The US legal system should scare investors more than North Korea

published 19 December 2014

141219-north-korea — North Korea isn't the real threat, the US legal system is

There are lots of things to worry about in the global economy right now. The fallout from the massive crash in the oil price and Russia's growing desperationare just two of the most obvious headline-grabbers right now.

But another big story this week has highlighted a longer-term risk, which I think is still not getting enough attention from investors in big companies. It is regulatory and legal risk.

Sony's travails this month illustrate the point perfectly. Earlier this week, it pulled the release of its new comedy about an assassination attempt on North Korea's leader Kim Jong Un.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

This has caused endless outrage. The White House is now calling it a "serious national security matter", and Kim himself claims that the very existence of the movie is an "act of war. It has, as one commentator put it, gone "beyond stupid."

But from Sony's point of view, the hackers are not the only aggressors in the game. The US legal system is just as much of a problem for them. The hacker or hackers (who may, for all we still know, be a group of giggly teenagers in a hotel in Bangkok) have threatened terrorist action against anycinema playing the (apparently quite bad) movie.

The risk is slight to non-existent. But what if even the slightest harm were to befall a cinema-goer following this threat even if it couldn't be proved that the harm was caused directly by the original hackers?

The victim's lawyers would be able to claim the cinema was negligent in allowing the film to be shown, given the known threat. They'd sue the cinema. The cinema, which would presumably find its insurance wasn't valid, given the known threat, would sue Sony. It would all very expensive very quickly.

The huge growth in the role of the state in the developed world and the legal profession that feeds off the laws that growth has created, makes doing business oddly more risky than it once was.

We've often looked here at how regulatory risk and legal risk affect sectors such as tobacco, oil and banking.But given the never-ending rise in the scope of the state, I wonder if shareholders take it into account elsewhere as much as they should.

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.