How Can Managers Avoid Lawsuits?

Nobody likes to be sued, especially in a difficult economy where companies are struggling to survive and laying off workers. CEOs and other senior managers spend an average of 20% of their time on business legal matters yet few have any formal training on the subject. As a result, they may be unaware of the legal dominos their business decisions set into motion and they end up learning about the law in the school of hard knocks. Learning the hard way is never desirable. It’s painful. It chews up valuable time and hard earned profits.

All businesses compete on a legal playing field. They also operate within a complex network of business relationships that provide fertile opportunity for lawsuits. Some of those relationships are external to the company, involving customers and suppliers. Some of those relationships are internal to the company, involving employees. The inability to recognize the legal side of those relationships can cause problems. It can escalate contract disputes, aggravate employment disputes, or result in lost patent, trademark, or trade secret rights, to name a few. It can cost companies millions in terms of lost revenue, lost productivity, and lost competitive advantage. Yet with the proper tools, such situations can be anticipated and managed.

It all starts with employees. In legal terms, employees are agents of their employer. They speak and act on behalf of their organization. They have apparent authority. Everything they say and do in their job capacity reflects on their employer and can create legal liability for their organization. From a strategic perspective, the cause-and-effect relationship between employee actions and corporate consequences means that all employees are individual gatekeepers of their organization’s legal liability. They can create liability, or they can mitigate it.

The business documents employees write have added legal significance. Unlike human memories that can fade, documents are tangible evidence that live in computer memories and conventional paper files. Once they are created they have a life of their own, one whose end is by no means certain. They can come back to haunt the company unless they are managed well during their life cycle. Unfortunately, most employees don’t appreciate the pivotal role they play in a document’s life cycle or the role documents play in protecting their company’s legal health. This lack of awareness can turn business documents, such as emails, instant messages, letters, faxes, and memos, into litigation wild cards or “smoking guns.”

Lawsuits are triggered by the breach of duty, supporting evidence, and the incentive or motive to take action and sue. The first two items are the legal requirements necessary for a successful case; the third is the hidden catalyst that sets it all in motion. Put them all together and they converge into a perfect storm. Eliminate or reduce any one of these aggravating factors and the likelihood of successful litigation goes down.

Organizations that don’t plan ahead and consistently expect to be bailed out cultivate a rescue culture. Being reactive instead of proactive affects every aspect of a business. Making a habit out of waiting until something goes wrong increases the odds that multiple legal problems will happen at the same time. Overreliance on this method of risk management can lead to a system overload that traps you with insufficient resources just when you need them most.

In today’s business climate the value of good legal risk management cannot be overemphasized. It can not only help a company avoid legal problems but also enhance a company’s reputation with other companies, employees, and consumers.

Whether you’re a business owner, a senior executive, or a manager working your way up the corporate ladder, it is far better to be proactive and learn what you need to know about business law now rather than learning the hard way later. When it comes to business, what you don’t know can really hurt you. Investing in legal literacy now can help avoid lawsuits and pay huge dividends.