Legal Risk Management: 5 Ways to Proactively Mitigate Risk

From JDSupra, Jeffrey Wolff discusses ways to mitigate risk. Jeff writes:


Corporations must innovate and set themselves apart from their competition to achieve long-term success, but they cannot act with reckless abandon in doing so. Rather, they must strategically plan their moves to proactively defend themselves against sources of legal, financial, or reputational risks.

How can businesses see the full panoply of risks associated with an action—or with inaction? Many organizations are turning to modern technology to gain a more complete sense of their risk profile. According to PwC’s 2023 US Risk Perspectives Survey, 57% of risk professionals reported that they saw businesses making better decisions with the help of technology that provides risk insights.

This post can help you join the ranks of those businesses making better decisions about risks. First, we’ll define legal risk and legal risk management and discuss the benefits of proactively managing legal risks. We’ll then take a look at the key challenges of identifying and mitigating legal risks and outline five strategies for managing risk in the face of constant change and uncertainty. Finally, we’ll wrap up with an explanation of how technology can give corporate legal teams greater insight into the legal risks they face.


What is legal risk?

What is legal risk management?

The benefits of proactive legal risk management

The key challenges involved in identifying and mitigating legal risks

5 legal risk management strategies to weather uncertain times

Modern technology offers real-time insight into legal risks

Legal risk is the chance that an organization will suffer negative consequences due to litigation, prosecution, or regulatory action. Legal risk often arises from an organization’s failure to understand or properly comply with statutory and legal requirements related to its operations, though haste and poor decision-making also contribute to legal risk.

Common types of legal risks include:

  • contract risks, including breach of contract;
  • litigation risks, such as tort or employment law claims;
  • regulatory risks, including risks associated with data privacy and environmental protection requirements;
  • tax risks that may arise from underreporting business income or wrongfully claiming certain exemptions;
  • intellectual property risks, including copyright and patent infringement; and
  • product liability risks, such as manufacturing defects and inadequate warnings on labels.

Note that many of these specific areas of legal risk overlap, making it difficult to separate individual risks into categories. For example, an employment law claim may be considered a contract risk, if the claim arises from an employee’s contractual relationship with the employer, as well as a regulatory risk, if the claim includes the violation of employment regulations, as well as a litigation risk.

Regardless of the labels we use, legal risks of all types can inflict substantial financial, reputational, and legal damage. The consequences of uncontrolled risk can range from lost profits and legal fees to criminal prosecution of high-ranking executives.

Some degree of legal risk is inevitable. But there is much that corporations can do to protect themselves by proactively managing legal risk.

Legal risk management is the practice of identifying, preventing, and responding to legal risks. By developing a comprehensive risk management framework, corporations can perform routine risk audits and adapt their policies and operations as appropriate, thereby avoiding:

  • lawsuits and related legal fees,
  • regulatory investigations and fines,
  • criminal prosecution,
  • reputational damage and loss of public trust, and
  • financial losses due to reduced business.

Legal risk management is closely related to enterprise risk management, which is the practice of identifying and responding to risks that could threaten an organization’s ability to achieve its goals. When a corporation fails to identify and mitigate legal, business, financial, or other risks, it opens itself up to immense liability that could jeopardize its very existence.

But the benefits of proactively handling legal risk go beyond merely avoiding liability.

When we discuss proactive legal risk management, we’re referring to an approach in which an organization anticipates potential issues and regularly monitors for developing threats so it can take remedial action to prevent problems before they occur.

Reactive legal risk management, by contrast, is a wait-and-see approach in which an organization only addresses problems after they’ve arisen.

Taking a proactive rather than reactive approach to legal risk management enables organizations to:

Despite the benefits, proactive legal risk management does pose some challenges.

The most pressing challenge of legal risk mitigation in today’s world is the growing volume of data that corporations generate and store. Data is becoming an increasingly large part of the corporate landscape. According to the 2023 Data and Analytics Leadership Annual Executive Survey by NewVantage Partners, 88% of organizations reported increased data investments in 2022, and 94% plan to invest even more in 2023.

To cope with all this data, organizations are storing it across an increasing number of repositories. As of 2022, corporations stored over 60% of their data in the cloud, where it’s likely to be distributed across multiple platforms and repositories. Each piece of that data could represent a legal risk—but to evaluate those risks, corporate legal teams need to be able to locate and evaluate all of the organization’s data stores. When business data is widely dispersed, the risks hiding within that data can easily pass unnoticed.

Nor is data volume the only difficulty in legal risk mitigation. Organizations also face ever-evolving regulatory compliance and cybersecurity issues thanks to new data privacy laws and increasingly sophisticated threats.

What can corporate legal teams do to grapple with these challenges and protect their organizations from risk?

In the last few years, businesses have had to navigate numerous disruptions, from a global pandemic and rapidly worsening effects of climate change to ongoing geopolitical conflicts and economic instability, to name a few. Here are our top five strategies to proactively manage legal risks in unpredictable times.

1. Prioritize information governance.

Corporate data holds the answers to nearly every question. But an organization can only rely on the answers in its data to the extent that its data stores are accurate and accessible. That’s why properly managing data is the key to managing risks. By developing a strong information governance program, an organization can ensure meticulous recordkeeping that enables early identification of potential legal risks. Plus, a solid information governance program demonstrates the organization’s commitment to compliance and competence in managing its assets.

2. Monitor cybersecurity and quickly identify intrusions.

The sooner an organization identifies a problem, the faster it can resolve it. Staying on top of data security and implementing technology that can proactively scan for potential risks enables organizations to promptly recognize cybersecurity threats and intrusions—which means they can neutralize those threats before they cause significant damage.

3. Regularly review and amend contracts.

Risks associated with contracts are among the most common legal risks. Contract-related issues can lead to strained business relationships, slowdowns in production or shipping, reputational damage, and costly litigation. To reduce risks arising out of contractual agreements, corporate legal teams should review new contracts for errors and periodically scan through all existing contracts to identify legal risks; inconsistencies, and other areas of concern. With that knowledge, the organization can address concerns by amending, terminating, or declining to sign or renew problematic contracts as appropriate.

4. Make contingency plans.

In business as in life, even the best-laid plans can—and often do—fall through. That’s why corporate legal teams must put contingency plans in place to protect their organizations in case things do not go as expected. For example, an organization should be prepared to immediately restrict access to certain data sets if it becomes aware that a third party or employee is stealing or misusing information. An organization should also be prepared to prepare reports and inform data subjects in the event of a data breach.

5. Lean on technology.

Sometimes you have to fight fire with fire. Most legal risks today arise from data and technology, and it takes technology to recognize and manage those risks. Technology lets corporate legal teams detect and manage risks quickly and efficiently, preventing their organizations from suffering greater losses than necessary and showing regulators and stakeholders alike that they’re compliant and responsible.

If a corporate legal team has to painstakingly sift through all of their organization’s data sources and manually collect data to scan it for potential risks, they aren’t going to have time to do anything else. That’s why legal teams need tools that can conduct real-time risk scans on data in place, wherever it is generated or stored.

Source: Legal Risk Management: 5 Ways to Proactively Mitigate Risk | IPRO – JDSupra

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