Introduction
The BGP Technologies Company is facing financial difficulties that can be attributed to poor economic environment. As a result of this the Company would like a risk an avoidance plan that can be useful reducing some of the legal costs that arise owing to the nature of the business. Drug manufacture companies are often faced with law suits due to the complexities that are associated with testing of drugs, the drug composition, etc. In addition to that testing is a mandatory requirement in this industry and often results in law suits as a result of animal rights activists, abnormal reactions during testing and other such situations.
In this report some recommendations will be provided which may be useful in reducing the costs associated with litigation in the future.
Recommendations
To set us off it is important first of all to establish whether specific forms of business entities are more suited to risk management/avoidance. This is important due to the fact that an operational business is classified under one of several entity types. Each entity classification has different legal requirements that affect its susceptibility to risk. For example a Partnership is a form of business entity that involves a number of parties making a shared investment. Each partner is exposed to business risk to the degree of the total investment (Spedding & Rose, 2008). In some cases an individual with a higher investment will make large unprecedented losses whereas their participation may have been minimal. Such a distribution of risk is likely to be unfair in the event of a loss. This form of entity appears unsuitable for a high risk business venture like a stock trading company.
Another type of business entity is the Limited Liability Company. This type of Company is registered and wholly owned by the shareholders. The advantage of this type of Company over partnerships is in the event of a loss, the shareholder is only responsible for the monetary value of the number of shares he/she holds (Spedding & Rose, 2008). However, despite the improvements in shared risk this company allows share holders the right to elect directors. This right does not give them any control over how the Company is run, thus leaving actual operations in the hands of the directors (Spedding & Rose, 2008). This suggests if the directors make bad decisions the shareholders stand to loose thus the choice of directors should be done with great care. Based on the information from the above two paragraphs it is clear that a proper selection of the business entity is crucial based on the varying degree of risk associated with different business operations.
Therefore the management of ownership rights in these various business entities is a complex task that requires adequate preparation. Among the appropriate solutions to secure rights of owners is the use of risk transference. This concept would require that BGP Technologies shifts the responsibility associated with risk to a third party thus reducing the risk to the owners. One way of accomplishing this is by sub contracting tasks with high risk to an external party (Hearnden and Moore, 1999). For example it may be the case that a large portion of the litigation expenditure is as a result of pressure from animal rights activists. These groups may have identified loop holes in the testing procedure or animal handling within the laboratory. To prevent such litigation in future it may be advisable for BGP to award an external company a contract to carry out the testing. Thus any risk associated with this aspect will fall on the sub contractor. Sub contracting will require careful selection of a potential candidate and close monitoring (Hearnden and Moore, 1999).
Sub contracting or outsourcing allows the firm to concentrate on its core competencies and reduced associated costs. It has been reported that the US pharmaceutical industry is outsourcing pharmaceutical manufacturing at an increasing rate of 10-12% annually (Chris, Briggs and Bachkar, 2009). This is resulted in increased profitability and reduced legal costs related to disposal of waste and employee related litigation. This position suggests hat BGP may benefit by outsourcing and reducing the number of manufacturing plants. This should be done with consideration to the disadvantages associated with outsourcing such as a lack of a shared vision. For this reason it is recommended that a proper selection method is used in choosing appropriate partners.
Another scheme that can be implemented in protection of owners’ rights by BGP Technologies is the use of an insurance policy (Hearnden and Moore, 1999). Insurance policies require the payment of a periodic premium to the insurer. The insurer is expected to pay the full amount of the policy in the event the subscriber fall victim to the circumstance insured against. However, this option may not be very entirely effective in the case BGP. This is because insurance companies may not have policies that cover all the situations that are likely to arise in drug manufacture.
Also in keeping with the reduction of risk associated with litigation another method may be to implement a Company wide ethics program to boost compliance with SEC regulations. Following the collapse of several large corporations due to negligence on the part of the executive’s current legislation requires several compliance related issues to be addressed in listed Companies (Ferrell, Fraedrich and Ferrell, 2009). This point is crucial in that it highlights on weakness of Limited Liability Companies. The inability to make decisions in the running of day to day business by members means directors have a free hand which if unchecked can result in violation of owners rights.
The Securities and Exchange Commission (SEC) put this rule in place to allow it act as a monitor for investors or the owners rights (Ferrell, Fraedrich and Ferrell, 2009). It has been observed that in large listed Companies senior officers may take advantage of their authority and lunge the organization into financial disaster. Following such careless decision making the investors often begin to file law suits against the organization due to negligence on its part. The organization often being duped by the profits brought in by the unscrupulous executives may have been unaware of these actions. In light of this the SEC recommended that listed companies have in place an ethics program that can ease the reporting of any unethical practices observed. It should be noted that successful implementation of such programs requires strict compliance by senior administration for the junior ranks to understand the importance of the actions.
Although the action of implementing ethics programs may seem far fetched with regards to reduction of litigation costs it is very important. It has been observed that traditional sources of legal liability have arisen due to breach of contract and negligence by such officials. Owing to this, new concepts such as proportionate liability and limited liability partnerships have been coined to provide some relief (Brooks and Dunn, 2009). However, even with this the enticement of the stock market suggests the need for regulatory greater checks and balances. Without such mechanisms the rights of the owners can be violated easily by greedy executives.
Despite the fact that business always involves some degree of risk, the proper management of this can in fact result in significant reduction of related legal expenditure. First, it has been recommended that the administration attempt to focus on the strategic objectives of the organization in decision making (Nelson, 2006). Greed and excessive competition can cause executives to make risky choices with investor’s money. Second, it has been observed that improvements in operations across the organization can be useful in reducing related liability costs. In this regard an organization could chose to focus on areas it is most competent and outsource expertise to other organizations.
Third, despite the fact that BGP is a multi national Company legal compliance could go a long way in reducing risks in the course of business. Again owing to poor decision making executives may be encouraged to bend the rules. It has been observed that a significant portion of litigation involving companies such as BGP may be attributed to poor compliance. Lastly, it has been observed that reliable and regular reporting on operations can go along way in reducing legal costs in a business. It is clear that in some cases the executives of the companies that collapsed owing to corrupt trading practices were operating independently. Reporting on a regular basis and closer scrutiny of may have provided a solution for these corporations.
References
Brooks, L. J. & Dunn, P. (2009). Business & Professional ethics for Directors, Executives & Accountants. Mason, OH: South Western Cengage Learning.
Chris, E. I., Briggs, C. & Bachkar, K. (2009). Managing Risk in Pharmaceutical Global Supply Chain Outsourcing: Applying Analytic Hierarchy Model. Proceedings of ASBBS, 16(1), 1-15.
Ferrell, O. C., Fraedrich, J. & Ferrell, L. (2009). Business Ethics: ethical Decision Making and Cases. Mason, OH: South Western Cengage Learning.
Hearnden, K. & Moore, A. (1999). The Handbook of Business Security: A Practical Guide to Managing the Security Risk. London: Kogan Page Limited.
Nelson, B. L. (2006). Law and Ethics in Global Business: How to Integrate Law and Ethics into Corporate Governance around the World. New York; Routeledge.
Spedding, L. S. & Rose, A. (2008). Business Risk Management Handbook: A Sustainable Approach. Burlington, MA: CIMA publishing.