- 45%+ of in-house counsel cite cybersecurity, environmental issues as primary concerns
- Cybersecurity particularly top of mind for financial institutions
- Less than one-third report being prepared to proactively mitigate risks
As the threat of litigation comes into sharp relief for global companies amid the COVID-19 pandemic and a heightened enforcement environment, more than 45% of legal executives say they are most concerned about risk associated with cybersecurity and environmental issues, according to a survey of 400 legal and compliance professionals conducted by global law firm Baker McKenzie. However, less than one-third of those leaders say they are prepared to proactively identify and mitigate these latent risks.
According to this new research and the accompanying report, Litigation Intelligence: Ready for Anything, 92% of compliance and legal professionals say they are aware of growing litigation risk to their businesses and the need for coordinated and comprehensive ways to manage those vulnerabilities. However, they are likewise concerned about a parallel surge in costs, with 70% saying they are choosing not to identify specific litigation risks for fear of higher costs for their organization — creating a situation ripe for litigation in an increasingly contentious global environment.
To help companies identify and assess their risk, Baker McKenzie's Ready for Anything report is accompanied by the Litigation Intelligence Tool, enabling organizations to measure their litigation preparedness, benchmark against peers and establish cost-effective strategies to reduce litigation risk.
"We continue to see rapid digitalization across all industry sectors, in addition to rising expectations and accountability in relation to ESG matters, empowerment of employee and customer voices, and growing enforcement efforts and coordination between global authorities," said Jennifer Semko, a partner in Baker McKenzie's Litigation & Government Enforcement Practice based in Washington, DC. "These issues have only been accelerated by COVID-19, with some organizations beginning to uncover vulnerabilities arising from their response to disruption, and governments under pressure to fill holes in domestic finances. All of these factors are combining to create significant litigation risk for companies going forward as we emerge from the pandemic."
Distinct Industry Divergence
While the new research uncovered dominant and universal sources of litigation, it also revealed some notable differences across sectors – offering an illustration of commercial challenges by industry.
For example, organizations operating in the Industrial, Manufacturing and Transportation (IMT) and Energy, Mining & Infrastructure (EMI) sectors report that environmental and commercial matters are their greatest litigation threats — reflecting ongoing scrutiny of ESG performance and the prevalence of activist stakeholders, as well as supply chain issues and contractual disputes arising from COVID-19 disruption. (Approximately 73% of leaders in the IMT space identify environmental issues as their company's greatest litigation risk, while 85% of EMI leaders say the same.)
“As ESG principles become enshrined in laws, they will become the subjects of the compliance obligations of the company and the directors’ duties of oversight," said Peter Tomczak, Chair of Baker McKenzie's North America Litigation & Government Enforcement Practice. "At the same time, when companies focus on fulfilling mandatory and voluntary standards in relation to ESG, there is growing recognition that those organizations may also be creating long-term value for investors. Long-term company value and sustainability are often intertwined.”
Likewise, cybersecurity concerns are most top of mind for leaders in the Financial Institutions (FI) and Technology, Media and Telecommunications (TMT) industries, with 83% of FI respondents noting it as their greatest concern, and 92% of TMT leaders saying the same.
"Litigation related to data and cybersecurity is rising considerably, as digital transformation expands the technology footprint of companies," said Paul Glass, a Partner in Baker McKenzie's Data Privacy practice based in London. "The more complex the tech stack — with layers of providers that have a role in hosting, sharing and organizing confidential and personal data — the greater the likelihood of mismanagement and breaches. Data controllers are struggling to manage this risk in a meaningful way and are finding it is not possible to simply outsource liability."
Tax and Employment Risks Loom Large
Certain litigation risks remain heightened across all sectors. For example, though just 18% of respondents listed employment as their greatest litigation risk, it remains a key area of vulnerability for companies to prioritize regardless of industry or market, said Paul Evans, a partner in Baker McKenzie's Employment & Compensation Practice in New York.
"The impact of COVID-19 on work and working life has created an environment that is particularly ripe for claims of discrimination, retaliation, health and safety and the like," Paul said. "In a very short period of time, employers were forced to close operations, reimagine how work gets done, right-size workforces to deal with changing demands, safely reopen workplaces and navigate public health issues involving testing and vaccines. The fast pace at which decisions have been and will continue to be made, as well as their unprecedented nature, has and will continue to lead to litigation across the globe."
Likewise, tax disputes are also on the rise in a COVID-19 environment, while more countries take regulatory measures around digital tax and transfer pricing, combined with the fact that tax regimes have a significant increase in the amount of information available to them due to an increase in reporting obligations.
"COVID-19 is accelerating these challenges – creating an economic crisis and budget shortfalls, which create greater need for tax revenue – as well as giving rise to new ones," said Antonia Azpeitia, a Partner in Baker McKenzie's Tax Practice based in Madrid. "Understanding the impact on intra-group supply chain and pricing policies, which jurisdictions should absorb extraordinary losses or profits generated by the pandemic and how to justify these decisions to tax agencies worldwide will be critical."
Preparedness and Risk by Geography
The research also highlighted regional variance, finding that organizations in the UK were the top performers in their litigation preparedness, with Mexico and Singapore-based companies scoring the lowest in readiness.
In the United States, executives identified commercial and cybersecurity as their top area of litigation risk (52% listed commercial as top concern; 46% listed cybersecurity), while 60% of respondents in the UK named data protection as the chief concern, in addition to cybersecurity (62%). In Japan and Hong Kong, tax concerns are of greatest priority, with 52% of respondents in both markets listing it as their top litigation concern. Commercial litigation risk was identified as a point of concern across jurisdictions, particularly in Singapore, where 52% of business leaders stated it was a top priority.
"As the production center of the world, many supply chains originate in the Asia Pacific region, but legal infrastructure in some of these markets is often not best equipped to manage the kind of high-value commercial disputes we have seen arising from COVID-19," said Nandakumar Ponniya, a Partner at Baker McKenzie based in Singapore and Head of Dispute Resolution in Asia Pacific.