What does 'legal risk' encompass?

Legal risk encompasses the potential for financial loss or operational disruption due to legal actions taken by or against an organization, as well as risks stemming from non-compliance with laws and regulations. This type of risk can arise from a variety of scenarios, such as lawsuits, regulatory enforcement actions, breaches of contract, and changes in legislation that affect business practices.

When organizations fail to comply with legal standards, they may face penalties, lawsuits, and reputational damage, which can have significant financial implications. Legal risks are inherently management's responsibility to mitigate through various means, such as implementing compliance programs, engaging in due diligence, and regularly monitoring for changes in law that could affect business operations. This understanding is crucial within risk management frameworks, as it highlights the need for ensuring that legal and regulatory compliance is integrated into overall business strategies.