Do You Understand Legal Risk Management?

September 10, 2019

Today, many in house lawyers and managers still think of risk management as the department that manages insurance policies. Some may in fact think that risk management also encompasses handling bad publicity or maybe even covers a disaster recovery plan. Many in house lawyers, as well as some corporate managers don’t believe risk management is part of their job description. However, given the globalization of business, the increased volatility of today’s business climate and the changes in social media that has increased communication tenfold, risk management is now part of every manager’s job description, including the in house lawyer.

The main role of in-house counsel in corporations or legal entities is now, of course, to mitigate legal risk in connection with the sale of products or services provided by the company. In essence how the company protects its success will be based in part on its ability to manage, control, and minimize legal risk, especially in a litigious society such as the US marketplace. Legal counsel must take an active effort in developing strategies, systems, and processes that will minimize the legal risks faced by the company on a daily basis. The area of risk management for in house counsel has become so large it can now be labeled “Legal Risk Management” or LRM.

What is LRM? Legal risk is the probable occurrence of a future event or non-event that will have a negative impact on the company that could result in law suits, fines, investigations, crisis, reputational harm, financial harm and of course the destruction of the company’s brand or even the company. Legal risks and business risks intertwine to such an extent that business risk have legal impact. Therefore, in house counsel must become involved in the day to day management of business risk itself and think in terms of risk analysis. The lawyer must use tools to not only identify risk but provide a qualitative analysis a risk’s probability and its impact on the company’s objectives and bottom line. Various tools include risk map, use of processes such as interviews of key personnel, procedures involving review of industry guidelines, internal procedures, risk diagrams, etc. What risk analysis has been developed to gauge the safety controls in the manufacturing division’s product design protocols? How does the R&D division handle the potential risk of defective parts and materials?

It is time that in house counsel realize they are in fact legal risk managers. The law department of a corporation can serve it well by playing a substantial role in the corporate wide management of risk by proactively managing potential risk instead of just reacting to it. By working with cross corporate teams to manage risks through corporate governance, compliance, loss control, review of HR processes or product safety concerns besides just purely legal issues, a corporation’s law department increases its value to the company.

By controlling and managing legal risk, an organization is able to control its future. Without adequate LRM processes, a company is exposed to claims, lawsuits, fines, and investigations. Not a day goes by where some governmental investigation or lawsuit is not reported in the local newspaper. These days it is a common occurrence. Therefore, it is imperative that an organization and its in house legal team understand that by managing legal risk it can control its’ future. Therefore, it is imperative that an organization understands the role that LRM plays in an organization.

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