Risk Aversion and the Business Lawyer | Lawyernomics

Risk Aversion and the Business Lawyer

Scott Greenfield recently took issue with the notion of “risk aversion” being seen as a negative for lawyers.  And as Scott notes, there are all sorts of reasons for criminal defense lawyers to be risk averse – most of which start and end with the fact that stakes involve the liberty (and sometimes, the life) of your client.  The stakes don’t get higher.  The choices are stark.  It’s not the place to try something out on a whim or press as a matter of principle.  Risk minimization is almost always the order of the day; to do otherwise is to gamble with your client’s freedom.

But in the corporate legal world it’s a different story.  Businesses and corporate managers succeed by taking smart risks.  And their lawyers help them succeed by offering legal advice that’s in tune with the organization’s level of risk aversion.  The lawyer for a business needs to know how likely a given risk is, how material it would be if realized, and what the opportunity is on the other side of that risk.  Without a good understanding of these dimensions, it’s impossible to provide meaningful legal advice.

Unfortunately, there are a whole lot of lawyers who have difficulty discerning how risk works in business.  They look to eliminate every risk, no matter how small, and no matter how much opportunity awaits on the other side.  They become known as nay-sayers and roadblocks within the organization.  It’s the kind of behavior that causes “risk aversion” to be justifiably thrown around as a black mark.

An unfortunate consequence of having overly risk-averse attorneys in an enterprise is that it actually increases the likelihood that something really bad will go wrong.  Hand-wringing corporate lawyers quickly get marginalized as managers realize they aren’t helping to find solutions.  So the managers help themselves.  Work-arounds to “Legal” are created.  Lawyers are cut out the loop and not consulted.  And instead of being able to nudge things in the right direction, lawyers have to clean up a much bigger mess.

Which, perversely, just reinforces the risk aversion. 

Unlike criminal law, the vast majority of corporate counseling work involves dealing with grey areas:  Will doing X increase the likelihood of getting sued?  Will not doing Y cause regulators to ask questions?  Does the way we’ve done Z comply with the law?  And so on. Only by knowing the business really well can lawyers provide valuable input; after all, it’s not worth taking much risk at all if the “opportunity” from so doing is that an internal client has less work to do or saves some niggling portion of its budget.  Conversely, it may be worth taking on a great deal of risk to do something innovative or enter a lucrative new market.

Note that this is NOT an endorsement of violating the law; you don’t advise ignoring the FCPA because there’s such a great market in Bangladesh and gee, how we could dominate it if only we could grease a few palms . . .  It’s just that it’s very rare in the corporate world to be faced with a business decision that represents bald-faced lawbreaking.  Every day it’s about weighing relative risks against relative opportunities – or if one stands on ceremony, at least enabling your colleagues in the business to do so.

Which is why its so critical to not be risk averse.  If the business sees its attorney as part of the team, someone who is working to grow the business and help it take smart risks, they’re going to be far likelier to run things by that attorney – and far likelier to listen on those occasions where the attorney needs to tell them no.  And that’s a much better result for client and lawyer alike.

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