Illustrate the inherent legal risks, taking into account the probability of occurrence and their impact on the business. The focus is on legal risks. Companies, their boards of directors and legal advisors face a challenging business environment in which financial and reputational losses occur as legal risks develop. Finally, decide on the right attitude to risk. Is the company risk-averse, risk-neutral or risk-oriented? In our model, attitudes toward risk form the shaded „danger zone“ in the grid, separating causes of low from significant concern. The more risk-averse the person or company is, the more we move the dividing line up and to the left, and the more risk-averse the company is, the more we move the line down and to the right. An extremely risk-averse company would avoid even low-probability serious events (as shown in the first figure below), while a highly risk-averse company could only avoid high-probability severe events (as shown in the second figure below). A remedy by which a court orders a party to do or not to do a particular act. In late 2018, Deloitte surveyed senior general counsel and in-house counsel from various companies across various industries in Europe, North America and Asia Pacific to compare and contrast their relative maturity versus risk levels. While the content of this chapter is intended to provide you with useful templates for assessing legal risks, it should not be construed as encouraging illegal or unethical behavior. Companies are required to comply with the law and behave ethically. The model presented in this chapter is particularly useful when the law is not clear or when the question for the manager is what steps to take and what costs to avoid legal risks. Immediately following a general introduction to the law in Chapter 2, we will devote the whole of Chapter 3 to the principles of ethical business conduct.
A company`s attitude towards legal risks must also be influenced according to these principles. Often, law is taught to economics students as a kind of condensed version of law school. Subjects are taught in the same way as those of law students, but at a simplified level. This type of training can be very useful, but it ignores a crucial difference between lawyers and managers and the law: lawyers are trained to argue for specific legal findings on behalf of a client, while managers make decisions to manage legal risks. The law is rarely black and white, like „Don`t do that or you`ll go to jail.“ On the contrary, legal decisions often include questions such as „Our brand is similar to several others. Is it too similar? Or: „Adding this statement to our product label may expose us to liability, but it is not prohibited by law. Will we continue? This leaves many statutory management decisions to the manager`s risk tolerance. Compared to the way lawyers work, this requires a completely different approach to legal reasoning! In this sense, a business-oriented course on legal topics should essentially be a course on business strategy related to legal issues.
It should give managers an overview of the legal risks associated with running a business, how their decisions change those risks, and how they can minimize or use those risks to their advantage. Create a heat map of residual risks by developing controls for each inherent risk. Once controls are developed, subtract the control from the inherent risk that corresponds to the residual risk (inherent risk – control = residual risk). Each of these techniques can change the nature of legal risk. Adapting these techniques to legal risk brings lawyers closer to the organization`s operations to reduce costs and the impact of uncertainty. In today`s 24/7 world of information and social media, dealing with a crisis requires dealing with public relations while making important strategic decisions. Therefore, in-house counsel play an important role in helping the firm manage a crisis, establish public relations and minimize legal liability. While the goal of limiting legal liability is crucial, it should not be achieved at the expense of the company`s reputation with consumers and shareholders as a „good civil society“ that acts with integrity.
As organizations become more sophisticated in identifying and managing legal risks, we can expect legal risks to be separately identified and integrated into an organization`s risk management framework. This change in approach will allow Legal to respond more effectively to increased expectations and contribute to competitive advantage by controlling legal risks arising in the company`s areas of activity. Legal risk assessment is an important tool for the implementation and execution of a legal strategic plan, a compliance program and a crisis management plan (which takes into account not only legal risks, but also force majeure and operational risks). An accurate assessment of the competence of the legal department in legal risk management can only be made if legal risks have been identified and prioritized. With this knowledge, in-house counsel can explain to the business community what resources are needed to mitigate risks, so that controls can be established and residual risks identified. Risk analysis is the process of understanding the risks in the risk register. To analyze legal risks, start with a control assessment. Risk controls can take different forms depending on risk, industry and organization. For example, to manage a contractual risk, an organization can use a requirements tracking system to ensure that individual obligations are met. Once legal risks have been inventoried and analyzed in the risk register, it is important to communicate the results to the entire company. However, many risk experts diminish the power of their message and the effectiveness of their communication by presenting each risk. A risk researcher, on the other hand, is not just the person who hopes to maximize the value of retirement investments by investing in the stock market.
Just like a gambler, a risk seeker is someone who engages in a business (such as blackjack card games or slot games) as long as a long-term positive return on money is possible, even unlikely. Ultimately, an effective legal risk assessment is not only the „starting point“ for an effective compliance program, but also the foundation for an effective compliance program. Similarly, an effective risk assessment is the basis for a well-executed strategic plan and a much-needed crisis management plan.