There is no doubt that many business executives place a high value on effective legal risk management. According to some survey results, the old technique of depending primarily on experience, judgment, and intuition in a reactive manner is being abandoned at a greater rate than ever before.
Despite this, many business executives, regardless of their level of seniority, have never received any formal training on how to manage their legal risks successfully with this in mind, how corporate executives understand and manage legal risks this year and beyond will significantly impact their bottom line.
Legal risks differ from financial risks in that businesses can (and should) incur financial risks such as CAPEX, corporate acquisitions, and employment negotiations and recruitment if they are allowed.
Furthermore, legal risks are inextricably linked to some financial risks, and it is these risks that must be addressed. Many businesses have an implied “zero tolerance” attitude regarding legal risks posed by an employee’s illegal behaviour. Unfortunately, this approach does not result in a risk-free environment.
Establishing codes of conduct or ethics is really the first step, as the shared attitude and culture that develops inside the company toward obeying the law or authorities will be largely determined by actions rather than words. In practice, the steps below can assist businesses in managing legal risks:
This should prompt business executives to consider the following question: Where are legal risks most likely to arise? For example, when it comes to documentation, organizations must thoroughly evaluate the legal documents they use and determine who is responsible for ensuring the documents’ legal effectiveness. Similarly, businesses must examine the nature of their legal exposures in the country in which they operate and the litigation “culture” of that country.
Businesses must establish a knowledge of the likelihood of occurrence and magnitude of consequences in this situation. This is critical for setting priorities, budgeting, and allocating resources. The existing legal infrastructure could be considered when assessing legal risks: What degree of independence do the judges have? How complex are contract law concepts to grasp? In the face of changes in corporate operations, sectoral developments, and applicable policies, rules, or regulations, such studies should be undertaken every year and on a regular basis. Proper prioritization is essential because of the large number of predictable risks; nonetheless, certain dangers require more immediate attention than others.
Monitoring entails empowering authorized workers to regularly report essential information so top management can quickly assess its significance. However, all reasonable precautions should be taken to avoid conflicts of interest when performing this role. It is also critical that the risk monitoring team’s legal operations consulting lawyers have sufficient independence. Because lawyers’ primary duty is to provide technical legal advice, it’s unlikely that they would have complete control over all choices resulting from the monitoring process—furthermore, the reporting lines and who is responsible for what should be clear.
Although commercial insurance is extensively utilized by businesses to mitigate damage caused by legal risks, it does not cover all legal hazards. The limits and terms of insurance plans must be thoroughly examined and understood. Mitigating loss will necessitate a study of legal documents, the allocation of resources for defending or prosecuting claims, and an examination of the likely financial impact.
Businesses will need to ensure that their mitigation plans encourage as quick a response as possible, given the incredible speed with which agreements are conducted currently.
True, each organization will have its own legal risks, but completing the measures outlined above can help you control the legal risks (such as faulty documentation) that can lead to serious problems.
Finally, in order to effectively manage legal risks, businesses must build functional management structures to aid in sound decision-making and coordinate the work of the board of directors, executive managers, and lawyers. There is no uniform structure that is well-suited to all enterprises, with the exception of a few common characteristics.
The board of directors should establish policies, compel executive managers to produce monthly reports on legal risk management, and cultivate a good working relationship with experienced legal operations consulting lawyers who can alert the company to potential legal issues. When it comes to adopting board-approved rules and standards and allocating proper resources to manage legal risks, executive managers will need to walk the talk.
Shikana Group provides holistic guidance around strategic business decisions. It offers support and insights that maximize efficiency and reduce the cost of operations of investors in East Africa by managing and mitigating legal and commercial risks.