Strategic risk management is part of strategic planning. It is a systematic way of identifying legal risks in business, establishing programs for eliminating, avoiding, transferring, or mitigating the effects of such risk, and educating business managers on how to deal with such risks in the future. It is designed to help business managers improve future earnings of the company by identifying and appropriately dealing with legal risk which leads to future costs that may be avoidable.
Why Focus on Prevention?
Failure to practice preventive risk management leads to crisis management and the loss of valuable corporate assets, including top management time, organizational stability, productivity, money, and morale. The cost of prevention is nominal compared to the cost of resolving legal risks after they become problems or disputes. Prevention cannot be delayed or avoided.
What is Legal Risk?
Legal risk is the possibility that a business will incur financial losses, including non-operating losses, based upon its legal relationships with its employees, creditors, competitors, customers, and others. With a rapidly changing and increasing complex legal environment, the number of legal risks facing businesses is increasing dramatically. Managing legal risk is no longer intuitive and the legal mine field through which business managers must now navigate is crowded with potential explosions.
How Does Strategic Risk Management Work?
The focus of strategic risk management is diagnosis of your business to prevent legal risk in the future.
- Risk Identification: “What legal problems do I currently have and what are my future legal risks?” Legal audits help diagnose or identify existing and future risks.
- Risk Assessment and Determination: “With the existing legal risks in my business identified, how significant are they and what can I do about them? Legal counsel helps create a program to eliminate, avoid, transfer, or mitigate existing legal concerns or risks.
- Strategic Risk Control and Avoidance: “What strategy can I implement to avoid or control legal risk in the future?” Legal counsel helps to establish a program for handling the company’s legal risk in the future.
What is a Legal Audit?
A legal audit is like a physical examination for your business. It is a tool for analyzing the existing legal condition of your business and identifying potential future legal risks. It includes interviews with key officers and employees and a review of critical documents, such as articles of incorporation, bylaws, minutes of meetings, policies and procedures manuals, contract forms, online contracts, and other significant contracts, and the company’s website. Based upon the review conducted, an analysis is made and recommendations provided to management for handling the legal risks identified in the review.
Is It Possible To Eliminate All Legal Risk?
The objective of strategic risk management is not to eliminate all legal risk. That would be impossible. In fact, there is much legal risk that cannot be eliminated and there are legal risks that you will consciously accept because the cost of eliminating them is too high. However, strategic risk management can help reduce the possibility of facing unexpected expenses in the future by dealing with legal issues now.
How Do I Know If I Need Strategic Risk Management?
If you are in business, you need strategic risk management. Just as you cannot send your friend to the doctor for your physical examination, you cannot avoid having the diagnosis made for your particular business. Business managers must plan for all aspects of business operations at the same time. One such function managers cannot overlook is planning for legal risk. If a manager focuses on production, but fails to anticipate how the production will be capitalized, the business has a high possibility of failure. Likewise, if business managers focus on the future success of the business, but fail to effectively plan for legal risk, the business may face significant, if not insurmountable obstacles in the future.
What Legal Risks Do I Face?
Each business and each industry is different. As a result, in addition to several common legal risks in business, you face unique risks. For example, all companies face the possibility of employees making claims for harassment or discrimination. However, software publishers face unique risks when selling software in foreign countries. Your business should be evaluated individually and a plan adopted for the risks of your particular business.
Issues Which May Impact Your Business
The following are examples of common issues addressed by strategic risk management:
Does your website infringe on the intellectual property rights of others?
What rights do you have in your trademarks, and do your trademarks infringe on the rights of others?
Are your officers, directors, and shareholders protected from personal liability?
Are there any limitations on how or when you can terminate any employees?
Can your key employees compete against you or solicit your employees?
Are your distributors independent contractors or are they employees for whom taxes and other assessments must be paid or franchisees for whom federal law compliance is required?
Are you fully protecting your intellectual property as important assets of the company?
Is your business engaging in any price fixing or other unfair trade practices?
Do all of your means of raising capital, debt and equity, comply with federal and state law?
If one of your shareholders dies, can he or she sell his or her shares and control to a person who is adverse to other shareholders or current management, or who may not share the same values or goals as other shareholders and management?
Are your contracts current, and have you performed as required under your contracts?