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Erosion in the rule of law creates potential corporate governance gaps & increases risks for management

Natalie Runyon  Director / ESG content & Advisory Services / Thomson Reuters Institute

· 5 minute read

Natalie Runyon  Director / ESG content & Advisory Services / Thomson Reuters Institute

· 5 minute read

With many countries and regional bodies experiencing elections this year, the erosion of the rule of law worldwide could pose significant risk exposure for many organizations

Observing a world engulfed in conflict across different regions and witnessing the monumental shifts caused by rapid technological innovation, it becomes crucial to consider the ways in which political dynamics can further complicate an already complex risk landscape, especially in 2024 in which there are more than 50 countries and regional bodies experiencing elections.

Of particular importance is the ongoing evolution of the erosion of the rule of law around the world. This fact alone creates risk exposure, especially in governance and assessment of legal risks, for companies’ chief legal officer (CLO) or general counsel (GCs), who act as the guardians of the company when it comes to legal, reputational, or ethical risks as well as other types of risk.

Erosion in the rule of law

Sean West, co-founder of Hence Technologies and author of the GeoLegal newsletter, recently points out that the World Justice Project has framed the current status of the rule of law as “in recession” around the world, a trend that started just under a decade ago.

For companies, the implication of this decay is that the assumptions in how the practice of law operates are no longer certain, according to West. “From an in-house point of view, we see CLOs getting pulled very much into the political planning and fray of their companies,” he says, adding that the disappearance of the norms in the roles that lawyers and the judiciary play are causing a seismic influence in the risk environment for companies. “This could leave companies to underestimate the risk that they face in certain places.”

For example, the companies that lawyers represent — whether they work as in-house counsel or external legal advisers — are subject to the effects of political climates, which can affect their share prices and business strategies to different extents. If lawyers only considers the legal aspects narrowly, they might miss out on identifying certain opportunities and hazards. Indeed, a company might win a legal battle but face unexpected political fallout as a result.

Further, legal professionals might judge a situation to be of low risk by not factoring in the wider political context, which is especially relevant given the numerous global elections happening this year. “The way that things have always been in a particular region or economy may not be the way that they are six months from now when a more populist or a new government comes in,” West explains.

Interrelated risks create integrated approaches

The lack of certainty in international affairs and how it could impact companies is one of many challenges for CLOs and GCs in the risk landscape. Add in the technological shifts and fragmentation of regulatory regimes, and the overall risk environment gets murky fast. “We can’t just talk about things like international affairs or artificial intelligence or environmental, social and governance issues as if their independent events,” West says. “They’re happening in a context that creates friction.”

Law firms — especially as technology elevates the standard for delivering value-added services to their clients — must consider the evolving needs of their customers to stay competitive. Indeed, being proactive on behalf of their clients is going to be worth a lot more than spending an extra dozen hours or so. Ongoing conflicts in the Middle East, for example, can disrupt companies’ supply chains, resulting in various legal complexities, from withdrawing operations from affected regions to revising agreements or justifying unmet commitments.

For law firms doing business with clients in these circumstances, the task of understanding the initial causes of these supply issues is crucial for identifying key strategic or competitive opportunities for the businesses. GCs are increasingly involved in these discussions, although they may not always have the collective expertise from their deputies and team members who may or may not be skilled in this specific type of analytical work, West adds.

Guidance for CLOs and GCs to address governance gaps

West advises that GCs and CLOs review their companies’ strategic plans and determine the Top 5 priorities that are critical for their companies’ success. Then, in collaboration with cross-functional peers, they should analyze how politics can disrupt or enable these priorities. They then are in a better position to make an assessment through the lenses of both risk and opportunity, simply by answering two questions:

      • What is the company really trying to achieve today based on my knowledge as an manager of risk, whether it be legal, reputational, financial, or something else?
      • What are the different ways in which the politics of a region could manifest itself and disrupt the company by triggering the type of risk for which I am responsible?

West explains that it is then necessary for the group to build some scenarios around the potential events and identify what their companies’ proper responses would be. Working collectively as a group — when the group is not in the heat of a crisis — to build out plans for how each function would operate should the scenario develop enables effective decision-making around the best action when a crisis does hit.

Also equally important is the development of functional plans. For risk management leaders, it is important to understand what their companies’ mitigating actions would be in advance of any crisis. Going one step further, one best practice is embedding these discussions in their companies’ enterprise risk management governance and processes and to gather with peers a few times a year to review scenarios and plans, while keeping the values front and center to determine effective responses.

The decay in the rule of law is just one of many dynamic complexities in today’s risk environment in which companies are operating. It is critical for GCs and CLOs to gather with their peers regularly to assess and re-assess how the operating context is changing and then tweaking their risk mitigation response plans appropriately as a key part of ongoing governance to ensure their companies’ sustainability and success.

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