Legal risk

From CEOpedia | Management online

Legal risk term and every action around handling and managing it are freshly gaining popularity due to recent corporate scandals, market crashes and industry investigations. That is why it is yet ill-defined and not that well understood in business. Legal issues can be found in the vast majority market actions such as lawsuits, liability claims, shareholder actions and even more government actions. Therefore, successful legal risk management(which is often shortened just to LRM) is a key factor embedded in many vital areas of strategic decision-making(Hopkins B.E. 2013, P XII - XX).

As defined by Whalley and Guzelian "legal risk is the risk of financial or reputational loss that can result from lack of awareness or misunderstanding, ambiguity in, or reckless indifference to, the way law and regulation apply to your business, its relationships, processes, products and services"(Whalley M., Guzelian C. 2016, p. 3). The way to manage it proactively is to understand where does it come from.

Legal Risk Occurrence

While such risk can emerge in various parts or at any time in a certain company, proper way to manage and handle should be a priority to the management. Their actions should contain inspecting, supervising, handling and soothe certain company's legal exposure. Due to proper training or implementation of precautionary insurance programs it can be preventive in its nature(as it could belittle the amount of penalties or investigations). It has to be properly implemented so that the company could benefit from it. Proper departments must actively oversee risk managing functions(Hopkins B.E. 2019, 17). LRM processes are most often designed and implemented to engage prophylactic projects. By overseeing company's defense line against hazardous factors from the environment(such as safety litigations) management can prevent and annihilate many risks and problems before they grow to a larger scale or even before they see the daylight in their company. It is at the most importance that a company comprehend how big role legal risk management has in the organization. Proper undertakings, calculations, regulations and implementation of right systems results in minimization and control of legal risks(Hopkins B.E. 2013, p. 3-4).

Avoiding Legal Risk Exposure

Ideally the management should be aware of any possible risks and handle them through a process covering sweeping areas of responsibility and involve actions as:

  1. Risk estimations of a company environment and notifying management.
  2. Developing and implementing solutions to such issues.
  3. Advising on insurance coverages and alternatives for those.
  4. Overseeing product service matters.
  5. Having an eye on safety issues, reporting and taking precautions if needed.
  6. Proper retention of documents.
  7. Reviewing compliance.
  8. Educating and training employees about product and legal safety issues(Hopkins B. E. 2019, chapter 18).

Examples of Legal risk

  • Regulatory risks: Regulatory risks are those associated with changes in laws, regulations, and compliance requirements, as well as enforcement actions. For example, a new law could impose additional taxes on a company, or a new regulation could require a company to adjust how it does business.
  • Litigation risks: Litigation risks are those associated with any lawsuits that could be brought against a company or its employees. These could include class action lawsuits, contract disputes, employment disputes, intellectual property disputes, and more.
  • Reputational risks: Reputational risks are those associated with a company’s public image, including its brand, reputation, and customer relationships. These risks could arise from negative media coverage, customer complaints, or even a company’s own actions.
  • Financial risks: Financial risks are those associated with a company’s financial performance and stability. These risks could include losses due to fraud, mismanagement, or market volatility.
  • Compliance risks: Compliance risks are those associated with any laws, regulations, or standards that a company must adhere to in order to stay in business. These could include laws regarding labor and employment, health and safety, environmental protection, and more.
  • Contractual risks: Contractual risks are those associated with contracts that a company has entered into. These could include disputes over the terms of a contract or a breach of contract by one of the parties.

Advantages of Legal risk

Legal risk management has numerous advantages which can greatly benefit a business. *It provides a secure and reliable legal environment for companies to operate in, protecting them from any legal issues which may arise. *It also helps to ensure that businesses are up-to-date with the latest legal regulations, allowing them to stay compliant with the law. *Legal risk management helps businesses to identify potential legal issues before they arise, allowing them to take proactive steps to prevent any potential problems. *Finally, it can help businesses to save money and time, as they can quickly and efficiently identify legal issues and handle them without the need to go through lengthy legal proceedings.

Limitations of Legal risk

  • Legal risk is limited by the scope and size of the organization. Legal risk management is very difficult in larger organizations due to the complexity of their operations and the large number of stakeholders involved.
  • Legal risk is also limited by the availability and affordability of the resources needed to identify, manage, and mitigate the legal risk. Organizations with limited resources may not be able to access the necessary legal advice and representation needed to properly manage their legal risks.
  • Legal risk can also be limited by the level of understanding of the legal system and the statutes and regulations that govern the organization. Organizations may not have the internal expertise to effectively identify and manage legal risks.
  • Legal risk can also be limited by the level of political and regulatory environment in which the organization operates. Political, economic, and social changes can create new legal risks that the organization may not be prepared to address.
  • Finally, legal risk is limited by the organization’s ability to develop and implement effective legal risk management strategies. Organizations must be able to identify, assess, and manage legal risks, as well as be able to implement effective strategies to mitigate potential legal risks.

Other approaches related to Legal risk

One of the approaches related to legal risk is Risk Avoidance. It is a strategy that involves identifying risks and taking steps to avoid them. This may include limiting activities that may lead to legal risks, such as avoiding certain business activities or avoiding certain customers.

Another approach is Risk Mitigation. It involves taking steps to reduce the potential for legal risks by implementing steps to limit the impact of those risks. Examples of risk mitigation include implementing policies and procedures to monitor and control activities, implementing training and education programs to help employees understand legal risks and implementing internal systems to identify and manage legal risks.

A third approach is Risk Transfer. This involves transferring the risk to another party, such as a third-party insurer or another company. This could include entering into contracts that provide for indemnification or other forms of risk transfer.

Finally, Risk Management is an approach that involves assessing legal risks and taking steps to manage them. This may include implementing policies and procedures to identify, monitor, and control legal risks, as well as implementing systems to ensure that legal risks are managed effectively.

In summary, legal risk management involves assessing risks and taking steps to avoid, mitigate, transfer, and manage those risks. It is an important part of any business and should be taken seriously to ensure the long-term success of the organization.


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References

Author: Kamil Ochmański

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