Managing risk is an integral part of conducting day-to-day business operations. When business leaders seek legal support, the in-house team should resist the temptation to reflexively say “no” when a course of action appears, at first glance, to pose significant risk. On the flip side, they also should avoid being a “yes-man/woman” to the C-suite. Instead, internal counsel can add significant value by looking beyond legal risk alone to identify, evaluate and manage the company’s total risk profile in a way that helps management achieve legitimate business objectives.
An in-house lawyer’s involvement in risk management will of course depend on the corporate, regulatory and organizational structures of the company, such as whether the company is public or private, whether its risk management function is separate from legal, and what level of industry regulation the company faces. However, when internal counsel does play a role, it is best to strike the appropriate balance between being a trusted business partner/advisor and an effective risk manager. Easier said than done? Here are some suggestions to help achieve that balance:1) Find out about the bottom-line goal.
Nothing perpetuates the negative perception of lawyers more than immediately saying “no” to a potential action or transaction suggested by a business leader. Instead, in the face of worrisome risk, internal counsel should take the time to ask about and fully understand the business objectives behind the proposed action or transaction.
For example, management would like to complete a divestiture of assets (a manufacturing plant) in an extremely short time frame (before the end of the quarter); but there may not be enough time to do the normal internal due diligence and provide advance notice to impacted employees. (All employees are being offered a job by the acquirer on the same terms). The legal department is asked to sign off on this transaction, and do so with quick turnaround.
When evaluating a proposed course of action, internal counsel should aim to get the whole picture by asking questions that will further their understanding of the company’s bottom line objectives. Although it may seem intrusive, this information is essential to crafting a workable solution, one backed by complete and thoughtful analysis, and may lead to discovering alternatives which actually better achieve the company’s objective.
Lastly, it’s important to speak up if the issue involves further analysis or requires more study. In this example, the risk issues relating to employees and diligence might reasonably have been outweighed by the goals of the transaction – generating cash and reducing operating expenses. Again, the aim of the in-house lawyer is to decide how to best accomplish the desired objective with the least risk or an acceptable level of risk.
2) Consider the non-legal risks.
When internal counsel assess risk, their initial analysis is typically focused on legal risk, including issues arising under employment, environmental, anti-trust/unfair competition, laws, regulatory compliance, anti-bribery or corruption laws, health and safety, disclosure laws, corporate governance and data protection and privacy laws. However, legal risks do not exist in a vacuum, and actions that are technically “legal” may nonetheless be ill-advised in light of their impact on key constituents of the company, such as employees, shareholders, customers and/or suppliers, as well as on the company’s brand identity.
For instance, a key customer has experienced quality issues with recent product deliveries. Although the company has a valid purchase order in place, the customer may not appreciate receiving an end of quarter shipment that has known product issues. The potential loss of the customer must be weighed against the loss of the quarterly revenue. Similarly, if a proposed human resources policy, while technically legal, is expected to negatively impact morale or pose obstacles to recruit new employees, these concerns should be factored into risk-benefit analysis.
Most business leaders appreciate their counsel’s thorough analysis of all potential risks, not just legal ones.
3) Don’t be afraid to say “no.”
If management’s course of action seems improper or illegal, for example, internal counsel should handle requests for legal input with an open mind, asking valuable questions and crafting alternate solutions designed to achieve the company’s objectives when significant risks are identified. Management will respect and appreciate being counseled against certain actions if the in-house legal team offers thoughtful and thorough advice.
In-house lawyers field a variety of questions, many of which involve ambiguity and interpretation. If decisions are made as knee-jerk reactions to any hint of risk, it could lead to counsel being excluded from future key decisions, or worse, a failure to advance the company’s goals. Rather, internal counsel can be most effective by taking the time to fully understand the company’s objectives - by engaging in fact-finding and risk analysis and recommending solutions and alternatives that are actually workable.
Perry Tarnofsky is a Partner with Outside GC's California-based team. Perry brings over 25 years of experience leading in-house legal teams at companies in the software, technology and consumer products industries. He is noted for his practical approach to problem solving, balancing business objectives with risk tolerance while also prioritizing growth. Perry can be reached at firstname.lastname@example.org or 714-757-4390.