Risk is a risky business

Twenty years ago, the management board of a global company made a mistake that cost the company billions of dollars. Unusually, for the time, the chief executive of the conglomerate was also its former general counsel.

"What does this tell us about the ability of lawyers to manage business risk?" asked one of the 10 general counsel who attended the Martindale-Hubbell Counsel-to-Counsel forum in Paris last week.

The questioner was undoubtedly playing devil's advocate. But the anecdote raises important issues, such as the role in-house lawyers should play in managing business risk and whether they are the best equipped to advise on areas of risk that do not directly impact on the legal function.

It is now well established that the last two decades have seen a huge evolution in the role of the in-house lawyer. The concept of the reactive in-house lawyer - acting like a law firm within a company, isolated from the rest of the business and brought in only when legal advice was needed - is firmly rooted in the past.

The global market has brought with it a new generation of general counsel who are far more aligned to the financial performance of the company. In-house lawyers are increasingly called on to be proactive and to advise the business on all areas of financial risk to the company.

"It is not enough to advise on legal issues because by the time it gets to you the time for your real contribution has passed," said one general counsel at the forum. The other participants echoed this view.

This has become ever more important in the UK with the onset of the Turnbull Report and other corporate governance regulations, which require companies to have systems of internal control to manage risk effectively and protect shareholder value.

But with the new role comes new challenges for the in-house lawyer. One participant at the forum highlighted this when he took issue with the title of the conference: In-house Navigator. He said this suggested that the modern business was a single ship going in one direction, but for him it was quite different.

"A company is more like an armada with different divisions going in different directions," he said, adding, "for me the challenge is to ensure that all ships are following the same course".

So how can general counsel meet this challenge? The first step is to gain the ear of the CEO. This can be difficult, particularly in smaller businesses, and although in-house counsel are increasingly on the management board, this is not always the case.

One participant said that in some instances in-house lawyers had to wait until crisis point before their advice was taken on board. If they called for a solution too early, they found they would not be listened to.

But another said that in small companies that do not have the resources to respond to a crisis it is all the more important that all the divisions are going in the same direction. It is in-house counsel's role to manage this so that they can prevent problems.

Once the management is on board, the main task is to identify risk within the business and deal with it effectively at an early stage.

Getting close to the business is key. The more aligned that you are to the company the greater is your ability to assess where the risk lies.

Two in-house counsel had set up an internal management system to identify high-risk activities. These 'risk audit' systems - launched in conjunction with the business units - identified areas of risk within the group and formulated mechanisms to manage those risks so that a major crisis could be avoided.

It was agreed it was crucial to get the business units involved. The client "does not want to be passed a manual and told 'this is what you should do'", said one general counsel.

Another spoke of how he had introduced a red, yellow and green system for assessing risks. The units were invited to assess other units' processes, where the risk lay and whether the team was taking appropriate steps to manage it. Alongside the audit process is the education of the business units on how to identify financial risk to the group and what steps to take.

All the participants agreed that training is crucial. But clients do not want a lawyer lecturing them from a podium on legal complexities which make little if any sense in the day-to-day running of the business.

The challenge is to make the training process attractive and easy to understand. One participant admitted that people in the business did not initially take the training programme seriously. Not because it was an inappropriate use of the legal department but because it was not perceived as profit making. But gradually it had an impact because the department had made it interesting and relevant to the business.

Most took the view that in-house lawyers should be responsible for auditing and training programmes rather than placing this in the hands of outside advisers. Although law firms are increasingly marketing their ability to provide training to in-house lawyers as part of the service package, general counsel generally prefer to do it themselves.

This is because it is better to have someone who knows the business from the inside and can make the training relevant to the client. It also provides a vehicle for in-house lawyers to make themselves known to their clients.

"In-house lawyers can make training far more relevant to the business," said one participant. "Also, I want the business units to see the in-house team as a resource they can come to if they see the beginning of a problem. I do not want them to think that the expertise is outside the company."

But all is not lost for external law firms - equally important for general counsel is the ability to know when to go to outside advisers. One of the most important qualities is to know what you do not know.

One in-house lawyer said external advisers could also assist general counsel when the management was not listening by carrying the same message to the executive. "In a small company, unless it comes from an external consultant, sometimes it will not be taken seriously."

The message from the Paris meeting then is that there are huge challenges ahead for in-house lawyers as they move away from their traditional role as legal advisers.

But those lawyers who do not grasp the challenge should beware. The forum closed with a final warning shot from one general counsel.

"Lawyers who act like a law firm in the company are a thing of the past," he said. "Company lawyers need to be part of the process and be involved in formulating policy for the group. "Otherwise the risk is that you will be outsourced some day because you are no closer to the business process than the external lawyers."