Governance, Risk and Compliance
By Diana Buccella Modified April 17, 2020
Staying on the right side of the law is critical for your company’s success – and its existence. That’s why you have a legal department.
Corporate legal teams handle risk management, legal governance, and compliance issues. In an increasingly regulatory environment that is enhanced by citizen watchdog agencies with large social media followings, legal teams face a challenging task in making sure their companies control legal risks and stay protected from a lawsuit. To do that, enterprises need to ensure that they are accurately capturing, monitoring, and controlling legal risks.
What is the value of a legal risk management plan? Primarily, these plans help you allocate the resources you need to identify, prevent, and address potential incidents that can put your company at risk of legal backlash.
Here are the top four risks that concern legal teams.
Fraudulent or illegal activities can bring down mammoth organizations, destroy carefully built reputations, and even send employees to prison. Enron has become the single most recognized cautionary tale regarding fraud in corporate America.
Each year from 1996 to 2001, Fortune magazine named Enron “America’s Most Innovative Company.” Enron grew so fast that from January of 2001 to August of the same year, its price per share jumped from $43.44 to $90. CEO Kenneth Lay, his executive team, board, and investors raked in money. Few people knew that Enron was recording projected profits as actual profits, artificially inflating its success. Lay’s wonder-boy, financial guru Jeffrey Skilling, was renaming assets as profits, transferring revenue-losers off the books, and generally falsifying the company’s records.
By fall of 2001, Enron was well on its way to becoming the largest corporate bankruptcy in U.S. history at the time. Ultimately, Ken Lay was found guilty on 10 felony charges, and Jeffrey Skilling received a 24-year prison sentence. Arthur Andersen, Enron’s accounting firm and (until then) the most respected name in the business, also faced criminal charges and eventually reorganized under a different brand.
If your legal team isn’t adequately prepared to handle massive fraud cases or if it doesn’t have a plan in place if fraud were to occur, you are leaving your organization open to extreme vulnerabilities.
Increasing numbers of customers are prioritizing green companies. Environmental conscientiousness is also important to many watchdog groups and regulatory agencies. Poor sustainability practices that do not reduce an organization’s energy footprint or that actually accelerate anthropogenic climate change can hurt a company’s reputation and place it in legal jeopardy. Thankfully, most green initiatives are not complicated to launch and can pay off in real dollars saved. For instance, lower energy use means lower overhead costs. A less toxic environment reduces worker’s compensation claims. Promoting green eating in the company cafeteria can lower health insurance costs.
Building a sustainable business isn’t just for lean, youth-oriented startups. Top companies are going green, too. McDonald’s, for instance, is cutting energy depletion by installing energy-efficient appliances. Dell has instituted a recycling program to help manage the growing problem of e-waste. And Bank of America cut its paper use by 32% and now recycles 30,000 tons of paper each year, saving 200,000 trees. These companies are attracting the right kind of attention and should be well positioned to comply with any new environmental regulations imposed by federal or state governments.
Companies doing business in highly regulatory industries like banking, healthcare, and energy need to be especially cognizant of the latest changes in laws and best practices. If an organization’s employees are unable to manage new and changing legal or regulatory requirements, that organization puts itself at grave legal risk. Writing in Business News Daily, Adam C. Uzialko says, “Staying on top of the rules (which are often changing) is essential to maintaining a competitive edge. Failing to do so means incurring penalties and potential legal issues, which could cause you to fall behind your competition.”
Uzialko notes five federal policies that are likely to change and that could impact your company – sales taxes on e-commerce purchases, tariff and trade policies, federal tax policy, the Affordable Care Act, and General Data Protection Regulations (GDPR) in the European Union. Recently, China’s decision to stop buying recyclables from the U.S., Germany, Japan, Australia, and the U.K. – unless those waste products meet very high purity standards – has sent waste management companies and shipping conglomerates into a tailspin. Although a foreign government imposed these regulations, American companies are paying the price for them.
Loss of intellectual property occurs when an organization fails to protect and/or enforce its intellectual property rights. Particularly prescient for companies that engage in extensive research and development, loss of intellectual property is a serious threat in a global economic environment.
Due to conflicting national laws and the varied ability of national governments to enforce them, companies that do business across borders run high risks of getting ripped off by unscrupulous hackers, and often, police agencies can do little to stop them. Luxury fashion brands and media production companies have historically borne the brunt of fake reproductions, but today, hackers and thieves can steal any scientific and technological knowledge not protected by secure cyber borders and crack legal teams. Perhaps most disturbing, many technological innovations could be co-opted for nefarious purposes and sold on the international black market. That means federal regulators and crime agencies are watching intellectual property closely. You should be, too.
Risk management for legal teams should be a top priority for any company that would like to remain in business without facing stiff fines. While technology alone is not a one-size-fits-all risk management solution, it is part of a simple, affordable, and effective approach to legal risk management. Resolver’s risk management software can help you avoid the pitfalls of legal risks.