Litigation is a fact of life for modern business and is becoming increasingly commonplace. Among the companies surveyed for this report, almost seven in ten have faced lawsuits in the past three years, with employees and customers the most likely source, and one in five has experienced lawsuits targeted at individual directors or officers, including non-executive directors.
Size matters
It seems that size matters – in a number of ways. First, litigation is most common for larger companies. Among the biggest companies surveyed (those with annual revenues exceeding $1bn) almost nine in ten have faced litigation and three in ten have experienced lawsuits aimed at directors or officers. Averages do not tell the whole story, however. For small firms in particular, litigation may not happen or may be infrequent, but if its frequency is unexpectedly high, there can be a substantial and sudden increase in the resources required to deal with the issue. The biggest danger of all may be for those companies that are growing quickly, which are less familiar with the scale of exposure that larger companies experience. “Companies sitting in the middle, which are becoming larger businesses, need to address these issues early in their development plans,” explains Mr Frankland.
Slow growth, but a heavy burden
In the past three years, 38% of companies have seen some increase in the number of cases brought against them, and 34% have experienced growth in the size of claims, while just over 50% have seen no change at all. Similarly, when asked about whether the scale and extent of litigation activity is changing in specific parts of the world, more respondents saw it worsen rather than improve, with Europe recording the biggest deterioration.
However, the frequency of corporate litigation may be less of a problem than the cost of handling cases. The evidence suggests that for many organisations, this burden is now reaching a level that is seen as unacceptable. Almost seven in ten companies believe that managing litigation risk consumes resources that could be more valuably employed elsewhere, including both financial and human resources.
The search for cost-effectiveness
Many companies are bringing the legal function in-house or experimenting with other cost structures in order to rationalise the expense on litigation issues. Even attempts to make litigation more cost-effective sometimes has the opposite effect. Preparatory work carried out before the launch of an action can reduce the number of cases going to trial but can still increase the overall expense of the exercise. There is also considerable activity – and therefore money spent – dealing with complaints and settling claims before they reach the legal system.
A cost passed on to consumers
One logical outcome of all these rising costs is an increase in prices charged by a significant minority of companies for their products and services: 34% say that they have had to increase the prices they charge to cover additional spending, and even more – 39% – expect to have to do so in the next three years.
Even more striking for many companies are the broader repercussions that increased litigation risk is having on their wider business strategy and operations. Put simply, fear of future litigation appears to put constraints on the ambitions and growth prospects of many businesses around the world – something that, in aggregate, can have a devastating economic impact. Success in business requires companies to innovate and to ensure that they have the agility and rapid decision-making required to seize opportunities as soon as they arise. The looming threat of litigation, however, can drastically constrain the ability of companies to develop these capabilities.
Is the risk of litigation strangling innovation?
Litigation risk also serves as a barrier to investing in certain markets, and to launching new products and services. Around one third of respondents say that they are more cautious about making these kinds of investments as a result of litigation risk – whether real or perceived.
Europe and Asia are alert
One key debate currently centres around the reach of the US legal system and spread of the so-called compensation culture. In recent years, there have been growing concerns that this aspect of the US legal culture is spreading to other regions. According to survey respondents, 55% believe that a “US-style ‘compensation culture’” is developing elsewhere in the world, while just 5% disagree.
In fact, US litigation norms are spreading in two ways. Almost everyone interviewed for this study believes that businesses outside the US are growing increasingly ready to litigate. Just as important, however, has been the greater willingness of US courts to rule on cases that might once have been considered extraterritorial.
