Legal Risk Management: A Strong Foundation For Business Development

During a business’s operation and development, risk control is always a crucial consideration. Not just in business strategies, but also in managing legal risks. Unlike other types of risks, legal risks are long-scope considerations, with damages difficult to determine. This makes them hard to manage without proper guidance.

Enterprises are allowed to trade in all types of goods and services not prohibited by law. However, all enterprises engage in numerous relationships within an inherently volatile and complex business environment. These activities always come with certain risks, and businesses need to identify potential dangers to implement timely measures to minimize possible losses, ensuring smooth business operations. Managing legal risks by applying legal knowledge will support sustainable business development. Enterprises that are unprepared, lack plans, and have insufficient legal knowledge in transactions are often the primary source of legal risks. Legal risks must be avoided absolutely and cannot be casually accepted or overlooked. Only with a solid and effective legal foundation can businesses grow strong and sustainably.

Factors That May Lead to Legal Risks in Business Operations

Legal risk is the possibility for financial or reputational loss as a result of failing to adhere with laws, regulations, or contractual obligations. The factors leading to risks can be both subjective from the enterprise and objective from external sources.

Subjective Factors from the Enterprise: There are two common subjective factors which lead to legal risk. The first is a lack of awareness in understanding and implementing the law. The second is the limited competitive capacity of the enterprise.

A lack of awareness in understanding and implementing the law is unfortunately plentiful in the Vietnamese commercial world. Many Vietnamese enterprises do not prioritize or emphasize the need to understand legal regulations related to business activities, especially international trade, foreign laws, international treaties, and customs. The consequence of their lack of legal awareness is ignorance of international commercial law, leading to imprudent business actions. For example, enterprises may act according to a partner’s requests without knowing that such actions are prohibited by the partner’s country’s law. Or, when facing disputes in international transactions, businesses fail to understand foreign laws on litigation, resulting in non-cooperation in the trial process and ultimately receiving unfavorable judgments from foreign courts.

Limited competitive capacity for enterprises is also a harsh reality in Vietnam. Most Vietnamese companies are simply inferior in size to MNCs, so lack the managemental or financial resources to achieve favorable legal outcomes against them. As a result, Vietnamese enterprises often having to concede and accept unfavorable contract terms during international commercial negotiations to secure successful transactions. These terms can later become sources of legal risks. The limitations also manifest in the capacity to resolve disputes in transactions. Without a clear understanding of international business law and Vietnamese law, enterprises cannot access legal resources for business operations or dispute resolution.

Objective External Factors: There are two main factors here that lead to risks: the unpredictability of legal changes and the limited legal support system for enterprises.

With societal development, laws naturally change. Some changes are foreseeable for businesses, while others are not. To respond promptly to legal changes, businesses need to meet essential conditions such as legal compliance awareness, a good internal legal team, or robust support from law firms. There are also objective conditions such as transparency in legal changes by the government, the implementation period for new legal regulations, etc. Without these objective conditions, businesses may be unable to foresee or update legal changes, leading to potential legal risks. A universally applicable example is changes in tax incentives. Taxes are a major concern for any business. If tax incentive law changes can be predicted or known in advance within a reasonable time, businesses can avoid risks. Many Vietnamese enterprises have suffered losses due to the inability to foresee changes in tax incentive laws.

Vietnam has a substantial number of lawyers and legal support associations. However, the capacity of these entities, especially in the international trade environment, remains limited. In international commercial activities, enterprises often need legal safety assurances through consulting services from law firms, legal companies, associations, or state agencies. If this legal support system has systematic limitations, it will be challenging to help businesses avoid legal risks.

Legal Risk Management Process

Managing and controlling risks is essential for businesses aiming for sustainable development. The steps for legal risk management and control are carried out sequentially:

Identifying potential legal risks: This should be regularly performed by businesses. Each enterprise must recognize the critical role of the law in production and business activities. To identify potential legal risks, businesses need to review their compliance with corporate law, labor law, social insurance, contract law, intellectual property law, competition law, and processes containing many hidden dangers. Typically, legal risks arise from both subjective and objective factors.

Establishing legal risk control procedures: After identifying potential risks, businesses must address them immediately by applying legal procedures. Establishing regulations and operational procedures within the company is necessary to create legal safety corridors for each department and unit, helping individuals identify permissible boundaries and foresee the responsibilities they face when violating regulations. Developing legal risk control procedures will be more effective if businesses focus on restructuring the organization towards streamlining, clearly dividing responsibilities and authorities, and prioritizing the establishment and application of control procedures for high-risk activities such as purchasing, import-export, financial management, warehouse management, and contract control.

Enhancing legal knowledge for key personnel: It is essential to raise the awareness of legal compliance. Each employee in the company impacts the operational efficiency and success of the business differently. Especially in decision-making or advisory roles, key managers are able to significantly influence the likelihood of the company encountering legal risks. Therefore, employees need to be trained, guided, and updated to understand and grasp legal regulations in their areas of responsibility. Key managers must regularly update their knowledge in areas such as corporate law, contract law, commercial law, labor law, social insurance law, tax law, and intellectual property law.

Building a legal and compliance database: Each business, based on its specific industry, needs to compile and systematize all relevant legal regulations, creating a corporate legal library for easy access by any employee. This library can be in the form of a corporate legal bookcase or an electronic library, or by using external legal document services. For large businesses, forming or improving the legal department’s quantity and quality is crucial to meet the significant demands of legal research and forecasting for Vietnam, international organizations, and countries where the business operates. For small and medium-sized enterprises, having at least one legal specialist with good expertise is necessary. Setting up an internal legal department: Depending on the company’s scale, needs, and capabilities, it can consider hiring lawyers to support its activities, establishing a separate internal legal department or combine both approaches. Large enterprises or those with extensive business operations can establish an internal control department to support and control risks alongside the internal legal team.

Seeking support from lawyers and legal service providers: As Vietnam increasingly integrates into the global economy, organizations providing support services to businesses in general and international trade, such as legal consulting, insurance, auditing, and trade promotion services, are reliable and useful companions in necessary situations. Staying informed with regular updates on legal issues by legal service providers will help minimize legal risks for businesses.

Legal risks must be absolutely prevented and managed, not handled casually. Only with a solid legal foundation can businesses grow strong and sustainably.

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