Risk Environment - Banking3Market RiskCredit RiskLegal RiskReputationalRiskPolitical RiskIT Risk Operational RiskCustomer defaultingon a loanBank of Canada raisesthe Bank RateFederal governmentdecides to tightenrequirements for homemortgages ATM machine networkcrashesTeller inputs $1000 fora $100 depositCustomers sue in classaction for improperinterest chargesClass action bycustomers is reportedin the media
Risk Environment - Manufacturer4AutomakerMarket RiskCredit RiskLegal RiskReputationalRiskPolitical RiskIT Risk Operational RiskDealership defaultingon inventory financingFluctuations in pricesof raw materials likesteelFederal governmentimposes higher fueleconomy requirementsComputer systemscontrolling assemblyline failsCustomers sue in classaction for injuriescaused by defectivevehiclesClass action bycustomers is reportedin the mediaParts not arriving ontime at assembly plant
Managing Legal Risks - 3 steps1. 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?” “Howmuch 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 Risk5
QUICK QUIZ“Our product might cause harm to 5% of ourcustomers.”a) Identification of legal riskb) Evaluation of legal riskc) Response to legal risk6Press “S” to pause or resume slideshow at anytime.
QUICK QUIZ“Our customers may sue us with a class actionfor injuries caused by our defective product.”a) Identification of legal riskb) Evaluation of legal riskc) Response to legal risk7Press “S” to pause or resume slideshow at anytime.
QUICK QUIZ“Let’s recall the defective products.”a) Identification of legal riskb) Evaluation of legal riskc) Response to legal risk8Press “S” to pause or resume slideshow at anytime.
Legal Risk Management StrategiesType of Strategy StrategyRisk Avoidance Make a loan to a riskybusiness client withmortgage security onclient’s real estateRisk Reduction Not make a loan to a riskybusiness clientRisk Shifting Make unsecured loan athigh interest rateRisk Acceptance Purchase mortgageinsurance9Whatever the strategy, always consider Reputational Risk
Ford Pinto Case10http://www.streetfire.net/video/ford-pinto-crash-test_198486.htm
Ford Pinto Case• Gas tank exploded in low-speed rear collisions• Ford was fully aware of the defect. However, the car metminimum 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 Pintowithout fixing the defect. What was Ford’s risk management process? Work through the 3 steps. What went wrong?11Source:http://www.huppi.com/kangaroo/Pinto.htm