Not Just Dodging Bullets: How Legal Teams with a Holistic View of the Issues Can Control Risk and Improve Corporate Governance

Article written by Lionel Schwirtz, Deputy CEO in charge of operations at Legal Suite

Young boxers entering the ring for the first time very quickly learn an important lesson: it’s not necessarily the hardest hits that floor you. Rather, it’s the punches you don’t see coming that knock you out. The same is true in business – there’s nothing worse than being blindsided by an issue you weren’t aware of. Take Credit Suisse for example: on an analyst call earlier this year, chief executive Tidjane Thiam admitted that he had been kept in the dark about some illiquid trading positions at the bank. The result? About $1 billion of write-downs across two quarters.

And it’s not just the CEO’s at financial institutions who find themselves at risk if they fail to expect the unexpected. In-house legal teams can handle thousands of cases across hundreds of customers in an environment where missing even a single deadline might cost the firm dearly – perhaps even enough to wipe out profit for an entire year.
The only way to be sure that nothing slips through the net and protect the company is to gain a holistic view of all legal activity – one that enables in-house counsel to view the full picture of company exposure and take proactive steps to manage it, mitigating issues before they arise.
In a way, it’s a bit like classic sci-fi adventure The Matrix. The story begins with Keanu Reeves’ hero Neo being offered a choice between two pills. If he takes the blue pill he’ll remain ignorant about the true state of the world. But take the red pill and he’ll get to see the world for what it really is. Of course, he chooses the latter.
And this is how we see our mission at Legal Suite. We allow our clients to take the metaphorical red pill, seeing the truth about their situation so that they can change it – in much the same way as Neo bends the Matrix to his will.
This allows those clients to add much greater value to the business. Typically, legal departments in financial firms have been thought of as cost centres within businesses but those with a holistic view of company exposure are different.
For the first time, legal departments have been enabled to act as trusted advisers, providing strategic counsel to the CEO on how to mitigate risk and grow the business – not just dodging bullets.
In particular, there are two areas in which legal teams can add value simply by seeing more clearly the true state of company affairs: control and corporate governance.

Control

It’s very easy for a situation to spiral out of control, sometimes without people even realising it. A holistic view of company legal dealings allows in-house counsel to see in advance when a situation could get out of hand and take steps to rein it in – minimising the firm’s exposure to risk.
For instance, the company could be handling too many litigations at once. Of course, this can be difficult for a team if its resources are being stretched too thinly, but the bigger issue is the real risk it poses to the firm. To put it simply, litigation is expensive – especially in a post-financial crisis world of fines that can run to hundreds of millions – and can be a severe drain on cash-flow, even for the winner.
And given the proliferation on financial risk regulation in recent years, it’s only those legal departments able to see problems coming that can turn away from crisis mode and on to the front foot, taking control of their companies’ destinies.

Corporate governance

Good corporate governance depends on efficient process. Efficient process depends on knowledgeable employees. And knowledgeable employees depend on a near real-time holistic view of all moving parts – both present and historic.
Take contract life cycle management for example. One of the major issues with a negotiation can be when one party is determined to force a clause through and keeps adding it in at every stage – even after it has already been rejected. Tools like Legal Suite display the complete transaction history so users can see exactly what was agreed and when, along with what was rejected at each stage – allowing in-house teams to keep control of their negotiations, doing deals more quickly and on more favourable terms, even in the event of personnel changes.
And this is the fundamental point. Credit Suisse’s Tidjane Thiam was living in the Matrix, with only an illusory view of the bank’s affairs. But in-house legal teams that take the red pill can see the truth, picking up on problems before they appear and – just like Neo – their personnel can move faster and their advice can punch harder. Protecting the boss, the bottom line and the business.

What would you recommend doing if a company is handling too many litigations at once? What is the best course of action?

When facing too many litigations it’s important to get perspective through a holistic view of your situation. There are five key steps to this process:

1.      First, make an inventory of the types of litigation the organisation is facing;

2.      Next, identify and mitigate common sources of disputes and litigation;

3.      Then collect data for conducting an effective Early Case Assessment;

4.      It’s also important to automate alerts and reminders on deadlines and important dates;

5.      Finally, generate reports on potential and existing litigation and related risk and costs to the organisation.

Ultimately, it is crucial that you take a hands-on approach to anticipating all litigation-related activity in order to evaluate the financial risk and control costs.

In your experience what are the common reasons for companies ‘spiralling out of control’? Do these reasons differ depending on the industry and/or jurisdiction?

Companies can lose control for any number of reasons. Common causes include a lack of global vision and transparency, levels of disconnect within the organisation or instances when information gets lost.
These difficulties have been on display in the financial sector in recent years, such as through the data silos that contributed to the crisis in 2008 and with subsequent Basel II and III regulations intended to strengthen risk management by increasing transparency.
But these issues actually affect all kinds of organisations and we’ve got clients spanning a whole range of sectors, looking to implement preventive, detective and corrective measures and manage their exposure.

Which legal department do you think demands the most? Moreover, which department is the most important to scrutinise?

Of course, much depends on the specifics of the organisation but all areas of legal activity are important and should be monitored carefully.
That said, contract management has long been a top priority for many firms. According to the IACCM, more than 80% of worldwide business is managed through contracts. To put that in perspective, the Institute of Supply Management estimates that the average Fortune 1000 company has between 20,000 and 40,000 active contracts at any one time. Given that Faulkner suggests that 10% of active contracts are lost each year, it’s apparent that legal technology is absolutely essential to not only saving time and money but to reducing risk as well.

What more could international corporations do to ensure they get the best outcome for business?

International organisations need to implement a fully integrated solution within their global information system. They would need to make sure the system they choose is user-friendly, adaptable and scalable, as it will have to accompany the organisation development in a fast-moving business environment.
Anticipate deadlines, prevent and measure risks through a collaborative system – these are the keys to success!
ELM solutions vendors, unlike internal developments, will provide state of art technologies offering best of breed solutions and helping optimise legal department performance.