Legal Risk and Challenges

Document Sample
Legal Risk and Challenges Powered By Docstoc
					         CLO          21    A DV I S O RY         GROUP

                       Managing Legal Risk
                      To Meet the Challenges
                       Of the 21st Century
                  The Enron situation may lead to expanded government controls,

                 tighter accounting standards and more explicit duties for boards of

              directors, auditors, and most likely, corporate lawyers. Using the Gateway

                   Model and a new set of post-Enron action steps, CLOs will be

                            able to manage this risk-heavy environment.

                                      B Y S T E P H E N E . N OW L A N

                                                 he Chief Legal Officer     to consider. Our report
                                                 of the 21st Century        describes how many legal risk
                                                 Advisory Group meets       drivers are metastasizing, creat-
                                         quarterly to develop and refine    ing new minefields and a
                                         the Gateway Model for manag-       greater workload for law depart-
                                         ing law departments in light of    ments. We describe how the
                                         the serious new challenges fac-    Gateway Model creates a rigor-
                                         ing corporations. The CLO 21       ous approach for managing
                                         Advisory Group convened in         legal risk that strikes the best,
                                         Palm Beach, Fla., in January       right balance between effective
                                         2002, to discuss Gateway           support for business objectives
                                                                                                                VINCENT MCINDOE/IMAGES.COM

                                         strategies for managing legal      and the implementation of

                                         risk. During the meeting, the      internal controls that have
                                         conference room lights did not     teeth. We also present the
                                         go out as they did at the now-     Advisory Group’s inventory of
         ● Stephen E. Nowlan is          infamous Enron board meeting       Gateway Legal Risk Building
         senior vice president of        in Palm Beach a few years ago.     Blocks and discuss some of the
         TyMetrix and serves as the      Not surprisingly, group mem-       key implications for implement-
         facilitator of the CLO 21       bers were energized about legal    ing them. Finally, we report on
         Group.      risk because of the Enron col-     the concerns of CLO 21                                       become a popular topic at social
                                         lapse and the Congressional        Advisory Group members about                                 gatherings, much to the delight
                                         hearings probing the role of the   the cutbacks in law department                               of any lawyers present. Whereas
                                         Enron lawyers.                     resources that threaten sound                                this topic used to be discussed
                                            This report summarizes the      legal risk management.                                       only in tedious corporate meet-
                                         discussion highlights and the                                                                   ings about “internal controls,”
                                         post-Enron action steps that       The Enron Meltdown                                           everyone with a 401(k) account
                                         CLO 21 Advisory Group mem-         Thanks mostly to the shenani-                                or a Congressional parking per-
                                         bers encourage general counsel     gans at Enron, “legal risk” has                              mit is now batting the subject

        46 chief legal officer                                                                                                                
                                                                            these controls were not imple-
                                                                            mented appropriately, and the
                                                                            board did not discover this until
                                                                            it was too late to prevent
                                                                            Enron’s demise.
                                                                               Executives who either did not
                                                                            correctly understand their roles
                                                                            or who manipulated the environ-
                                                                            ment to sidestep them, inadver-
                                                                            tently or deliberately thwarted
                                                                            these intended controls.
                                                                            Although the senior Enron
                                                                            lawyer working on the partner-
                                                                            ship deals correctly identified the
                                                                            risk issues and got corroborating
                                                                            advice from outside counsel, he
                                                                            was ineffectual in dealing with
                                                                            the legal risks. He either lacked
                                                                            the authority and standing in the
                                                                            company to force corporate
                                                                            actions to address the risks, or he
                                                                            lacked the leadership to take the
                                                                            issues to the board of directors.          “Legal Risk:
                                                                               According to testimony
                                                                                                                   The risk that arises
                                                                            before the House, this lawyer
                                                                            sought the help of the general          from a perceived
                                                                            counsel who, apparently, was of
                                                                            no assistance. When the lawyer         or actual violation
                                                                            sought the help of the chief
                                                                                                                   of laws, regulations
                                                                            accounting officer and the chief
                                                                            risk officer, he was advised not      or agreements leading
                                                                            to stick his neck out and to
                                                                            drop the matter.                       to costs, penalties,
                                                                               The former CEO claimed he
                                                                                                                  liabilities or sanctions
                                                                            didn’t know of the lawyer’s
                                                                            efforts to seek his review of the      imposed as a result
                                                                            matters or meet with him. The
                                                                            lawyer did not try to approach             of the legal
                                                                            board members with the infor-
                                                                            mation, presumably because he
                                                                            felt he had gone far enough by        — CLO 21 Advisory Group
                                                                            advising executive officers of his
                                                                               Would the board members
                                                                            have acted if the lawyer had
                                                                            informed them of his findings?
                                                                            Could the meltdown have been
around with aplomb. If this            trols to manage legal and busi-      avoided if the board acted at
leads to a climate where more          ness risk, the culture of the        that point? One can only guess,
business executives pay atten-         company has an overriding            and the question as to whether
tion to legal risk issues, it is not   influence as to what level of risk   the lawyer had a duty to go to
a bad development.                     will be assumed. The Enron           the board is left for debate.
   The Enron meltdown                  board assumed, with assurances          Many of us have seen situa-
demonstrates that even in a            from the auditors and executive      tions similar to this one. No
company that goes to great             officers, that risk controls were    doubt, similar situations are
lengths to set up internal con-        in place and working. However,       being resolved because the

spring 2002                                                                                                       chief legal officer 47
CLO         21      A DV I S O RY            GROUP

                                   lawyer in the hot seat takes the    many boards, wishing to avoid        New York legislature issued a
                                   bull by the horns and keeps         the tarnish of “Enrust,” will re-    damning report of abuses in the
                                   knocking on mahogany doors          evaluate the performance of all      insurance industry. It found that
                                   until he or she finds equally       control officers, including the      life insurance companies were
                                   right-thinking people to deal       general counsel, and demand          buying new issues from under-
                                   substantively with the problem.     replacements for those who           writers as part of the distribution
                                   However, absent the willingness     appear not to have the back-         of the securities (primarily debt)
                                   of the lawyer to risk his or her    bone and management skills to        with the intent of reselling them
                                   position and career, many           rigorously implement controls.       as the underwriters found buy-
 Legal risk used to be             lawyers will accept the advice of                                        ers. In effect, the securities were
                                   higher-ups and simply drop the      Legal Risk is Expanding              “parked,” and the underwriters
   discussed only in               matter, even if reluctantly.        At Breakneck Speed                   did not bear the market risk of
                                      The general counsel is           Along with the promise of new        holding the securities during the
  tedious corporate                responsible for creating the cul-   opportunities in the 21st centu-     distribution; the life insurers did.
    meetings. Now,                 ture in the law department          ry, comes the realization that       When the underwriters ultimate-
                                   wherein an individual attorney      business and legal risk are          ly found buyers for the entire
   everyone with a                 dealing with risk issues will       expanding at a profound rate         issue, the life insurers resold the
                                   either find support among col-      that may outstrip the abilities of   securities to the new buyers
 401(k) account or a               leagues or be left out on a limb.   corporate law departments to         through a member of the under-
                                   The general counsel does not        manage or control them.              writing syndicate, which was a
Congressional parking              operate in a vacuum, however.       Possibly most alarming is that       company owned by officers of
 permit is batting the             Every general counsel has to        legal risk is frequently triggered   the life insurance company. They
                                   assess the overall culture of the   by a relatively small group of       took large commissions from the
    subject around                 company periodically and            people whose actions are diffi-      sale of the securities on their way
                                   decide whether he or she is         cult to predict, hard to control     through the underwriting com-
      with aplomb.                 comfortable with the risk           and usually extremely expensive      pany. As a result of the investiga-
                                   parameters that drive the busi-     to manage.                           tion, the New York legislature
                                   ness culture.                          Three recent developments—        enacted stringent laws to prohib-
                                      The general counsel is a con-    the World Trade Center bomb-         it numerous conflicts of interest
                                   trol officer on whom the board      ing, the Enron collapse and the      between the officers and direc-
                                   must depend to ensure that          proliferation of class-action        tors and their insurance compa-
                                   internal controls are truly work-   lawsuits—have dramatically           nies. Many states copied these
                                   ing and that lawyers are sup-       expanded the scope of legal risk     laws in the wake of the scandal.
                                   ported in their efforts to man-     that needs to be addressed by            And, as CLO 21 Advisory
                                   age risk. It is very likely that    major companies.                     Group member Donald P.
                                                                          This legal risk has resulted in   Horwitz reports, the Insull
                                                                       dramatic increases in the cost of    bankruptcy in 1932 was a key
                                                                       doing business, through              factor leading to the creation of
 ❒ Growth of laws and regulations                                      increased insurance costs, pre-      the Securities and Exchange
 ❒ Expanding access to the courts by plaintiffs                        cautions to ensure employee          Commission in 1934. (See
 ❒ Aggressive plaintiff bar                                            and corporate security and           page 55.)
 ❒ Advances in science and technology                                  greater efforts to control and           Great corporate scandals
 ❒ Increasing costs of risk transference                               monitor corporate behavior.          inevitably lead to new laws and
 ❒ Increasing cost of internal legal staff                             Perhaps most importantly,            regulations, and it is no surprise
 ❒ Increasing cost of outside counsel                                  greater investor awareness of        that the Enron situation will
 ❒ Expanding business arena                                            potential business and legal         lead to the codification of
 ❒ Increased scrutiny                                                  risks has led to lower stock         expanded legal risks in the form
 ❒ Anticorporate attitudes                                             prices and a further shrinking       of expanded government con-
 ❒ Procedural flaws in state court systems                             of capital markets during a          trols, tighter accounting stan-
 ❒ Unorganized corporate defense bar                                   global recession.                    dards and more explicit duties
 ❒ Increasing cost of internal resources (e.g., corporate                 Other sensational corporate       for boards of directors, auditors
   representatives who must devote time to litigation)                 scandals have also rocked            and quite possibly, corporate
 ❒ Increasing costs of outside audits                                  investor confidence. In 1906, the    lawyers.
                                                                       Armstrong investigation by the           Post-Enron, insurance risk

48 chief legal officer                                                                                            
  P O S T- E N R O N A C T I O N S T E P S F O R C H I E F L E G A L O F F I C E R S
 BOARD-OF-DIRECTOR ISSUES                                                OTHER CONSIDERATIONS
 ❒ Board members of many companies will ask management for               ❒ General counsel will want to ensure that members of the law
   greater substantiation of the prudence and soundness of inter-          department have a clear understanding of the circumstances
   nal practices, the rationale and wisdom of major deals and the          where a legal risk issue should be escalated to the general
   reliability of audit and control processes.                             counsel, so seemingly minor issues don’t become huge prob-
 ❒ Many board members will be very concerned about their                   lems due to insufficient risk analysis and review.
   roles and their potential liability, and they will need and want      ❒ Inasmuch as any type of accounting problem or restatement
   more specific advice and understanding of what action steps             of financials may lead to disastrous rumors, general counsel
   they should take to fulfill their roles and responsibilities.           will want to have a plan and team in place to address the legal
 ❒ General counsel should be certain that board members are                issues arising from such a situation.
   well-educated about the action steps that boards should take          ❒ General counsel may need to review the company’s document-
   to avoid future problems with public credibility and/or govern-         retention policy and audit the document-retention practices of
   ment agencies, such as the SEC.                                         the law department and business units to ensure the process is
 ❒ Some board members may request outside legal advice on                  operating as required.
   specific projects or issues, or just out of an abundance of           ❒ General counsel may need to review:
   caution. General counsel need to be prepared to address these                                                  s
                                                                           ● the management of the company’ 401(k) plan to ensure

   requests and will want to be especially cautious in selecting a           that it complies in every way with regulatory requirements
   law firm with no conflicts of interest.                                   and that all actual practices are consistent with the formal
 ❒ General counsel should be more proactive and demanding                    401(k) plan in place;
   of the auditors by asking more questions and reviewing                  ● the crisis-communication plan to ensure that the company

   more carefully what the auditors are doing to ensure the audit            has a plan and a team that is well-suited and well-prepared to
   process has sufficient rigor and integrity (instead of just               manage any type of crisis that arises;
   answering questions posed to them by the auditors).                     ● the process of selecting outside counsel in situations where

 ❒ General counsel should review the adequacy of the charter                 the firm is expected to give legal opinions about potential
   for the audit committee and the guidance given to the audit               company issues to ensure that the selected counsel is free
   committee about its role.                                                 from conflicts that would erode the credibility of their
 ❒ General counsel may want to advise management about the                   opinions;
   selection of future board members so future members will                                 s
                                                                           ● the company’ policy on hiring the auditing firm for

   possess significant expertise and leadership qualities. The goal          consulting assignments to determine whether the law
   is to ensure the board members have the competence and                    department should give advice limiting the range of
   inclination to vigorously review management actions, not just             assignments that are offered to the auditing firm; and
   comply with management’s wishes. As one member of the                                    s
                                                                           ● the company’ process for receiving and following up

   CLO21 Advisory Group pointed out, it may not be in the                    on employee and whistleblower complaints to ensure
   company’s interests to have sitting CEOs of other companies               that the process of follow-up investigations and reporting
   as the principals on the audit committee if these CEOs do not             has integrity and does not engender additional risk as a
   have adequate time to spend on audit committee business.                  result of ineffectiveness.

underwriters will be much more       which provide a basis for denying   crippling underwriting losses, is   tions by revealing the level at
conservative in evaluating and       coverage under policy provisions.   showing an increasing unwill-       which their products (or actions)
pricing all corporate risks, espe-      The plaintiffs’ bar shows        ingness to accept the transfer of   were the original source of injury
cially directors’ and officers’      every indication of refining the    risk. Corporations face severely    or contamination. One modest
insurance, the cost of which is      art of tapping corporate arteries   limiting coverage provisions        example is technicians who will
expected to increase precipitous-    to scientific levels. Funded by     and rapidly escalating premi-       likely be able to reveal the con-
ly. Insurance companies will cer-    massive corporate settlements       ums, resulting in a greater         tents of many of the documents
tainly refrain from providing cov-   and awards that often dwarf the     degree of self-insurance that       shredded by Arthur Andersen
erage for companies whose oper-      operating budgets of corporate      may ultimately need to be dis-      LLP by recovering the deleted
ations appear vulnerable to sig-     law departments, the plaintiffs’    closed as material to the finan-    electronic files found on PCs and
nificant claims. Future litigation   bar has the ambition and            cial statements.                    network servers.
over coverage provisions is likely   resources to pounce on every           Another source of expanding         More significantly, advanced
to skyrocket as insurance compa-     possible corporate transgres-       legal risk is the degree to which   scientific methods are being
nies scrutinize corporate behavior   sion. Here again, the insurance     science and technology can now      developed that will enable
and identify actions or omissions    industry, already reeling from      push liability back onto corpora-   researchers to detect the pres-

spring 2002                                                                                                  chief legal officer 49
                             CLO     21    A DV I S O RY         GROUP

                                                       ence of industrial contaminants         and the roles they should play    is really quite problematic: The
                                                       in human DNA and potentially            in helping to manage these        lawyer never learns about
                                                       trace these back to specific man-       risks.                            details until after the fact.
                                                       ufacturers. Once the plaintiffs’        In many law departments,          Businesspeople can be very cre-
                                                       bar masters the                      these drivers must be imple-         ative at keeping lawyers at bay.
                                                       application of these new tech-       mented among legal team                  The driving concept of the
                                                       nologies, class actions will         members who are based on             Gateway Model is to keep the
                                                       expand exponentially.                different continents where           lawyers directly involved in
                                                          In light of these and other       business activities are gov-         the formulation and planning

                                                       legal risk drivers, there has        erned by a variety of national       of initiatives to give them the
                                                       never been a time in the history     laws, regulations and judicial       opportunity to practice risk
                                                       of major corporations when the       systems. Given the size of           management where it belongs:
                                                       legal risks have been so great       some law departments, many           at the birth of an idea and all
                                                       and the ability to transfer these    attorneys will not have sub-         the way through its imple-
                                                       risks so limited. This is particu-   stantive personal dialogue           mentation. This shifts the
                                                       larly alarming considering the       with the general counsel more        burden to the lawyers to be
                                                       global implications of today’s       often than once every several        able to offer useful advice
                                                       major companies. Enron’s bank-       years. In such an environment,       about how to structure initia-
                             The driving concept
                                                       ruptcy, for example, affects         the general counsel needs to         tives to keep them on the
                               of the Gateway          thousands of employees, credi-       have processes in place to           right side of the risk. The
                                                       tors and shareholders all over       ensure that each member of           lawyers must be creative and
                               Model is to keep        the planet. That this global         the legal staff develops a per-      helpful without crossing the
                                                       financial disaster was not pre-      spective on managing legal           line to sanction unethical or
                               lawyers directly        vented, because of a breakdown       risk that is consistent with the     illegal behavior. In the
                                                       in internal controls ineptly         department’s standards.              Gateway Model, lawyers must
                                involved in the
                                                       supervised in part by a 245-            The CLO 21 Advisory Group         be prepared to say “no” when
                             planning of initiatives   attorney corporate law depart-       discussed an inventory of the        it is truly required, but only
                                                       ment, should cause every             Gateway strategies to imple-         after alternative approaches to
                              that will help them      general counsel to lose sleep.       ment these processes. While no       an initiative have been thor-
                                                                                            general counsel will need to         oughly explored and rejected.
                                 manage risk.          Gateway Building Blocks              implement all of these strate-       Lawyers who only say “yes”
                                                       For Managing Risk                    gies, the Legal Risk Manage-         and lawyers who only say “no”
                                                       The members of the CLO 21            ment Building Blocks provide a       are equal threats to the suc-
                                                       Advisory Group agreed that the       comprehensive menu from              cess and public reputation of
                                                       drivers of effective legal risk      which to choose the right com-       their companies, each for dif-
                                                       management are:                      bination for any given company.      ferent reasons.
                                                       ● Ongoing discussion to refine          One key problem addressed             Building a team approach to
                                                         the legal team’s understand-       by the Gateway Model core            identifying and managing legal
                                                         ing of acceptable legal risk;      competencies and business-           risk among tens or hundreds of
                                                       ● Constant dialogue to review        integration strategy is that         inside and outside attorneys
                                                         legal risk issues that arise;      some law departments have            and paralegals is an extraordi-
                                                       ● Early and continuing involve-      been so focused on saying “no”       nary challenge. As Enron
                                                         ment in business partners’         that businesspeople have con-        demonstrates, it may take only
                                                         activities;                        cluded this is the only word in      one errant situation where legal
                                                       ● Support from within the law        the lawyer’s vocabulary. So the      risk gets out of hand to demol-
                                                         department for attorneys who       businesspeople have been             ish a company, if not by legal
                                                         need help to prevent business      motivated to aggressively keep       risks, then by reputational risks.
                                                         partners from taking on legal      the lawyer out of key initiatives    In few other professions is the
                                                         risks that are over the line;      until the only task left to the      margin of acceptable error
                                                         and                                lawyer is to manage the ensu-        potentially so minuscule.
                                                       ● Ongoing education for busi-        ing litigation. The illusion             As one general counsel at the
                                                         ness partners to ensure their      exists that the lawyer is manag-     CLO 21 Advisory Group meeting
                                                         understanding of basic legal       ing legal risks because he or she    put it, “I have to assume that
                                                         risk-management concepts           says “no” so often, but the result   each of my lawyers is not as clear

                         50 chief legal officer                                                                                       
as he or she should be about our        Shrinking Law                          the last three years as if current
tolerance for legal risk until I hear   Department Resources                   population growth and car sales
for myself a mindset I can trust.”      As widely reported, law depart-        trends were inconsequential?
Lawyers who join the department         ments are under pressure to               It is wishful thinking to
from outside the industry or            contain costs, and many have           believe that all a company
directly from law firms, for exam-      been given specific directives to      needs to prevent risks is to
ple, may need to rethink their          reduce costs below current             employ a law department
concepts of legal risk in relation      levels. While it is true that many     comprised of bright, energetic

                                                                                                                    VINCENT MCINDOE/IMAGES.COM
to their new employer.                  law departments can manage             and dedicated lawyers with the
   In a global organization in          their work more efficiently            judgment and guts to tackle
which different business units          through creative negotiations          substantial risks as they appear
have different risks, legal risk is     with outside counsel, better use       on the playing field. What is
decidedly a moving target.              of technology and more wide-           often overlooked by budget
Legal risk tolerance must be            spread adoption of best prac-          cutters is that large law depart-
constantly reviewed and refined         tices, this is not the time for        ments have responsibility for
as developments in the                  CEOs to arbitrarily hold law           hundreds if not thousands of
business environment occur. A           departments to formulaic cost          legal matters simultaneously. In                                   To set tomorrow’s
court decision, a new regulation        reductions that do not take into       today’s global mega-corporations,
or a shift in public attitudes          account the dramatic expansion         there are potentially hundreds                                    spending limits based
can be seismic events in the            of legal risks.                        or thousands of legal risks that
                                                                                                                                                    on the costs of
risk landscape.                            It is healthy for general coun-     have yet to be
   While many general counsel           sel to be challenged by CEOs to        identified and are not yet                                        managing yesterday’s
rely on the precept that hiring the     reduce costs and become more           being addressed.
best lawyers with established           innovative in the way legal serv-         Lawyers who are literally                                      legal risks is seriously
good judgment paves the path to         ices are delivered. But the chal-      scrambling from one meeting to
appropriate corporate legal risk-       lenge CEOs need to give general        another often do not have the                                         short-sighted.
management, in a larger law             counsel is to thoroughly               time or energy to review these
department, there is bound to be        re-evaluate how legal risks are        risks as thoroughly as they
at least one lawyer whose judg-         managed and fashion a legal            should. The sheer velocity of
ment or fortitude is less than “the     budget designed to deliver on          deals underway hinders the
best.” In most corporate debacles,      this mandate. In most compa-           lawyers’ ability to raise and
isn’t it usually found that it was      nies, the total legal spending of      review issues in a timely way to
just such a lawyer who failed to        the company constitutes a dol-         prevent the risks from being
manage as required?                     lar amount that is lost in the         realized.
   Using the Gateway Model, a           rounding of final financial               Moreover, the growth in
general counsel can create some         statements. However, as demon-         demand for legal advice by
deliberately overlapping strate-        strated by Enron and many              clients is likely to increase dra-
gies to help create a consistent        other recent examples, a failure       matically as business executives
view of legal risk within the           by the law department to ade-          and board members alike look
organization and the checks and         quately address and manage             for assurances from attorneys
balances to ensure that legal           legal risks can be potentially         that they are not taking on
staff is sophisticated, confident       catastrophic.                          undue legal risk. A recent sur-
and effective in spotting and              Unfortunately, today’s cost-        vey of attorneys at large law
managing legal risks.                   containment goals are typically        firms conducted by The
   One inescapable problem              set in relation to the level of        Affiliates, a legal staffing firm
confronting all general counsel,        spending by the law department         in Menlo Park, Calif., found
however, is how to manage               over the last several years. To set    that the 200 respondents
expanding legal risk in the face        tomorrow’s spending levels             receive an average of 48 e-mails
of corporate cutbacks. Sounder          based on the costs of managing         a day—one every 10 minutes.                                  Our web site,
strategies for managing legal           yesterday’s legal risks is seriously   In-house attorneys most likely                     ,
risk will pay dividends in the          short-sighted. What competent          receive a similar number.                                    provides extensive back-
long run. But in the short term,        CEO would advocate that high-          Which e-mails among the 250                                  ground on the CLO 21
they require adequate staffing          way planning be based on the           received each week identify                                  Advisory Group and
and realistic budgets.                  number of cars on the road over        urgent risks?                                                the Gateway Model.

spring 2002                                                                                                                                      chief legal officer 51
CLO         21      A DV I S O RY            GROUP

  Board members, especially         carefully whether the modest        such requests for legal advice     demanding in their review of
those on audit and finance          director fees they receive pro-     will no doubt continue to          internal operations and risk
committees, will certainly be       vide adequate incentive to out-     increase.                          issues. The law department will
more alert to the potential for     weigh potential risks. As new          Outside board members and       certainly be asked more frequent-
personal liability and will weigh   laws and regulations are enacted,   auditors will also be more         ly to review and comment on the


 The law department periodically updates and distributes a comprehensive Legal Risk Assessment Checklist for the legal staff that
 can be readily utilized to help identify legal risks related to business projects in such categories as: compliance, business operations,
 liability, litigation, reputation and others.
 The legal staff is provided with consistent and specific guidance as to the level of legal risk the company is willing to assume
 in its business operations and litigation activities.
 The legal team uses consistent legal-risk terminology to enable “apples for apples” discussions about legal risks, with specific
 descriptions of how risks (particularly “high” risks) should be classified in a consistent manner.
 There is a specific protocol in place that identifies under what circumstances and to whom legal risk issues are to be escalated
 (i.e., to general counsel and senior management) by members of the law department.
 Law practice groups meet at least annually to review and discuss the legal-risk guidelines for their business partners and the risk
 profiles of key projects and activities.

 The law department regularly distributes to business partners the current version of the Legal Risk Assessment Checklist to
 provide current insights about legal risk issues to which business partners should be alert.
  The law department provides ongoing legal risk education for business partners—via online programs, seminars and presenta-
 tions—about the company’s risk tolerance guidelines and steps they are expected to take to help manage legal risks.
 Lawyers have a well-publicized open-door policy with business partners to discuss legal risk concerns.
 Newly-hired executives at or above a designated level participate in a legal risk-management orientation programs provided by the
 law department to ensure they are familiar with the company’s legal-risk management guidelines, resources and protocols, and their
 responsibilities for helping to manage legal risk.

 Each practice group has a designated legal-risk coordinator who is accountable for ensuring that the practice group’s legal risk-
 management activities achieve legal risk-management objectives.
 A specific attorney is designated as the project legal-risk coordinator for each business project in which there are multiple lawyers
 participating in the project.
 Project risk coordinators and legal colleagues utilize the Legal Risk Assessment Checklist to assess whether the information the
 legal team receives from business partners is timely and adequate to identify and evaluate project legal risks.
 Practice group legal-risk coordinators meet quarterly to review and discuss their roles, the standards and processes for managing
 legal risk, emerging legal risks and risk case study examples.
 There is a systematic process in place to ensure that practice group legal-risk coordinators discuss high-risk matters to identify
 potential overlapping risk areas and coordinate risk-management activities where such overlap exists.
 Each practice group has a systematic process in place to correlate internal data on litigation reserves, audit letter inquiries and mat-
 ter-tracking systems to ensure that law department legal risk determinations and actions are consistent for each matter.
 There is a process in place to ensure that law firms handling high-risk matters submit updated legal-risk assessments on a quarterly
 basis (or more frequently) and that each legal-risk update is reviewed by the project risk coordinator, the practice group risk coor-
 dinator and the business project team and/or senior management when appropriate.

 The law department has a systematic process in place to:
   Review all customer, employee and investor complaints and suits to identify trends that may indicate potential legal risks
      that need attention;

52 chief legal officer                                                                                          
  full spectrum of business deal-     nities to question the lawyers      about the best ways to measure
  ings, if for no other reason than   about the level of diligence with   the strategic value of their law
  to give executives the ability to   which they reviewed the matters     departments to their companies.
  provide assurances to the board     at hand.                            They must shift the discussion
  that the “lawyers are OK with          General counsel need to engage   away from historic spending as the   This article has been copyrighted
  this.” Board members may well       executive management and their      basis of determining future law      by Stephen E. Nowlan and is used
  want more face-to-face opportu-     boards in serious discussions       department resources. ●              with his permission.

     Review the final reports of all regulatory compliance examinations to identify trends that may indicate potential legal risks
       that need attention;
     Review proposed and enacted regulation and legislation to identify legal risks and advise business partners in a timely way
       of additional compliance and legal risk issues;
     Review litigation and regulatory actions against competitors to identify potential areas of legal risk that may apply to the
       company, and to advise business partners of potential exposure;
     Review trends in insurance coverage litigation and the terms of the company’s insurance policies to identify potential
       coverage-denial risks;
     Annually collect and organize the insights of legal staff about emerging legal risks facing the company and the steps the
       law department and others should take to address them; and
     Annually collect and organize the insights of primary law firms about emerging legal risks to which the law department and
       the company should be alert.

   The project legal team prepares a risk profile of proposed projects and reviews this profile as appropriate with the business project
   The project legal team periodically updates the risk profile for ongoing business projects and reviews the update with the business
   project team (at least quarterly for high-risk projects).
   At the completion of major projects, the attorney designated as the project risk manager prepares an assessment of the open
   legal risks that still need to be managed on a going-forward basis.This assessment is reviewed with the practice group risk coordi-
   nator and others in the law department and business unit as appropriate. Ongoing legal obligations—such as payments, disclosure
   or reporting and compliance requirements—are identified.
   At the completion of major projects, the lawyers involved with the project (possibly including outside counsel) review the steps
   taken to manage legal risks and make improvements in the way the legal-risk management process operates for future projects.

   Appropriate law department representatives meet quarterly with business unit heads (and other company control executives)
   to review the status of high-risk matters in the business unit and recommend appropriate action steps.
   The general counsel and appropriate law department managers meet quarterly to review the status and management of high-risk
   matters in the company and identify appropriate action steps.

   Law firms are provided with consistent and specific guidance as to the level of legal risk that the company is willing to assume
   in its business operations and litigation activities.
   Law firm engagement partners are asked to confirm periodically that law firm staff working on assignments for the company
   has been thoroughly briefed on the company’s risk-tolerance guidelines.
   Periodically or at the end of major legal projects, outside counsel are asked to submit a list of suggested action steps for
   improving legal-risk management.
   Law firms’ performance in identifying and managing legal risks on behalf of the company is reviewed annually, and law firms are
   terminated or warned when their performance is not adequate.

   Newly-hired lawyers and paralegals participate in a legal risk-management orientation program to ensure they are alert to the law
   department’s legal risk-management guidelines, resources and responsibilities.There is a process in place to track participation.
   The performance of attorneys and paralegals in managing legal risks is reviewed at least annually by their supervisors, and those
   whose performance is inadequate are warned or terminated.

  spring 2002                                                                                                   chief legal officer 53

Description: Legal Risk and Challenges document sample