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Creating a Culture of Risk Avoidance

In the event of a product safety problem, product makers should be prepared to defend themselves. Raising awareness among employees is essential to the process

Against the backdrop of crises such as the current peanut-product recall, melamine in milk and pet food, e-coli in spinach, and lead in toys, let me suggest an overarching challenge for corporations: Cultivating a culture of risk avoidance and accountability at every level of the business.

Avoiding crises in the first place is obviously far better than having to endure the costly and disruptive consequences of dealing with such events. The fallout over defective products is often an ordeal on many fronts—lawsuits at the state and federal level, class actions and multidistrict litigation, government investigations, congressional inquiries, media scrutiny, interest from the investment community, and the potential for securities claims and criminal prosecutions. As we know, the financial implications can be staggering—liability in the billions of dollars is not unheard of, not to mention the millions of dollars in legal costs. Moreover, the reputation and competitive standing of the company may be on the line.

Develop a Strategy

Despite these high stakes, many corporations do not have a consistent or disciplined approach to risk management and accountability for product safety. That is a mistake. It is critical for businesses to consider how to reduce risk with such measures as a systematic application of "lessons learned," or undertaking a review of the critical decision-making processes involved in producing a product. A company must be prepared to defend every aspect of its decision-making and operations. Being large, decentralized or global, or relying upon business partners, foreign suppliers or outsourcing, is no excuse for knowledge gaps.

Most companies also need to expand their notion of what courts or regulators will regard as "foreseeable"—and thus something that should have been prevented. Accompanying this article is a checklist of just a few items a company may be called upon to defend when a product's safety is at issue. Each of these warrant some degree of ongoing scrutiny for risk management.

Creating a culture of risk avoidance and accountability requires education of employees at every level. It is not always intuitive. One technique is to demonstrate to employees, in a classroom atmosphere, how the words of people in other industries have been used against their companies in the courtroom. The same goes for internal communications.

Think Before You Speak

It is all too common for corporations to find themselves in the position of having to explain or contextualize seemingly insensitive or incendiary verbiage or ill-considered musings in internal e-mails, engineering memos, and marketing reports. Even memos of board meetings have been picked apart for potentially inculpatory statements. The words contained in these documents may have little or nothing to do with the merits of a given case, but ill-chosen words or speculative musings can alter (and have altered) the dynamics of an entire litigation and exacerbated corporate crises. In certain circumstances, it might be appropriate to simulate a cross-examination of an employee to illustrate how what they put in writing can be misunderstood and misinterpreted years later. This can be a real eye-opener for employees at every level across the company, and it is a minimum investment which promotes risk avoidance.

In some cases, companies have literally put their products on trial internally. They may troubleshoot quality control, marketing, or scientific and medical issues to determine whether their decision-making process can withstand the rigors and scrutiny of cross-examination. Outside experts can be brought in to challenge assumptions and public assertions about a product.

Strive for Consistency

It may also be worth comparing the consistency of internal and external communications of the company on a given subject. Ideally, this is performed by independent, objective, and knowledgeable individuals who appreciate how potential claimants will exploit any divergent statements. This is part of a disciplined assessment of risk, since the lack of consistency between external and internal messages can serve as the basis for everything from a consumer fraud class action to a regulatory proceeding and may even lead to the imposition of punitive damages or criminal prosecution.

The particular tools management needs to assess risk will vary. The point is to consciously inject risk avoidance into employees' thought processes. From the standpoint of corporate governance, the notion of informed and continual risk assessment and avoidance is fundamental. And the responsibility for oversight of management's risk avoidance processes lies squarely with the board of directors. Given what is at stake, it ought to receive the highest priority.

Arvin Maskin is a partner in the law firm of Weil, Gotshal Manges, and is co-chair of the firm's Products Liability Mass Tort Practice Group.

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