The first Chinese legal risk index report was recently released in Beijing during the fourth ‘Legal Risk Management Forum’. Issued by the Enterprise Legal Risk Research Institute of the China Business Law Research Association and Zhongyin law firm, the report highlights the importance of legal risk management for listed companies in China, as well as the value of legal service.
According to the report, the total cost of potential legal risks faced by 1,734 polled A-share listed companies in 2009 is estimated at RMB 62.1bn, against total net earnings of RMB582.1bn. The report also calculated a ‘legal risk index’ for each company. The average index score was 10.67, meaning for every RMB 100 of profit, RMB 10.67 worth of legal risk existed; the equivalent figure for the 100 listed enterprises with the highest risk, however was 358.
'It is worrying for listed companies in China in terms of the legal risk management. Most still lack effective legal risk prevention and control systems,” said Ye Xiaohua, director of the institute. “Most companies are not aware of any legal risk until the crisis erupts.” According to the research, in 2009 litigation causes involving listed companies were worth as much as RMB53.6bn, yet 27% of cases could have been eliminated if a good legal risk management system existed. “Hiring experienced lawyers and taking measures to prevent legal risk are urgent needs for a large number of Chinese listed companies.” said Ye.
In addition, the research puts the value of legal services into perspective. “The index gives an important benchmark and measuring system for legal risk management efforts. For example, if a company’s legal risk index number drops, that means its lawyer has done a good job,” said Han Yuqing, head of Zhongyin's brand management department, one of the co-hosts of the legal risk forum.
According to Ye Xiaohua, another report will be released next year by which time, entrepreneurs and lawyers should have a better idea of whether legal risk control is effective, and in which areas they need more improvement. ALB
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