Legal Risk Assessment and Mitigation

A couple of weeks ago, I shared my view on how businesses should handle their legal matters in general. Now, it is time to be more specific. In the next few months, I will elaborate each of the five pillars of efficient legal management.

This week is about efficiently managing and mitigating legal risks.

The very first question every company should know the answer to is about which laws and regulations are applicable to its business activities. This sounds quite simple but you would be surprised to see that many SMEs and start-ups fail to understand the legal framework they operate in. Such ignorance can have devastating effects. Indeed, certain rule violations may put an entire business at risk. I know of a few examples where start-ups had to re-finance or even stop their activities because they failed to recognise the importance of understanding labour law regulations.

But how do you approach your legal risk analysis in practice? My recommendation would be the following:

Step 1: Identify the Legal Framework for your Activities
The starting point for effective legal management is an assessment of the legal framework your business operates in. Do you need certain approvals by authorities to conduct your business? Do you know the specific labour laws applicable to your employees? Do you adhere to relevant data protection rules and do you know the rights and obligations of your board members? As you probably imagine, the number of rules applicable to a business is large.
Nevertheless, most firms can outline applicable regulations quite well. If you cannot or have not conducted an analysis of the legal framework in the past, do an assessment now and focus on the areas you are particularly exposed to legal regulation.

 Step 2: Identify the Risks of Non-Compliance
Once you know “your” legal framework, start identifying risks of non-compliance. Ask yourself: Where are we most vulnerable to non-compliance and what is the legal, financial and, increasingly important, the reputational impact of not complying with laws and regulations.
To understand the vulnerability to non-compliance, it is important to clearly understand your business and your processes. After you identified the risks, focus on key areas where non-compliance can have large impact. For example, whereas non-compliance with corporate law regulations does mostly not lead to any consequences, an investigation into fraud or bribery allegations can not only a broad legal impact but also devastating reputational consequences. So, try to focus on the latter. 

Step 3: Rank the Potential Risks of Non-Compliance and Prioritise Mitigation Actions
Although it would be optimal and a preferred state of handling legal matters to try to focus and mitigate all potential legal risks, resources are usually scarce and decisions have to be made. The most efficient way to a lean and efficient legal risk management is to focus on a few key legal risks with the highest impact potential.
Pick three to ten areas where – in your case - compliance with legal regulations is of vital importance and focus your attention and resources to these areas. This way, your firm can mitigate main non-compliance risks and still be agile and lean.

Final words
Legal risk assessment and legal risk mitigation is often regarded as expensive and not really necessary or the best use of resources. Business people often believe that investing in business development is much more rewarding and has a better potential to improve the bottom line. As long as none of the legal risks materialise, this is probably true. However, if there is a high impact incident of non-compliance, the consequences can be grave and sometimes non-reversible. A good business manager ensures the longevity of the business and keeps its reputation clean.

 You all know: “It takes many good deeds to build a good reputation, and only one bad one to lose it.” (Benjamin Franklin)

 Accordingly, take legal risk assessment and mitigation seriously!