A central pillar of effective risk management is to scan the external environment and attempt to anticipate what shape future threats might take. In the context of liability risk, this means identifying potential risks at an early stage – well before they have reached courts and forced companies into responding to the threat rather than preventing it. Among our survey respondents, there is only a certain level of consensus about what the key future liability risks might be. However, based on our survey, it is possible to group some of tomorrow’s most pressing threats into three broad categories: technology, the environment and corporate governance.
1) Technology
Technological development and innovation is now occurring at such a rapid pace that companies can find it very difficult to keep up with the legal implications. Innovation in the online world can have unintended consequences from a liability perspective, while health scares involving new technologies have come to the fore.
2) Environment
Concerns about climate change and the impact of business on the environment have the potential to create a new source of future litigation. Many non-governmental organisations have pushed business into the firing line of environmental litigation, while tightening legislation makes it much more likely that companies will transgress established boundaries. Meanwhile, an increasing focus on the ‘polluter pays principle’ is shifting responsibility back onto the originator of the problem.
3) Corporate governance
Issues associated with corporate governance and transparency have been high on the agenda since major scandals at Enron, WorldCom, Parmalat and others. These events brought a wave of stringent new legislation, such as the 2002 Sarbanes-Oxley Act in the US. But although this regulatory environment has been in place for a number of years, many boards report that they are still struggling with increasingly demanding compliance obligations. Failure to meet these exacting standards – and the potential for individual directors to be in the firing line – has become a potential source of liability.
Look ahead to forecast better
What perhaps emerges above all is that a surprisingly high proportion of companies have not yet given board consideration to a number of potential future liability issues, despite acknowledging that they are risks that need to be discussed. Within the organisation, some 52% have already discussed the threat from inadequate technology security, seen as the most likely factor to give rise to a new wave of liability claims. However, 29% have not given it consideration at board level – despite admitting that they should, and 14% acknowledge that there is little prospect of this happening in the near future.
So, how can companies begin to understand and monitor tomorrow’s liability issues – and with the current economic uncertainty, can this be done at all? While there are no easy answers, there are a number of guidelines that business leaders can follow.
Monitor and assess the risk environment in a more structured way
Faced with an uncertain future, where do business leaders turn to for advice that can help them plan for and monitor future risks? There are a range of resources that companies can call on, but it seems that the understanding of what is available and the take-up of these resources is patchy. Currently, seven in ten consult lawyers and half seek advice from insurance companies. Both are sensible steps, but many companies could benefit from surveying the wider horizon.
Companies should also monitor legal activity elsewhere (especially in the US, where many legislation waves originate), they should consider sectors other than the one in which they operate, as this can often be an indication of future drivers of activity for other industries. In addition, a relatively low proportion of companies take advantage of the increasing range of services available from risk and management consultants, while special interest and lobbyist groups can sometimes be a useful source of information, which is often free.
Put the right culture in place
With 42% of business leaders stating that a lack of awareness among employees is an obstacle to effective liability risk management, it seems fair to conclude that many businesses could do more to embed a stronger liability risk culture throughout the organisation. Staff education is key to ensure a higher level of awareness about liability risks and a clear understanding of the actions expected of them to mitigate and measure these issues.
A strong culture and awareness of liability issues will discourage employees from carrying out activities that could lead to future litigation because there will be a higher expectation of compliance, and because there will be a better understanding of the consequences of such behaviour. In turn, this would lessen the potential for litigation risk and improve the business’s overall performance and reputation.
Put in place an effective infrastructure to take pressure off the board
Our survey suggests that liability risk management has the attention of top executives. At 75% of companies, chief executives are ultimately responsible for managing litigation risk, and at 93% of companies, a senior executive is in charge – usually the chief financial officer or chief legal officer, if not the chief executive. It is encouraging that boards consider liability issues to be important, but clearly there is a limit to the amount of time they can spend discussing them. These issues already take up a disproportionate amount of board time – 13% on average – and 42% expect the board to become even more involved in the next three years.
It is therefore essential for boards to put in place mechanisms that give them confidence that the issues are being identified, monitored and addressed without consuming unmanageable amounts of their time. First, they should ensure that they have a strong in-house legal team in place, consisting of individuals who have the necessary qualifications, experience and understanding of the business to manage liability issues effectively. Putting in place the right team can be expensive, but companies should not be reluctant to spend on such an important capability.
Focus on prevention, rather than reaction
On average, companies spend around 50% more time preventing litigation risk than responding to it. However, 61% of business leaders recognise the benefits of a greater focus on precaution, rather than ‘fire-fighting’ problems. A balance needs to be struck between the management of existing risks and those that have yet to emerge. By attempting to anticipate problems before they become serious, companies also have a much better understanding of their overall potential exposure. This can give them a competitive advantage by allowing them to allocate resources away from potentially risky activities or by modifying products, services and processes to reduce the potential for future litigation.
