If you call the shots in any sort of business, you must have had known this feeling. You get a very important contract, or is about the start a new business division, and while everything is going quite good – there is that little bit of worry somewhere in your mind – what if something is screwing up without your knowledge within the complex processes, of the many activities being undertaken in name of your business?
While you are probably reviewing your risk profile from time to time, are you aware of the various legal risks that arise ot of your business operations? Legal risks are usually definite and identifiable, and once they materialise, they can be disastrous in many ways.
Legals risks threaten you with a range of unwanted consequences – heavy fines, loss of good will, bad publicity to even closure of business, loss of licenses or jail for those who are liable for non-compliance with various laws.
Experience says as far as legal risks are concerned, the most serious ones are easily identifiable right from the beginning – from the moment you even contemplate the activity or processes that gives rise to the risks – and the cost of eliminating or minimizing risks at that stage is always the least as compared to any other point of time.
Has your business just bagged the a very important order? Is your organization gearing up for that big moment that will propel it into the big league? Then this is the time you need to get your processes in order – that will control how things get done within the company. For instance, if someone is making potato chips in a factory, it is a great idea to build processes that ensure that all safety and health regulations are complied to and also that if an allegation of negligence (think tort or product liability cases) is brought against the manufacturer, it should be easy to establish that the company has taken due care by designing elaborate policies and framework to ensure that required standards are met.
Many businesses tend to assume good fortune as far as legal risks are concerned until they learn bitter lessons of long lasting disputes, bad publicity or blacklisting by institutional clients. Are you prepared to deal with uncertain and risky events which can turn your business upside down? What would happen if some of the people you depend on fail to deliver? Would you be able to live up to your commitment? Have you factored in the impact of the Service Level Agreement into your processes? Does your business have the required cushion for you to live up to your commitment?
Irrespective of your risk-appetite, it makes no sense to expose yourself to unnecessary legal risk unless you are willingly breaking some law for higher margins or some other strategic reason. And that is why you should consider legal liability management.
Here are 5 reasons why you want very strong legal liability and legal risk management:
- Raising money: Every business, not matter at what stage – starting from a startup company to a company which has already gone public – needs to raise money! It can be from lenders, through private placement or from a public offer. When you try to raise money, you must show that you have a viable business and that your business have been in compliance will all relevant laws. If you have huge unmitigated risks, or if they have materialized, it may become impossible to raise money.
- Stock price: Legal risks depress stock price big time. Every company’s stock has some price – be it a private or public company. Private companies always keep in mind the possibility of a sell out – and the price they can get if the current owners cash out. Almost every decision in a public company is usually driven by stock prices – and if the market gets a hint of unmitigated risks or any risk about to materialise, that is going to bring the price of the stock crashing down. Even in case of acquisition of a private company, the buyer is going to ask for huge discounts over the value of the company due to legal risks.
- Regulatory action: Regulatory bodies are dreaded in India. India has very strong regulatory regimes as far as companies are concerned. Bad corporate governance or non-compliance of laws may go unnoticed for years – but when they are discovered, regulatory action is stern and steep penalty and harsh punishments are meted out.
- Customer backlash: Having a great legal liability management ensures good policies that protects the customers from goof ups within the company. It also ensures that there are verifiable documentations of the good practices and policies of the company. This adds value to the experience of the client/customer and also makes them feel safe. Imagine you subscribe to services of a company which is often pulled up for legal violations. Even if there is no direct repercussion of the same on the service or product YOU are buying, you’d still not feel too safe about the company. No one wants to continue to work with a company or a brand that runs huge legal risks.
- Creating law compliant processes ensure that there are good processes: Many profitable businesses do not have concrete, well developed processes. That is nothing but bad management. Corporate Law and other laws are designed in such a way so that minimum good governance is ensured. If you start designing your processes and policies around legal obligations, you would always end up with a lot of well organized sound processes.