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Chapter 3

Management and Organizational Studies 2275A/B Chapter Notes - Chapter 3: Formal System, National Land Company, Debt Management Plan


Department
Management and Organizational Studies
Course Code
MOS 2275A/B
Professor
Philip King
Chapter
3

Page:
of 3
Chapter 3: Managing Legal Risks
Assessing the Legal Environment
Balance between managing the present and planning for the future
Legal mistakes are costly, distracting and harmful
Preventative approach requires a thorough evaluation of risks
Emphasis is on compliance with requirements and anticipation of changes
Reactive approach needs a strategy to deal with such developments
Legal Risk business risk with legal implications
Legal Risk Management Plan
- May have its own department or may be done by CEO or someone
outside the organization
- Internal/External lawyers are involved
- Managers at every level
- 4 step process
1. Identify legal risks
2. Evaluate the Risks
3. Devise a Risk Management Plan
4. Implement the Plan
Applying the Four Step Process
Identify the Legal Risks
Assess the organizations functional areas
- Accounting, finance, marketing, production, HR, info systems
- Useful starting point for risk analysis
- Some possible risks: misleading advertising; inferior products;
harassment; downsizing; wrongful dismissal; inadequately
maintained records
- Employees can help identify risks
- Review the organizations business decisions
- Examine the organizations business relationship and assess those
relationships
Review Business Decisions
- Asses risk in decisions concerning financial arrangements (credit
terms and sales)
- How contracts are worded; may involve standard form contracts
- Do employees understand contracts?
- Review land occupied to ensure safety; look for hazards before
purchasing land
- Plan for hiring, firing and dismissing employees
Examine Business Relationships
- Internal and external
- Employee difficulty, injury, discrimination
- Payment/delivery to/from suppliers
- Regulators monitoring regulations that that business needs to obey
- Customers may fail to pay on time/ claim they have not received what
was promised
- Professionals may fail to provide services
This step seeks to identify everything that could go wrong
Evaluate the Risks
Assess the probability of loss
Assess the severity of loss
Look at history, statistics and expert opinion
High probability can be offset with low level of loss
Low probability can be offset by high level of loss
Used to determine priorities for risk management
Devise a Risk Management Plan
Risk Avoidance
- When risk is too great
- Negative exceed positives
- Completely avoid risk (discontinue program, not enter contract, seek
other financing)
Risk Reduction
- Use on most risks when they cannot be avoided
- Ex credit some people will not pay can reduce risk by evaluating
creditworthiness of customers
- Contact municipal representatives see regulatory changes coming
- Carefully hire and train employees
Risk Transference
- Transfers remaining risk to another by contract
- Usually through insurance companies
- Insurance does not prevent loss, or adverse publicity
- Can create contracts that limit the liability of the business for
defective products
Risk Retention
- Keeping/absorbing all or part of the risk within the organization
- Used when cost of avoiding or transferring risk is greater than the
impact on the business if the risk materializes
- Pays losses out of its own resources
- Self Insurance organization can establish a funded reserve
- Insurance Policy Deductibles retain risks to certain dollar amount
- Noninsurance charge losses as an expense
- Increase in use b/c of expensive insurance premiums and refual to
cover certain risks
Implement the Plan
Carry out the plan
Monitor and revise the plan
Responsibility for implementation must be clearly assigned
Must assign people to monitor and deliver
Schedule inspections; formal system to ensure that inspections take place
Have an accident reporting system
Plan must be continually monitored and revised
If nature of business conducted by firm changes, the plan may need major
reconsideration
Plan need not be lengthy or complicated
Interacting with the Legal Environment
Reacting When Prevention Fails
Must be prepared to react quickly
Details of plan should include guidelines as to how employees should react,
how investigations should take place; records to be made; steps for further
prevention
See what senior management should be alerted
Address dispute resolution procedures
Managing Legal Services
When to Seek Legal Advice
- Consulting lawyers to soon and too frequently can be expensive and
cumbersome
- Best to have an ongoing relationship with legal professionals
- May be necessary to understand the legal process
- Important to clarify who decides if the organization needs legal advice
- Business must remain actively involved
How to Choose a Lawyer
- Have a clear idea of nature and volume of advice required
- Not all lawyers appropriate for all situations