Experts Opinions

Changing Management Attitude towards Risk Culture

Significant empirical evidence supports the premise that risk culture directly influence business resilience by providing or denying necessary capacities that the leadership uses to promote the successful realization of projects (Ashby et al., 2012, p. 32). By accurately defining the risk appetite and risk tolerance, stakeholders are able to integrate risk management measures into the overall business strategy, which makes execution of controls and mitigation measures easy and automatic. According to the Institute of Risk Management (2012, p. 12), the executive is not solely capable of solely making fruitful risk decisions without involving the other members of the staff and other intellectual installations within the organization. This aspect is specifically evident major corporations as noted by Alpaslan et al. (2009, p. 38) who concluded that the need for a functioning risk culture is a crucial as having skilled human resource team. While organizations invest huge amount of financial and human resources in developing products and competencies, it is important to allocate a similar level of attention to risk culture and risk management, which is the second most essential factor in the existence of any organization (Dressel, 2015; GRN, 2014; Shapira, 1986, p. 21). Fortunately, many major corporate organizations already have a risk culture in place. However, studies have shown that the executive administration does not accord risk management the level of attention it deserves (Levy & Sarnat, 1984; Kahneman et al., 1982, p. 13). Conversely, they have not considered the significance that it has in promoting resilience and continuity of business. As indicated by Levy and Sarnat (1984, p. 12), too much emphasis is placed on performance and meeting targets because few are anticipating impactful materialization of risks.

Risk and Personal Attributes

People have different perceptions towards risk, which is anchored on two specific personality traits. The first trait entails the spontaneity or unconventionality and systemic and compliance constructs. The second trait includes cautiousness, pessimism, resilience, and level of anxiety manifested by an individual (Bhamra, Dani, & Burnard, 2011, p. 5382). These aspects play a major role in determining how a leader will make decisions and take risks. Coupled with the promise of success or rewards of the outcome of a risk, leaders with the first traits are likely to make greater risks. A study conducted among stockbrokers shows that 55% could not choose to engage in insider trading even if they could earn $10 million without facing the risk of arrest (Sucharow, 2012). As such, persons with the second set of traits are inherently less likely to make risky decisions.

Linking Corporate Leadership and Resilience

Resilience, as defined from the ecological perspective, refers to the ability of a system to return to normalcy after a major disruption. Resilient systems largely depend on risk management that lowers the likelihood of occurrence of specific events. Risk culture, however, reduces additional factors other than risk that include uncertainty and vulnerability. Strategic risk management impacts on corporate resilience by providing opportunities for coping with risks. A long-term adaptation of a strong risk culture provides corporate climate adaptation and mitigation strategies that are efficient and synonymous to the company (Beermann, 2011, p. 839). Thus, strategic risk planning is fundamental in underpinning resilience. Resilient firms show better risk cultures, whereas the less resilient exhibit lack strong risk management cultures. Conversely, resilient firms show more long-term risk management strategy compared to less resilient entities that rely on short-term quick fixes of problems.

Given the function of risk culture in promoting active resilience, both factors can be considered as an integral part of strategic corporate leadership. The process of building resilience is attached to the complex dynamic role of a risk culture that depends on the external inputs from all members of an organization. Resilient companies cannot afford to accommodate disruptions in the strategic calendars to address risk issues. It would be a strategic impossibility owing to the level of interconnectedness of various risk management parameters. A risk culture, therefore, solves this problem by ensuring the issues are addressed as they arise however small they are, hence preventing escalation of crisis into a major concern that threatens the existence of an organization. If improved, long-term risk management systems can foster ultimate capacities for resilience that can deliver long term sustainability across different time spans.

Emphasizing the Impact of Risk Culture

A problematic risk culture is often blamed for an organization’s resilience difficulties and market performance. While this premise is largely true, there exists little understanding of the link between risk culture and business continuity. The Institute of Risk Management (IRM) observes that management problems arise when an organization’s risk culture undermines the long-term success of a firm. This premise is echoed by the International Institute of Finance (IFF) which proposes reforms to strengthen practices and support productive risk behaviors within the organization. An inappropriate risk culture is characterized by the inability to measure, detect, and address impending problems. John Harvie, the Director of the Protiviti Insurance and Business Operation Improvement, suggests that enterprise should take deliberate actions to change a counterproductive risk culture. This is because, like any culture, risk management systems of an organization are a vicious circle that has self-reinforcing capabilities.

The Financial Stability Board (FSB) pointed out that there exist significant risk governance weaknesses relating to responsibilities, firm management functions, and independent assessment of risk. These revelations followed the 2008 financial crisis that was nurtured by the culture of excessive risk-taking. Weaknesses in risk culture of many financial institutions were largely to blame for the financial crisis by failing to detect and address failures in compliance (FSB, 2014). Although supervisory and regulatory measures have been made around the world to address inefficiencies in risk governance, enterprises need to assess the effectiveness of their risk culture. An effective risk culture should consider risk appetite, risk capacity, risk profile, and risk limits as necessary and relevant entities in the overall business strategy and decision-making process. Principles guiding the risk governance activities should be institution-specific and must reflect the business model of the organization (2013). Conversely, establishing a strong risk appetite framework (RAF) is necessary for fostering strong risk culture and sound risk management, according to FSB.