Recognizing and Minimizing Tort and Regulatory Risk Plan
Managing regulatory risk and torts can be a time consuming and painful process, but when they are managed effectively, the outcomes can bring important benefits that will ultimately contribute to company performance. Before being able to identify and manage torts and regulatory risks it is important to first understand their definitions. A regulatory risk is any risk that a change in laws and regulations will significantly impact a security, business, sector, or market (Investopedia ULC, 2010). As Jennings 2006 states, a tort is an interference with someone or with someone??™s property that results in injury to that person or to that person??™s property. There are three types of tort liabilities; intentional, negligence, and strict liability. Intentional tort liabilities arise when a party commits intentional acts that result in the harm of a person or their property. Negligent torts refer to careless actions, which are done without thinking about the consequences, usually unintentional. Lastly strict liability can result from violation of a statute or because of public policy issues.
Common Torts and Risks
Torts can also be classified as property torts and personal torts (Jennings 2006). An example of a property tort would be the act of vandalizing private property, as the injury is done to someone??™s property, not to the person individually. An example of personal tort as stated by Jennings 2006, is defamation, because it involves publishing untrue statements about a person, resulting in harm to that person. Defamation can either be verbal or written and usually contains information that can be damaging to a persons reputation, in some cases it can be spiteful in nature. Another example Jennings 2006 gives for tort is contract interference, also called tortuous. This type of tort occurs when a party intentionally persuades another party to break an existing contract or enter into another binding contract with another party. An example of this kind of tort would be with the real estate business. Once a person has a contract with one realtor it is against the law to enter into another one with another party. The last tort Jennings 2006 talks about is infliction of emotional distress. This type of tort occurs when ones conduct is completely out of line, and results in the emotional pain and suffering in another person. This type of tort can often be found in domestic disputes.
Many of the torts and risks that were found in the simulation were done out of negligence resulting in a breach of duty by Alumina. Alumina violated the Clean Water Act five years ago with PAH test samples above the prescribed limit, resulting in environmental damages. Because Alumina broke their duty of care they were responsible for paying the associated fees and with the cleanup of the contaminated areas. Now five years later charges are being brought upon them again. A mother has brought personal tort litigation against Alumina blaming them for her child??™s leukemia. This litigation has now brought more allegations on Alumina, claiming they have been repeatedly contaminating Lake Dira with carcinogenic effluents. Alumina has a duty to exercise ordinary reasonable care of the safety of the neighboring community and they have violated this duty. Because of their negligent acts, Alumina now faces personal and property injury litigation that could end up resulting in millions of dollars for compensation and punitive damages being paid. In order to comply with the litigation Alumina is being asked to open confidential documentation to their case five years ago. This is a risk that Alumina must be very careful with. If they decide to open the classified documents through the FOIA act it could potentially lead to information getting out that they would like to keep private, and result in more allocations being brought upon them. But if they decide to withhold the confidential business material or only release portions, this too could potentially be damaging. The public will start to wonder what they have to hind. Alumina??™s biggest risk lies in the way they choose to respond to the allegations brought upon them. There are risks involved with going to court and allowing a judge and jury to make the final decision. A jury may not favor the company if they believe that a childs life is in jeopardy because of the high levels of PAH. A jury might be more sympathetic to a child than a corporation. But there are also risks involved with settling out of court. If Alumina settles out of court they may run the risk of ruining their reputation by admitting to causing the child??™s leukemia. This may also bring about more litigation where people ???jump on the bandwagon??? and try to get a settlement from a big corporation. In any decision, Alumina must ensure they continuously work with their legal advisors to make certain the right choices are being made.
Preventive, detective, and corrective measures
The specific measures that are taken to identify and correct risk will vary from one organization to another but there are a few essential actions to be taken to limit an organization from risk exposure. First organizations need to take a broader and more integrated approach to identifying and preventing risk. Risk management doesn??™t just deal with a single element within an organization, it needs to be viewed at and enterprise level and cover areas such as fraud, financial risk, market risk, and operational risk. Each area will focus on protecting the organization from loss resulting from insufficient or unsuccessful internal processes, people and systems, and from external events. The second preventive measure is to incorporate risk management as part of everyday business. It is important to have every employee from the top down involved with managing risk. Employees should be dedicated to creating more efficient business processes and a competitive advantage from regulatory compliance by demonstrating industry best practices (Jennings, 2006). For risk management to work effectively it can??™t be seen as a once a year exercise, it must be incorporated into daily operations. It will also be beneficial to train each employee on how to deal with compliance issues and may also be valuable to increase the size of the compliance team to ensure all bases are covered. Finally it may also be advantageous for companies to enroll in a type of self-audit program, where they can self-identify problem areas in exchange for reduced fines or penalties. Within this program managers are hired to oversee a staff of in-house professionals who do everything from supervising a company??™s current activities to investigating past activities to determine problems (Jennings, 2006). These problems are then reported to the correct authority and the company and agency begin working together to solve the problem. With this solution everything is out in the open, the company, agency, customers, and stakeholders are all aware of the problems and the corrective actions that are being taken to solve them. This type of corrective action proves to be a win win for both the organization and its clients.
Managing regulatory risk and torts can be a time consuming and painful process, but when they are managed effectively, the outcomes can bring important benefits that will ultimately contribute to company performance. There are countless types of torts and regulatory risks that large organizations and small businesses alike, may face. Being prepared for these risks is a vital step in preventing, detecting, and correcting risks, which are all measures needed to succeed. The specific measures that are taken to identify and correct risk will vary from one organization to another, but when properly instituted prove to limit an organization from risk exposure.
Investopedia ULC. (2010). Regulatory Risk. Retreived http://www.investopedia.com/terms/r/regulatory_risk.asp
Jennings, M.M. (2006). Business: Its legal, ethical, and global environment.
(7th ed.). Mason, OH: Thomson.