The traditional approach to managing risk can lead to a disconnect between GRC functions themselves and business units, and also a lack of a co-ordinated, consistent approach to addressing these issues.
Organisations, including those in the transport and logistics industry are finding that their stakeholders (particularly Boards) are seeking greater assurance regarding legal risks, and that governance, risk and compliance (GRC) matters concerning the organisation are being addressed in an integrated and proactive manner.
Traditionally, the governance, risk and compliance functions or frameworks each have a separate operation and focus. An organisation's governance arrangements is typically overseen by the company secretary, while risk is overseen by the chief risk officer and compliance by the head of compliance or General Counsel.
Organisations understandably have also focused their resources and corporate attention on those areas of their business which potentially create the largest legal and regulatory exposure. In the transport and logistics industry, these areas are typically occupational health and safety, environment, employee relations, and competition law. In some organisations, these matters are the responsibility of specialist, standalone business functions.
While this approach has its strengths, the limitation of this approach is that it may result in, amongst other things, a disconnect between the GRC functions themselves and their interaction with the organisation's business units, and also a lack of a co-ordinated, consistent approach to addressing these issues.
This article is the first in a two-part discussion, and will discuss the general concepts of GRC and legal risk management.
What is "GRC"?
GRC is a relatively new concept which seeks to emphasise a close inter-relationship between governance, risk and compliance and how these functions can be further integrated to increase their effectiveness. An integrated GRC approach is almost a reversal of the traditional approach described above.
An integrated GRC approach seeks over time to integrate all relevant policies, processes, procedures and controls. Specifically, this approach is designed to identify and standardise common processes, procedures and controls and ensure that they are consistently implemented and applied throughout the organisation.
The goal is a consistent approach to governance, risk and compliance – particularly concerning organisational strategy and behavioural management initiatives.
A GRC approach to legal risk management
Legal risk management is an integral component of an integrated GRC framework. It seeks to ensure that the organisation pursues its corporate goals and objectives within the boundaries of its legal obligations, regardless of how these legal obligations arise (for example, from legislation, industry standards and codes of practice, significant contracts).
Within a GRC framework, legal risk management is usually the responsibility of the organisation's legal and/or compliance function – often closely overseen and owned by the General Counsel.
Adopting a GRC approach to managing an organisation's legal risks yields the following benefits:
- an increased perception of value that legal risk management adds to the organisation;
- if properly implemented, the process of developing an organisation's legal risk management program (LRMP) can foster greater buy-in for business stakeholders and senior management to own their legal risks and the associated controls, processes and procedures;
- development of a performance model of legal risk management (ie. ensuring that the organisation is doing the right things having regard to its organisational goals), as opposed to a conformance model (ie. merely ensuring that the organisation is not doing anything wrong);
- legal risk management as documented in an LRMP integrates risk, compliance and legal planning to work towards embedding these matters into an organisation's processes and procedures, so that they are relevant, effective, efficient, robust and sustained;
- an LRMP also provides the ability to link into and support organisational business continuity, disaster recovery and crisis management plans;
- a reduction in breaches and errors;
- a reduction in costs and greater efficiencies;
- a more flexible and externally focused workforce capable of rapid change to meet stakeholder and organisational needs; and
- a greater assurance for the organisation and its Board and senior management that legal risks are being appropriately dealt with and the organisation remains on target with its performance objectives.
What does legal risk management in a GRC framework look like?
An effective LRMP within a GRC framework will often have the following components:
- Corporate objectives: a clear understanding of organisational objectives and an ability to demonstrate how GRC targets and the LRMP support these organisational objectives within the boundaries of the law and industry and organisational policies;
- Stated risk tolerance and boundaries: an organisation must be able to identify and articulate its risk tolerance level and the related boundaries of acceptable organisational and legal risk to its stakeholders (particularly to its staff and regulators);
- Legal risk management policy: there needs to be an overarching legal risk management policy which sets out the purpose of the LRMP in the relevant organisational context, and what the organisation aims to achieve through legal risk management;
- Legal risk management structure: this structure will typically consist of key definitions, risk assessment criteria and a commonly agreed set of protocols to address legal breaches or incidents, or risks which are rated in excess of the organisation's legal risk tolerance. It is crucial that the legal risk management structure is aligned with the first three points above;
- Identified legal requirements: these include specific mandatory legal requirements that apply to the organisation, such as laws and externally imposed codes of conduct. For an organisation's LRMP to be truly effective and meaningful, consideration of requirements should also extend to voluntary organisational requirements, for example adopted codes of practice, industry standards, contractual provisions and internal policies and procedures. These legal requirements are usually documented in a "Legal Obligations List" or "Obligations Register";
- Identification and assessment of key legal risks: the LRMP should seek to identify, analyse and prioritise the management of the organisation's key legal risks and controls. The focus should be upon those legal risks that must be assessed and monitored so that the organisation can meet its performance goals and objectives within the established boundaries of its legal obligations (mandatory and voluntary). The key legal risks are usually documented in a "Legal Risk Register";
- Detect, check and prevent: part of managing an organisation's legal risks is putting in place policies, processes and controls to ensure that the organisation can detect and check that the organisation is effectively discharging its legal requirements. The identification of any control gaps is also important. Importantly, legal risk management focuses not only on ensuring that there are adequate controls to address legal risks, but also that appropriate conduct and behaviours are being evidenced and inappropriate conduct prevented. It is therefore necessary to have separate processes to evidence, monitor and check for performance as against targets, and ensuring that undesirable conduct is not occurring. The policies, processes and controls can be documented in the Legal Risk Register;
- Continuous improvement and adjustment: LRMPs need to continuously strive to improve and adjust. If incidents or breaches are discovered, a new corporate initiative or project is to be launched, or there is a fundamental change to the organisation's objectives or legal obligations, the LRMP needs to be able to respond and adjust. This can accomplished by health checks, analysis of legal issues and incidents, routine reviews of emerging legal risks, projects and opportunities and root cause analysis of any legal breaches; and
- Communication and reporting: throughout all of the above processes, ongoing communication with all appropriate internal and external stakeholders is crucial. This includes the establishment of clear reporting lines and reporting arrangements to ensure that both management and the board have visibility on the organisation's legal risks and emerging concerns. Decisions made by the organisations in the above processes (and the underlying reasons for these decisions) and current versions of any documents and registers produced should be kept in a legal due diligence file.
The above is a high-level discussion of how we see legal risk management operating within an integrated GRC framework.
We have assisted organisations in the sector with their development, implementation, review and upgrading of their LRMP and we have drawn on our experience in writing this article.
In Part 2 of our discussions, we will look at some practical steps that organisations could consider in developing and implementing an LRMP within an integrated governance, risk and compliance context.
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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.