Chapter 3 - Managing Legal Risks.docx

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University of Guelph
Marketing and Consumer Studies
MCS 3040
Joseph Radocchia

Chapter 3: Managing Legal Risks Assessing the Legal Environment - A business must be able to analyze and evaluate its activities, forecast changes in the business environment and react effectively to unexpected developments - Business also needs to intelligently deal with the legal environment, and by doing so, the business is less likely to make mistakes that are: o Costly – in terms of expense of legal services and damage claims o Distracting – in terms of time and effort o Harmful – in terms of relationships and reputation in the industry - Preventative Approach – requires a thorough evaluation of the risks associated with the business’ activities, in order to minimize their impact (emphasis on compliance with legal requirements, and anticipation of changes in the legal environment) - Reactive Approach – recognizes that legal problems may still materialize, so the firm needs a strategy in place to deal with such developments - These two approaches are combined in a management plan that reduces the impact of legal risks on the organization - Legal Risk: a business risk with legal implications Legal Risk Management Plan: - A comprehensive action plan for dealing with the legal risks involved in operating a business - This process is often part of a broader exercise within an organization – Enterprise Risk Assessment, in which all risks are assessed and managed - Risk management involves the cooperation of managers and others at every level of the organization - Creating a risk management plan is a 4 step process: 1. Identify the legal risks 2. Evaluate the risks 3. Devise a risk management plan 4. Implement the plan Applying the Four Step Process: Step 1. Identify the legal risks  - It is a challenge to separate legal risks from the broader business risks - Ex: Every business runs the financial risk of failure and bankruptcy, but the legal focus of that risk would relate to the impact on the owners of the business Three methods that businesses use to identify its potential exposure to legal risks  1. Assess the Organization’s Functional Areas: - The functional areas of business are those that are traditionally recognized in business organization charts – accounting, finance, marketing, production, human resources, information systems - Examples: o Marketing programs are subject to industry codes and gov’t regulation – Consumer protection rules against misleading statements in advertising “regular” and “sale” prices o Production decisions may entail tradeoffs b/w efficiency and safety o HR involves risks such as harassment, wrongful dismissal and downsizing – if these matters are not handled according to well-developed policy, organization runs a greater risk of being sued o IT poses a risk if records are inadequately maintained and protected 2. Review the organizations business decisions: - A review of decisions having possible legal implications can be used to identify risks - Examples: o Company must assess the risk in its decisions concerning financial arrangements – How is credit granted to customers? o Company must asses the risk in its decisions on how its contracts are worded o Company must assess the risk in its decisions regarding the ownership and use of land o Company must assess the risk in its decisions affecting personnel – company faces legal ramifications in hiring, employing and dismissing employees 3. Examine the organization’s business relationships and assess those relationships - Focus on the relationships the business has internally and externally - Has the potential to provide a broad perspective b/c it identifies those who have relationships with the business, and the risks involved in those relationships - Examples: o Employees may create difficulties with customers or suppliers, be injured at work, or experience discrimination o Suppliers or lenders may claim that they have not been paid; suppliers may fail to deliver as promised o Regulators may charge the business for failing to obey regulations related to business signs or waste disposal o Customers may fail to pay on time or claim that they have no received what was promised Step 2: Evaluate the Risks  - Assess the profitability of loss - Assess the severity of loss - Important to recognize that now all risks are alike, nor should they be treated alike Step 3: Devise a Risk Management Plan  Methods for limiting company’s exposure to risk: 1. Risk Avoidanc
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