Legal risks are a significant part of a firm’s overall risk profile, and is typically guided by calculating the probability of risk and its potential magnitude. Yet this calcuation does not fully capture how risks manifest for organizations. This chapter presents a novel way of evaluating legal risk termed transformative legal risk management. Transformative legal risk management is different from traditional approaches because it incorporates a new layer of understanding legal risk. Using a four-pronged approach to risk management known as VUCA (volatility, uncertainty, complexity, and ambiguity). This chapter introduces two of the four VUCA risks: volatility and uncertainty. The chapter defines volatility, identifies sources of legal volatility, and presents responses that legal experts can use in response to volatility risk. The chapter then defines uncertainty, identifies sources of legal uncertainty, and presents responses firms can use to reduce uncertainty risk. The chapter shows how firms applying VUCA can not only minimize harm from legal risks but also elevate legal risk management into a practice that generates a competitive advantage over rivals.

Legal knowledge is a powerful tool for generating organizational value, but like any other valuable asset, it is vulnerable to misuse. First, the chapter highlights the extant literature on ethics and the strategic use of legal knowledge. Second, it identifies an innovative but underutilized UN regime which articulates a promising suite of values-based legal principles in support of ethical practice. Third, the chapter highlights the potential of a literature known as proactive law that can help reimagine how scholars and firms view legal knowledge in human terms. Finally, the chapter identifies how the culture of an organization can be a powerful force in support of values-driven applications of legal knowledge. The chapter concludes that, while there is much potential to develop ethical practices in the utilization of legal knowledge, much work needs to be done in order to better understand the ethical implications of legal knowledge and to mature ideal principles and practices into reality.

If legal knowledge can generate a sustainable competitive advantage in organizations, then what characteristics of managers and firms best cultivate that knowledge? Given that few managers currently perceive law as a strategic tool, development of a strategy is likely to offer firms an advantage that rivals will be slow to replicate. This chapter highlights two categories of variables. First, the attitudinal perception of managers influences the utilization of legal knowledge through their perceived legitimacy of legal rules, self-efficacy toward legal processes, organizational citizenship, and views of legal experts and the legal process. Second, the attributive characteristics of an organization, such as the presence of a lawyer-CEO, role of legal experts, structure of legal staffing, and regulatory intensity of the legal environment, influence how legal knowledge is deployed. This part concludes that both attitudinal and attributive variables can encourage the acquisition of legal knowledge, which can in turn proliferate the use of legal knowledge as a valuable strategic resource.

Is legal knowledge valuable? For businesspeople, legal knowledge has been an essential part of their craft for a very long time. The earliest known contract was written on a cuneiform tablet in 2750 BCE, where a farmer drafted into the military of King Sargon I contracted with another farm to grow and secure his crops in his absence in exchange for half of the grown produce. Contracts involving sales and purchases, rentals, labor contracts, co-partnerships and other agreements were used as early as 2000 BCE. Centuries later, the Roman Empire had formally trained legal experts who advised on legacies, guardianships, and contracts. In the modern era, prominent seventeenth-century merchant Gerard de Malynes noted that a businessperson was not a “compleat merchaunt” without knowledge of commercial law. Legal knowledge was so important to Joseph Wharton that, when he established the first collegiate school of business at the University of Pennsylvania in 1881, business law was one of five subjects he specified for the curriculum for what is today one of the most respected business schools in the world.

Executives, managers, and employees use legal knowledge with varying levels of sophistication which I term "pathways of legal strategy." There are five discrete pathways of legal strategy that firms use in their legal environment of business. The avoidance pathway focuses on circumvention of legal rules. Firms practicing conformance seek minimum compliance with legal obligations. Prevention firms apply business knowledge to avert legal wrongdoing. Value firms leverage legal knowledge to create and capture value. Firms pursuing a transformation strategy use legal knowledge to redefine the organization or an industry. Each of these pathways is analyzed for its distinct traits regarding the manager’s perception of the law, the level of legal knowledge in the organization, and the role of legal experts, and the pathway’s reinforcement of organizational goals. The pathways can help organizations identify strategic uses of legal knowledge, highlight any mismatches, and develop a clear trajectory in order to shift from one pathway to another. The first three pathways (avoidance, conformance, and prevention) will be addressed in this chapter.

This chapter explores whether legal knowledge is not only a valuable resource of a firm, but also a resource that can produce a competitive advantage that’s sustainable against the responses of rivals. This chapter first briefly summarizes the resource-based view of the firm, a prominent management theory used to determine if resources can be leveraged to achieve a sustainable competitive advantage. This chapter then shows how legal knowledge and business strategy can operate together to achieve firm goals, and also highlights contributions to scholarly literature on this subject which is generally known as legal strategy. The chapter next inquires whether legal knowledge can be a source of sustainable competitive for organizations. After defining sustainable competitive advantage, the chapter evaluates whether legal knowledge possesses the four traits necessary to support a sustainable competitive advantage – value, rarity, imperfect imitability, and the absence of equivalent substitutes. The chapter concludes that legal knowledge can embody all four traits, and thus be a source of sustainable competitive advantage.

This chapter addresses how the pathways of legal strategy can be applied in practice. The first part of this chapter presents three case studies that show how firms can respond to common legal challenges. The mandate to stop sexual harassment, the protection of intellectual property rights, and the prohibitions related to anti-corruption are all used as examples of how each pathway can be applied with varying levels of effectiveness. The second part of the chapter explores how a firm can elevate its implementation of legal knowledge from one pathway to another. This part shows how companies can evolve their legal practices from avoidance to conformance, conformance to prevention, prevention to value, and value to transformation. Although not every legal issue is transformative, understanding how the pathways work in practice can help firms deploy their legal knowledge as effectively as possible.

A contract is an important tool for organizations to obtain and sell resources, and its value is typically measured by the benefit acquired through the exchange. Viewing a contract only through this instrumental lens, however, leaves significant value unrealized. A contract is not just a tool for acquisition, but also a mechanism for governance, an instrument of coordination, and a relational lever to build trust and familiarity over time. The chapter identifies how organizations can use their legal knowledge of contracts to generate a collaborative advantage for both parties. The chapter will first explore how a contract can be a source of cocreated collaborative advantage. It will then show that contracting parties build trust by going through three levels of trust in order to have a trust-based relational contract from which significant value can be harvested. Finally, the chapter will examine how firms can preserve contractual value when trusting relationships are either limited or absent.

Continuing the exploration of transformative legal risk management, this chapter addresses the remaining two risk dimensions that govern a VUCA environment: complexity and ambiguity. Complexity is an environment that contains numerous interconnected parts, accepts inputs, generates outputs, and develops a capacity to learn and remember. The fourth and final dimension of VUCA is ambiguity. Especially challenging for firms deploying legal knowledge, ambiguity is an environment where causes and effects propelling events forward are largely unknown, the firm does not know whether an organized system will emerge, and little historical precedent exists for determining the most appropriate course of action. The chapter defines complexity and ambiguity, explains how they are applicable to legal risk, and articulates strategies for firms to use their legal knowledge to anticipate and address complex and ambiguous legal problems.