From a bird’s eye view, a legal function of any company involves documentation, regulatory, litigation, advisory and advocacy. With each of these sub-functions, the business of a company is managed and facilitated. In times of disruption, a company is constantly battling external factors to overcome challenges, working enthusiastically to maintain the trust of its consumers and doing whatever it takes to protect and grow its market share. Companies are reinventing themselves and so as their offerings. As once Mark Zuckerberg said, “the only strategy which is bound to fail is not taking risks”.
This risk taking is not limited to merely business decisions but transcend to legal function too. The business decisions are vetted by legal department and if the corporate lawyers adopt a hyper clinical approach to review business transactions, it will tacitly impact the risk taking appetite of a company’s business. At the same time, an in-house lawyer cannot afford to be reckless and not flag legal and regulatory issues to the business teams. The balance can be maintained by ‘prudent risk taking’ by corporate lawyers.
It is difficult for legal professionals to imbibe this quality of taking prudent risks. In part #2 of this series, I talked about the inherent challenge of lawyers – they are trained to weed out risks. To ask them to take prudent risks interferes with their wiring and conditioning. However, the modern day business requirements are such that companies expect and encourage lawyers to redefine their risk-averse attitude and make it business friendly. This comes when lawyers learn how to measure the risk involved in the business decisions and guide the company to take decisions which can potentially yield gains and at the same time are less likely to result into legal and regulatory issues. Measuring of risk is subjective to say the least. A same transaction may be christened as “risky” by one lawyer and while the other lawyer may view it from a different lens and clear it as being “less risky”. While the subjective element cannot be overruled, it can certainly be reduced if the corporate lawyer vetting the subject matter transactions:
- holds in-depth knowledge of the industry and company’s business (see parts #5 and #6 of this series) using which he fully appreciates the gains (which can be monetary and/or non-monetary) that the company is likely to underscore from the proposed transaction;
- is able to identify the possible legal risk that could arise if the transaction was to be undertaken;
- is confident about the remoteness or less likelihood of arising of risk using his legal knowledge, especially after applying the relevant case law;
- if possible, is able to contemplate a plausible legal defence that the company can have if the legal risk were to become a reality;
- looks into the possibility of taking proactive legal steps to mitigate the possible legal risk; and
- is mature enough to weigh the pros of likely business gains versus cons of legal risks.
A corporate lawyer is expected to use his prudent judgment to evaluate if the gains outweigh the probable legal risks. Over the years, I have seen and talked to young lawyers who look only for likely monetary gains for company while doing a risk profile of a transaction. It is important to understand that the non-monetary gains could be bigger for a company in the overall scheme of things. At the first blush, these may look insignificant but lawyers have to get the word of business for appreciating the importance of non-monetary gains. Further, it is quite possible that the lawyers are faced with such kind of scenarios routinely (and I would imagine such would be a case in start-ups). The above exercise is not something which is done as a matter of process for routine business transactions of a company but mostly in a short period of time by lawyers. Many a times these decisions have to be taken in real time too, especially where corporate lawyers are supporting time sensitive marketing and sales functions. Therefore, the corporate lawyers are more susceptible to make mistakes in taking prudent risks if they do not implicitly hold industry and business knowledge to apply it to discerningly weigh the gains as against the cons of legal risks. I have emphasized in the previous editions of this series too that industry and business knowledge are crucial steps for a corporate lawyer to become business friendly.
As against the routine business of company, there could be certain policy decisions which a company must take to increase its market share or sales, undertake important marketing campaigns, counter competition, introduce a new brand, reposition its existing brand, important acquisitions, hive offs, funding, etc. What if such fundamental decisions of the company are marred with certain legal risks? In such scenarios, the importance of prudent risk taking is heightened. To rationalize such business decisions legally, the in-house legal team must not only identify the “prudence” with rigor in the possible risks involved in implementing such crucial business decisions but also must make the “prudence” quotient read and sound bigger and justifiable. This can be quite challenging. The aforesaid six steps in such scenarios are then followed as a process for undertaking risk profile of such business transactions. Of course the senior lawyers of the legal team and possibly external legal experts handle such sensitive transactions but it is truly a learning experience for the young lawyers in the team if they get a chance to be involved.
As I mentioned before, the aforesaid six steps do not and will not eliminate the subjective element in undertaking risk profiling of a transaction. Subjectivity can lead to mistakes but that’s how lawyers get better at this skill. The risk appetite of a company varies and this has a direct bearing on the attitude of legal department. The modern day companies (established after year 2000) are more aggressive as against the old companies. In my view, if the start-ups don’t take risks, they stand to a less likely chance to survive. There are companies which have articulated ‘prudent risk taking’ as part of their values and culture. Then there are companies who may not have put this on their walls but nevertheless don’t frown upon prudent risk taking by their employees. I see these days older companies changing their culture and fabric to make an environment to support prudent risk taking. In this backdrop, the importance of inculcating this skill by corporate lawyers cannot be overemphasized.