The role of General Counsel and legal departments is changing. Not only do legal departments need to understand the law, draft legal documents and conduct litigation, but General Counsel is increasingly required take on the strategic management of legal risks to protect the value and assets of a company.
But what is legal risk?
Risk – by definition – is the uncertainty of the outcome of a certain event. Businesses are faced with a variety of risks on a daily basis. Business look to assume the right types of risk with positive consequences, like profit or increased market share, while reducing the potential of negative consequences, like litigation or fines. While many risks can have legal implications, that does not necessarily make all risks legal ones.
In this post, we’ll explore the various types of legal risks that can impact your business:
- Types of Legal Risk
- Corporate Risk
- Assets' Risk
- Contracts' Risk
- Risk for Disputes
- Regulatory Risk
- Conclusions
Types of legal risk
Certain types of risk are accepted as a part of business, others that relate to legal matters, like contracts, entities, assets, IP and compliance, can have serious, adverse effects on a business. As mentioned, any risk could have legal implications, however, typical legal risks that fall under the responsibility of the legal department include:
1. Corporate risk
Businesses have several options when choosing a legal and governance structure for the organisation which will set the tone and set a foundation for processes around taxation, liability, required documentation, etc., and how management and operational decisions are to be made.
General Counsel need to understand the pros and cons of each legal structure, and need to adopt a strong corporate governance that promotes ethical business practices throughout the entire organisation.
Once a legal and governance structure has been defined, it’s important to identify the corporate risks across the whole company, such as fraud or unethical business practices, and implement controls, like audits and awareness programs, to manage these risks.
2. Assets' risk
Another type of legal risk that General Counsel need to understand is the risk to assets. The value of both tangible assets, like buildings, and intangible assets, like human capital and intellectual property, need to be protected.
To protect the rights and obligations related to the legal assets owned by a business, General Counsel require a clear picture of all the company’s assets so that they can identify and manage risk to avoid negative consequences.
3. Contracts' risk
Contract risk is often defined as the possibility of financial loss either due to a buyer reneging on the contract or a failure by the organisation to adequately manage the contractual benefits or obligations.
However, when looking at contract risk it’s equally important to look at the contract management process to fully understand your company’s risk exposure. Poor contract processes, such as manual mistakes, non-compliant terms and/or an inability to close a contract on time, can put your company at risk.
Automatic processes and contract management software can help standardise the contract process and empower managers to draft contract terms using templates, reducing the organization’s exposure to contract risk.
4. Risk for disputes
Legal disputes include any dispute in which a legal claim is made, including employee misconduct, accidents, product liability, etc.
As General Counsel, one of your many responsibilities is to limit the risk of disputes. Even if disputes don’t end in litigation, they can damage business relationships, reputations and cost your company valuable time and resources.
To reduce the risk of disputes and litigation, General Counsel can take proactive steps like using risk transfer agreements, ensuring compliance, maintaining accurate records and using legal management software that can alert you to potential dispute risks.
5. Regulatory risk
Regulatory risks is the risk of having your company’s license to operate “withdrawn by a regulator, or having conditions applied (retrospectively or prospectively) that adversely impact the economic value of an enterprise” (PwC ).
Your business may be subject to regulations from government institutions, commissions and/or agencies. It’s important to understand the specific regulations that apply to your company’s activities and the related rules, such as specifications, policies, standards or laws, you must follow to avoid penalties and/or litigation. It’s also important to know when changes are made to that your company is not at risk of non-compliance.
Proactive regulatory risk management requires implementing specific policies, procedures and protocols to ensure that your company is in compliance well in advance of regulatory changes.
Conclusions
As General Counsel, our role is to support the organisation in assuming the right types of risk with positive consequences, like profit or increased market share, while reducing the potential of negative consequences, like litigation or fines.
General Counsel are increasingly being proactive in managing legal risks to protect company and shareholder interests. But to fulfill that role, not only do you need a structured way of identifying, assessing and mitigating risk but also for collecting the legal data to identify, track and report on those risks.
