2. 2
Legal Risk Management – Module 1.1
Risk Environment
Managing Legal Risks – 3 Steps
- Legal Risk Management Strategies
Ford Pinto Case
Legal Risk and Reputational Risk
- CIBC and Enron
3. Risk Environment - Banking
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Market Risk
Credit Risk
Legal Risk
Reputational
Risk
Political Risk
IT Risk Operational Risk
Customer defaulting
on a loan
Bank of Canada raises
the Bank Rate
Federal government
decides to tighten
requirements for home
mortgages ATM machine network
crashes
Teller inputs $1000 for
a $100 deposit
Customers sue in class
action for improper
interest charges
Class action by
customers is reported
in the media
4. Risk Environment - Manufacturer
4
Automaker
Market Risk
Credit Risk
Legal Risk
Reputational
Risk
Political Risk
IT Risk Operational Risk
Dealership defaulting
on inventory financing
Fluctuations in prices
of raw materials like
steel
Federal government
imposes higher fuel
economy requirements
Computer systems
controlling assembly
line fails
Customers sue in class
action for injuries
caused by defective
vehicles
Class action by
customers is reported
in the media
Parts not arriving on
time at assembly plant
5. Managing Legal Risks - 3 steps
1. Identification: recognition of legal risks
– “Can we be held liable for doing something wrong?”
2. Evaluation: assessment of legal risks
– “What are the chances of something going wrong?” “How
much can we be liable for?”
3. Response: reaction to legal risks
– “What are we going to do about it?”
– Apply risk management strategies
– Need to consider Reputational Risk
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6. QUICK QUIZ
“Our product might cause harm to 5% of our
customers.”
a) Identification of legal risk
b) Evaluation of legal risk
c) Response to legal risk
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7. QUICK QUIZ
“Our customers may sue us with a class action
for injuries caused by our defective product.”
a) Identification of legal risk
b) Evaluation of legal risk
c) Response to legal risk
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8. QUICK QUIZ
“Let’s recall the defective products.”
a) Identification of legal risk
b) Evaluation of legal risk
c) Response to legal risk
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9. Legal Risk Management Strategies
Type of Strategy Strategy
Risk Avoidance Make a loan to a risky
business client with
mortgage security on
client’s real estate
Risk Reduction Not make a loan to a risky
business client
Risk Shifting Make unsecured loan at
high interest rate
Risk Acceptance Purchase mortgage
insurance
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Whatever the strategy, always consider Reputational Risk
11. Ford Pinto Case
• Gas tank exploded in low-speed rear collisions
• Ford was fully aware of the defect. However, the car met
minimum government safety standards
• Ford estimated the gas tanks would cause each year:
– 180 burn deaths => $200,000 per death
– 180 serious burn injuries => $67,000 per injury
– 2,100 burned vehicles => $700 per vehicle
• Estimated total annual cost of legal settlements = $49.5 M
• Estimated total annual cost to fix vehicle defect = $137 M
(or $11 per vehicle)
• Based on this analysis, Ford decided to sell the Pinto
without fixing the defect.
What was Ford’s risk management process?
Work through the 3 steps. What went wrong?
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Source:
http://www.huppi.com
/kangaroo/Pinto.htm
