November 23, 2016
Building a Risk Culture Is Simple–Really
But remember: The only person in the company who thinks a strong risk culture is a positive thing is the risk manager.
Yes, building risk culture is easy! Before I explain, let me first clear up a few weird misconceptions about risk culture that have been floating around in non-financial companies:
Making decisions under uncertainty is not natural for humans.
Back in the 1970s, scientists had a breakthrough in understanding how the human brain works, what influences our decisions, how cognitive biases affect our perception of the world and so on. Daniel Kahneman and Vernon Smith received a Nobel prize in economics back in 2002 “for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty.” I am amazed how many risk managers and consultants continue to simply ignore this research. Identifying, analyzing and dealing with risks is against human nature. Stop kidding yourself. The sooner we, as a professional community, accept this, the easier it will be to integrate risk management into decision making.
Managers do not take risks into account by default.
One of the biggest deceptions floated around is that most business processes already take into account risks and that decisions are made by management after careful consideration of risks. Not so. Naturally, managers do consider some of the more obvious risks, and there are exceptional cases where risk analysis is already integrated into the decision making. For the other 95% of the companies, existing processes and management tools ignore or purposefully hide significant risks. I bet that if risk managers, instead of running useless risk workshops, had a deep hard look, they would soon discover that budgets are overly optimistic, project plans are unrealistic and some corporate objectives are borderline naïve. Of course, the rest of the company is fine with how things are and will do everything to stop risk managers from getting involved.
See also: Building a Strong Insurance Risk Culture
Making risk management everyone’s responsibility is just wishful thinking.
I don’t quite understand why, but there seems to be an idea that strong, robust, risk-aware culture is the ultimate objective. It sounds great, but it is physically impossible. And this is why I think so many risk managers have failed and so many more are struggling to make an impact. They are trying to move the rock that is not meant to be moved. This is probably the most important point of this article:
The only person in the company who thinks strong risk culture is a positive thing is the risk manager. The rest of the organization sees risk management as a direct threat to their personal interests, their income and their position in the corporate world.
Let me repeat: Most managers ignore risks and take uncalculated risks for a reason.
But not all managers and not all the time. And that’s where the risk manager comes in, trying to change the culture of CERTAIN individuals SOME of the time.
Risk management culture is not about hearts and minds.
By now, after reading everything I tried to communicate above, I hope you realize that management doesn’t care about risk culture. I mean they will still say the right words when the risk manager is present, but deep down nobody will care. The only chance for risk culture to stick is if it makes business sense for the individuals. And I don’t mean soft things like transparency, corporate governance and other nonsense, I mean direct impact on the bottom line or the personal security of an individual. The best examples of managers suddenly becoming very risk-aware were when I was able to show that by better managing risks individuals could protect their role, avoid prosecution, have a better business case for investors, save on insurance, save on financing costs or get higher bonuses.
And yet despite everything I said above, building risk culture is a piece of cake. Risk managers just have to realize that they won’t be able to convert everyone and that some people are beyond help. There is also no single solution that will do the job. It’s all about finding what makes each individual tick. It’s time-consuming, yes, but not difficult at all. Hence it can be equally applied by large corporations and small and medium-sized businesses.
Here are some practical ideas (make sure you click on the links in the article; each one leads to a short video explanation) to get you started:
- Develop high-level risk management policy – It is generally considered a good idea to document an organization’s attitude and commitment to risk management in a high-level document, such as a risk management policy. The policy should describe the general attitude of the company toward risks, risk management principles, roles and responsibilities and risk management infrastructure, as well as resources and processes dedicated to risk management. Section 4.3.2 of the ISO31000:2009 also provides guidance on risk management policy.
- Integrate risk appetites for different risk types into existing board-level documents; don’t create separate risk appetite statements.
- Regularly include risk items on the board’s agenda
- Consider establishing a separate risk management committee at the executive level or extend the mandate of the existing management committee – this worked like a miracle for me personally
- Reinforce the “no blame” culture, on why to disclose and account for risks
- Include risk management roles and responsibilities in existing job descriptions, policies and procedures and committee charters, not in a risk management framework document
- Update existing policies and procedures to include aspects of risk management
- Review and update remuneration policies
- Provide risk awareness training regularly
- Use risk management games
- And, most importantly, get personally involved in business activities.