Risk Management for Small Businesses and Non-Profit Organizations 101 (Part 1)

While there has been a lot of news chatter on the internet and in business and insurance publications about risk management, it has for the most part been without the benefit of a definition of the term.  Because of the AIG fiasco and those credit default swap thingies (a technical legal term), most of the buzz has been about enterprise risk management (referred to by risk management geeks as “ERM” to highlight the fact that they know what it is and you do not) and underwriting in the context of the insurance and banking/financial industries.  Given the fact that economic risk taking is the topic du jour, this may be interesting stuff (ahem), but not what folks like you and I have to deal with when managing smaller organizations’ risks from day to day. 

What we are really interested in is trying to protect entrepreneurs, businesses, non-profit organizations and their members, from bad things that could happen.  Or, at least, from the consequences (generally financial) of those bad things.  That’s it.  We can get that accomplished without a lot of Wall Street mumbo jumbo, right?  I mean, look where that sort of thing has taken us. 

That said, as I’ve been developing materials for a course on legal risk management I’ve been taken back to the days when these issues were academic for me (literally), which has in turn taken me back to the basics of risk management theory.  It’s been a good thing, because there are some valuable lessons and reminders there.  In its purest form, boiled down to its basics, academic risk management theory makes a lot of sense and provides an excellent roadmap (and if the folks on Wall Street had stuck to the basics we’d all be better off).  So, I’m hoping you’ll indulge me while I practice being “teachy” (I promise there won’t be a quiz at the end), because I’m hoping that maybe I can interest you enough to get you thinking about . . . well, about how you should be thinking about risk management for your business or organization.  Here we go.

A good “academic” definition of legal risk is as follows:

Legal risk is risk from uncertainty due to legal actions or uncertainty in the applicability or interpretation of contracts, laws or regulations.

Depending on your type of business or organization, you face certain specific legal risks, but in a general “big picture” sense, businesses and organizations all face the same two categories of legal risks:

1.  Contractual risks.  (Are your contracts legally binding and enforceable?  How do they allocate legal responsibilities?  Specifically, what responsibilities do you have?  What responsibilities do your customer or clients have?  If your customers or clients do not fulfill their responsibilities, what are your options?)

2.  Operational risks (defined by the Basel Committee, an international committee that has played a leading role in standardizing bank regulations across jurisdictions, as “the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events”).

So, as long as you don’t have any relationships with any other parties in which you have any contractual responsibilities, all of your internal processes and systems are flawless, and neither you nor your employees, subcontractors or vendors ever make a mistake, you don’t have to ever worry about risk management.

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