

advice being given. “That is why, when seeking to craft an integrative management consulting

ethics as a guiding principle, it is imperative first to focus on the fundamental justifiability of a

management consultant’s specific consulting understanding” (Hagenmeyer, 2007, p. 110).

Undeniably, the issue of business ethics is a relatively young study that will require further

examination. Especially in the ideals of transparency and accountability philosophies to which

every leader will need to know to create the type of ethical environment an individual, company,

or industry is to thrive.

By applying two philosophical theories on ethics, utilitarianism and deontology to the

independent management consultant profession it will provide exceptional detail into the

framework for type of business ethics needed to succeed in the consultant industry.

Utilitarianism and deontology are placed on either side of the spectrum when it comes to ethical

theory because of the fundamental divide between teleological (utilitarian ethics) and


deontological ideals. “Deontologists basically believe that consequences don’t matter in ethics;

teleologists believe the consequences are the only thing that matters” (Waller, 2008, p. 52). An

analysis of these two ethical theories will give further insight into the contrast and comparison

elements that are relevant to the consultant profession.

Utilitarian theory. The simplest way to understand utilitarianism is to understand that it

is not an appeal towards intuition or an attraction towards reason; people merely want to enjoy

pleasure and avoid suffering. “Starting from this simple principle, ethics becomes a matter of

calculating how to produce the greatest balance of pleasure over suffering” (Waller, 2008, p. 50).

Utilitarian’s believe that any act that creates the greatest balance of pleasure over pain, it is

ethical. The utilitarian will consistently use calculations to determine whether their actions will

result in producing the benefits of a proposed act, policy, or duty. If events occur that were not

anticipated, the calculated consequences may also be wrong. “The best chance of plotting the

right ethical behavior is to make [the] best calculations, based on all the information [that can be]

secured” (Waller, 2008, p. 51). Utilitarian’s pursue this type of philosophy to avoid using

intuition or abstract reason; both considered a flawed perception of the world. Act-utilitarian and

rule-utilitarian have different views on the delivery and specifics of the calculations. Act-

utilitarian determines what should be done by considering the specific act that would produce the

best consequence. The rule-utilitarian “look more deeply at societal practices and institutions”

(Waller, 2008, p. 52). The utilitarian theory of ethics is effectively transformative to business

ethics because of the nature to produce the greater good with the minimal amount of pain.

A utilitarianism principled independent management consultant sees the moral standards

to achieve the right course of action would be to produce the best results possible for their clients

and limiting the pain of drastic changes. A consultant using utilitarianism will adhere to either


act-utilitarianism or rule-utilitarianism as the best fit for them in making those changes in the

business model. For instance, if the consultant uses rule-utilitarianism they will seek to make the

calculations to produce the greater good by taking known practices of change management to

maximize the effect and minimize inefficiencies.

Deontology theory. Another philosophical theory of ethics is deontology, the theory

originating from the concept of individual moral duty. This is to contrast the consequential view

of ethics similar to the aforementioned utilitarian theory. Consequentialists believe the choices

they make are morally assessed according to the results of the act. Deontologist consider the

morality of the choices and not the results those choices create. “The most familiar forms of

deontology…hold that some choices cannot be justified by their effects—that no matter how

morally good their consequences, some choices are morally forbidden” (Stanford Encyclopedia

of Philosophy, 2012, para. 13). Seaquist (2012) emphasizes this point by contrasting the

deontological view with utilitarianism stating, “The rights of the individual are very important

and there are some things one should not do, even if they would benefit a large number of

people” (p. 49). The deontological view of justifying the means to create an optimal result is

countered with the idea that people must act out of respect to the moral law. “The deontological

approach…is the way to balance the teleological dualism of means and ends by adding the

regulative dimension of the concept of moral duty, which manifests itself in self-imposed

constraints regardless of potential unwanted consequences for the acting entity” (Micewski &

Troy, 2007, p. 20). The stark differences between utilitarianism and deontology identifies

specific areas that independent management consultants behave and molds the psyche of those in

the profession to do the right thing, the definition of ethics.


The consultant that behaves with deontological approach will assess their decision based

on the actual choice and not the result of the choice. Thus, the consultant will weigh whether the

decision to modify a process according to the needs of the present over the results of the future.

More importantly, the deontological decision-making process keeps the patron legally and

ethically legitimate.

A careful evaluation of the two ethical theories, utilitarianism, and deontology has

expanded the comprehension of the optimal ethical environment for the independent

management consultant. This report has determined the philosophy to achieve the best legal

outcome for an independent consultant is the theory of utilitarianism. The consulting profession

is related to project/goal oriented processes and a utilitarian worldview would fit well in the

industry because of the similarity of the means justifying the ends. Although the ethical theory

we are discussing does not address the legality of the means, it does recognize that it is the moral

decisions that we make to create the greatest for the whole.

Areas of Law Relevant to Independent Management Consulting

Contract law. Common law dictates that the precedence and traditions of a society will

often outline the law itself. Contract law has been created to bind a relationship between two or

more entities to facilitate trust between those involved. For instance, a contract enforces and

protects an agreement or promise. A contract is comprised of five elements, offer and

acceptance, consideration, capacity, and legality of purpose, all of which needs to exist in order

for there to be a valid, enforceable contract. Contracts are made to keep a promise and validate

trust enforceable by legal authorities.

The independent consultant’s interest in contract law is validated since it establishes

credibility with the promisor and promisee. Furthermore, a contract confirms that the consultant


and the client understand the scope of the project, the obligation of the consultant, and their

authority. There are four distinct types of contracts that most consultants agree to, fixed-price,

cost, performance, and incentives contracts (Cohen, 2001, p. 111). There is no one type of

contract that is preferred over the other, but are more accustomed to fit the situation.

Tort law. The purpose of tort law is to remedy civil infractions inflicted on an

individual. This is in contrast to criminal law to which is an infraction on society. Furthermore, a

tort crime will have at least three elements, an act by the defendant, the defendant comprehends

the consequences, or intent, and the plaintiff suffered damages due to the actions of the

defendant (Seaquist, 2012, pp. 105-106). These three elements of tort liability establish the

intentional, comprehension able consequences. When the tort is unintentional, the defendant is

said to be negligent. The elements of negligence are a process to establish that negligence is

appropriate. These elements are:

Duty of care. This is the first step towards establishing negligence and it creates the

notion that a person is expected to behave in certain circumstances. “A duty of care…is the

standard of behavior expected of a person in a particular situation” (Seaquist, 2012, p. 122).

Standard of care. This element defines the reasonable behavior of the defendant and

establishes this behavior as the standard. Thus, “Falling below the duty of care is not exercising

the care that a reasonably prudent person should have exercised under the circumstances”

(Seaquist, 2012, p. 123).

Breach of the duty of care. When the defendant creates the standard of behavior to

avoid the risk of causing damages, it is said to have prior knowledge and presumes duty of care.

“A person who acts carelessly – unreasonably, without due care – breaches the duty of care, and

such conduct is characterized as ‘negligent’” (Owen, 2007, p. 1607).


Actual causation. This element of negligence is a lesson in cause and effect by testing

the hypothesis asking the question, “but for the existence of A, would B have occurred?” (US

Legal.com, 2013, para. 1).

Proximate causation. The next element, proximate causation, implies that the plaintiff

may not be negligent if the space and time between injury and negligence have no relevance

(Seaquist, 2012, p. 125).

Actual injury. The last element is a culmination of the previous elements and the result

of each. For example, actual injury is the damage a plaintiff suffers because of the proximate

causation of a defendant’s breach of duty (Owen, 2007, p. 1685).

Defenses to negligence. Despite having been proved through the elements of negligence,

a defendant could escape liability by providing evidence for one of three defenses, contributory

negligence, comparative negligence, and assumption of risk.

Contributory negligence. The defendant could use this defense when the plaintiff is

partially at fault. If this defense is used and the plaintiff is found partially at fault, it is possible

the plaintiff will not receive any compensation (Seaquist, 2012, p. 126).

Comparative negligence. A modern update of the contributory negligence is the

comparative negligence. This defense would still allow some recoverable damages for the

plaintiff. Thus, this defense reduces the possible reward because “The plaintiff's damages are

reduced by whatever percentage her own fault contributed to the injury” (Environmental Law

Online, 2013, para. 4).

Assumption of risk. The third defense against negligence is to prove that the plaintiff has

previous knowledge of a product or activity to be dangerous. The difficulty for the defendant is

to prove “The plaintiff knew or should have known the inherent danger of engaging in the


activity in question and whether he or she voluntarily assumed that risk” (Seaquist, 2012, p.

128).

Criminal Law. This type of law considers the infractions committed are harmful to

society as a whole. This will involve various types of people to bring justice to those that have

been harmed. In criminal law there are two elements to every crime that the prosecutor will need

to identify to convict a person, “A criminal act or omission by the accused and the existence of a

wrongful state of mind or intent at the time of the commission of the wrongful act or omission”

(Seaquist, 2012, p. 83). These elements of a crime do not necessarily require an act of intent

failure to act will not result in criminal liability unless the accused had a duty to act. For

instance, a producer of a television show is not liable for the actions of their star actor while the

actor is off duty. However, if the producer had seen the actor drunk and about drive while

working, there could be a special relationship that could cause the producer to have a duty to act.

White collar and corporate crime are two types of criminal activity that occurs in the

workplace. White-collar crimes are individuals that commit crimes against the company thus,

doing harm against them. Corporate crime is criminal activity that affects the economy and

society. This type of crime can have devastating impacts on people. Therefore, corporate crimes

are more serious than white-collar crimes.

Liability Exposure

A business is created because of a person’s idea, instinct, or dream but the creation of the

entity will require a fundamental decision of what type of business it be organized under, a sole

proprietorship, corporation, or a limited liability company (LLC). By examining each of these

types of organizational forms to comprehend the impact these forms have on personal liability.

In addition, as these forms are compared and contrasted, a clear view of the types of


organizations will formulate the optimal choices for the independent consultant to take. Even

though more expensive to create than a sole proprietorship, LLC is the best type of

organizations because owners have limited personal liability for business debts and IRS rules

now allow LLCs to choose between being taxed as a partnership or a corporation.

Sole proprietorship. Perhaps the simplest form of business is the sole proprietorship

because of its definition of being a company owned and operated by one person. An

entrepreneur may form a sole proprietorship because of its ease to create and having “Complete

authority, within the boundaries of the law, for the running of the business, and does not need to

report to any other person” (Liuzzo & Bonnice, 2007, p. 292). However, those who decide to

become sole proprietors will need to understand they are liable for all the legal debts and

obligations of the business. This type of business entity is common for the independent

management consultant due to its solitary work environment.

Corporation. In a corporation, the owners have become those who invest capital into the

entity, they call themselves stockholders. Stockholders elect the directors that will elect or hire

managers to operate the company. “The law grants a corporation status as an artificial being

much like a person for most purposes” (Seaquist, 2012, p. 427). Thus, a corporation acts as

though it is a person, can own property, and borrows money. Furthermore, the stockholders of

the company are not personally liable for corporate debts and suing the corporation can occur. If

the independent management consultant decides to incorporate themselves they will have heavy

taxes levied on it because they “Have a ‘double tax’ problem, both corporate profits and

shareholder dividends are taxed, corporate profits are taxed at a lower rate than the rates for

individuals” (Cornell University Law School, 2013, para. 4). Moreover, the personal liabilities


of the shareholders are protected under the veil of the corporation. Therefore, a personal liability

lawsuit will not personally affect individuals, rather than the corporation itself.

Limited Liability Company (LLC). The LLC is the “goldilocks” of business

organizational forms because it takes some of the advantages of the sole proprietorship form and

combines with some of the advantages of corporations. For instance, LLC’s provides the limited

liabilities of a corporation and the tax implications of a partnership. Even with having limited

liability, the members of the company shall also have the ability to manage the day-to-day

activities of the company. “As is true for all small firms, the owners of an LLC frequent ly have

difficulty in raising additional funds to expand or maintain the business” (Liuzzo & Bonnice,

2007, p. 298). Independent management consultants are protected from personal liability under

the rules of a LLC. However, the company can suffer tremendous losses if not protected by

liability insurance or other forms of insurance.

Conclusion

The legal and ethical issues that independent management consultants face every day are

often times daunting. This report has uncovered many of the implications that create the

foundational and fundamental aspects of the consulting profession. Once a comprehensive

examination of the profession was conducted, it revealed that the consultant could be one of two

types of employment, one that works for a firm contracted to a client working on-site or in

office, or an independently contracted consultant. Moreover, the first step to illustrate the legal

and ethical issues was to examine two types of ethical theories. It was concluded that

utilitarianism was an ideal philosophy of ethics to affect the independent consultant the greatest.

The report also investigated three relevant areas of law that the consultant needs to consider,

contract, tort, and criminal law. Furthermore, this lead to examining the liability exposure of the


independent consultant, choosing the limited liability company as the optimal option in the type

of business entity that would protect the consultant from personal liability. This report produced

the vital evidence that legal and ethical issues initiates the motives of an independent

management consultant because using philosophical theories of ethics creates a foundation for

legal decisions and using common law practices formulates the environment as an independent

management consultant.


References

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