Legal risk

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Legal risk
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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).


Author: Kamil Ochmański