Why Every Lawyer Should Understand the Importance of Enterprise Risk Management

Why Every Lawyer Should
Understand the Importance of
Enterprise Risk Management
1
November 20, 2012
EILEEN GARCZYNSKI, ESQ.
DAVID I. GREENBERG, ESQ.
What is Risk?
2
“Risk is the uncertainty caused by the occurrence of an
event that might affect the achievement of
objectives.”
“Risk comes from not knowing what you're
doing”
― Warren Buffett
Severity of Malpractice Claims is Steadily
Increasing
The number of large claims has risen sharply. Nearly all the insurers have
seen an increase in the number of claims with a reserve (including loss
and expenses) of more than $500,000 in 2012. Increased severity can be
attributed to various factors. An obvious one is the sheer magnitude of
the transactions or of the underlying matters law firms are working on.
Given the $500,000 or greater yardstick, increased defense costs can also
play a role.
Large Claim Payouts Have Increased
The share of claims resulting in multi-million dollar payouts has grown
exponentially. Four of the six insurers indicated their company had paid or had
participated in paying a claim of $100 million or greater and another had a
payment between $50 million - $100 million.
Largest Number of Claims Come from
Three Main Practice Areas
ü Real Estate
ü Corporate & Securities
ü Business Transactions
A&G Survey Shows Conflict of Interest
Most Common Error
Five of the six insurers cited conflict of interest as either the first or second most
frequent cause of malpractice claims. Two listed failure to calendar or follow-up
as first or second.
What is ERM?
7
Enterprise Risk Management (ERM) provides a
framework for risk management, which typically
involves:
(1) Identifying particular events or circumstances relevant to the
firm’s objectives (risks and opportunities);
(2) Assessing them in terms of likelihood and magnitude of impact;
(3) Determining a response strategy; and
(4) Monitoring progress.
By identifying and proactively addressing risks and opportunities,
business enterprises protect and create value for their shareholders,
employees, and clients.
ERM Cycle
8
(1) Identifying Law Firm Risks
9
Top Five Risks Identified as Facing Law Firms
(Order of Severity)
§  Bankruptcy or acquisition of significant clients
§  IT security
§  Pressure on fees
§  Conflicts of Interest
§  Errors made by staff/lawyers on complex, high-value transactions.
- Insurance Journal 2009
(1) Identifying Law Firm Risks
10
Identifying Risks Can Be Done In a Variety of Ways
Risk Workshop
Pros: Good way for participants to share views and create enriched discussions.
Popular due to efficient use of time and sharing opportunities.
Cons: High level of facilitation skills required. Voting required. Limited by
geography.
Structured Interview
Pros: Creates conversations; face-to-face contact promotes ERM culture
Cons: Limited by geography. High level of interview skills required. No opp. For
dialogue among fellow colleagues.
Formal Survey
Pros: Can cover a larger number of participants; well documented.
Cons: Quality of responses can be an issue. No conversations – opp. for sharing
lost. Prep time.
(1) Identifying Law Firm Risks
11
Risk Types Practice Management Financial Example Risks Professional Responsibilities (including malpractice, conflicts, litigation
support); Professional Development Risks; Managing the Engagement
(Engagement/Disengagement/Non-Engagement/Scope of
Engagement); Client Relations; Bad Clients; Lateral Issues, Rogue
Lawyers; etc. Transparency and Disclosure; Internal Controls; Anti-Money
Laundering; Credits; Firm Investments; Portfolio Risks; Audits;
Bankruptcy or acquisition of significant clients; Pressure on Fees, etc. Key Roles Practice Leaders, Management
Committee, General Counsel or Legal
Officer; Directors of Conflicts,
Litigation Support, Library, Knowledge
Manager, Records Manager CFO, Practice Leaders Strategic Reputational, Marketing, Markets, etc. Managing Partner, General Counsel Firm Governance Firm processes; customs, policies, committees, management structure,
etc. Management Committee, Managing
Partner, General Counsel IT/Cyber Confidentiality, Data Security & Ethical Walls, Data Recovery, Issues
with Third Party Suppliers and Outsourcing. CIO, Technology Manager, General
Counsel Operational Employment (Talent – Lateral and New Hires), Fraud, Damage to
Assets, etc. Environmental Natural Disasters, Epidemics, etc. HR, COO, General Counsel,
Management Committee COO (2) Assess Likelihood Using
Key Risk Indicators
12
Financial Risk
Practice Management
Cyber
KRI # 1: > % loss in firm revenue
KRI # 1: 2 + Open Malpractice Claims
KRI # 1: Outdated Software
KRI # 2: Open Line of Credit
KRI # 2: Non-use of Engagement &
Disengagement Letters
KRI # 2: iPads; Thumb drives; etc.
KRI # 3: Compensation Commitments
KRI # 4: __% of clients = __% revenue
KRI # 5: # Account Receivables > 90 days
KRI # 6: Unfunded Pensions
KRI#7:
Insufficient Insurance Limits
KRI # 3: Outdated Conflict System
KRI # 4: Outdated Client Intake
Procedures
KRI # 3: Inadequate Cyber Ins.
KRI # 4: Unsecured Conferencing
System
KRI# 5: Zero use of Ethical Walls
(3) Determining A Response Strategy
13
—  Role & Composition of Executive Leadership in Oversight
and Implementation
¡ 
¡ 
¡ 
Provide a Holistic top-down view of risks faced by the firm
Reinforcement of transparent, firm-wide view of risk management
Encourage firm culture (‘tone @ the top’) of ERM awareness in
everyday decision making
—  Dedicated Oversight/Audit Committee
¡ 
¡ 
¡ 
¡ 
Diverse Group
Trained on firm’s fundamental operations
Relevant Industry Expertise
Report on strategies, procedures, implementation and success of ERM
process both across the organization and upward to the leadership.
(3) Future: Risk Register/ERM
14
#
The Risk:
What can
Happen and
How Can it
Happen
The
Consequences
of an Event
Happening
Adequacy of
Existing Controls
Consequence
Rating
Likelihood
Rating
Level of
Risk
Risk
Priority
Monitoring Progress
15
Evidenced By
Solid Firm Governance/Culture
Ø  Collegial Environment
Ø  Selective Lateral Hiring
Ø  Low Partner Turnover
Ø  Well written/executed Partnership
and Management Agreement/Plan
Financial Strength
ü  Small or no Line of Credit
ü  Varied client base
ü  Frequent and timely billing
ü  No unfunded pensions
ü  No compensation commitments
Monitoring Progress
16
Evidenced By
v  Strong Client Intake System
Practice Management
v  Conflict Avoidance Procedures/Walls
v  No Outside Interests
v  No Suits for Fees
v  Engagement/Disengagement/Non-
Engagement Letters
v  No Malpractice Claims
v  CLE Requirements met
Operational
v  Strong institutionalized long-term
clients preferred
v  Lateral Hire/Talent Management
Review
v  Clean File Audits
Benefits of ERM
17
—  Loss Prevention
—  Cost Savings
—  Insurance Premium Savings
—  Departmental Efficiencies
—  Competitive Edge
¡ 
¡ 
¡ 
¡ 
Growth in Lateral Talent
Retention of Clients
Quality of Client Relationships
Alternative Fee Arrangements
—  Quality of Working Environment
—  Reputation
Questions?
18
Q.
A.
Eileen Garczynski, Esq.
Vice President
Ames & Gough
[email protected]
David I. Greenberg, Esq.
David I Greenberg, PLC
[email protected]