Magazine article Risk Management

Establishing an Appropriate Risk Culture

Magazine article Risk Management

Establishing an Appropriate Risk Culture

Article excerpt

The role of the head of enterprise risk management (ERM) is no longer simply to run a risk management program--it is to create the right risk culture across the organization. In fact, according to Moody's, "Enhancing risk culture is one of the most credit-positive actions management can take, but is also one of the hardest things to implement and to observe."

With all this focus on enhancing risk culture, why does it continue to be such a challenge? The problem is that, when most ERM teams think about "enhancing risk culture," they focus on increasing risk awareness as a means to reduce overall enterprise exposure. This doesn't get to the heart of the problem, however. These organizations are overlooking the idea that increasing awareness of risks--especially the downside--is likely to make employees more risk averse, which may not be the most appropriate risk posture. What organizations should do is get everyone to think like a risk manager.

Progressive ERM teams think about risk culture differently. They endeavor to drive a culture of appropriate risk-taking. These companies move beyond awareness, creating an atmosphere where employees are always making risk-informed decisions. To help bring this to life, here are a few examples of how some companies influence behaviors within their organizations to establish an appropriate risk culture.

ESTIMATING RISK PERCEPTIONS

While most ERM teams characterize their companies as risk averse, it is nonetheless important to understand the preferences and perspectives of key leaders when it comes to risk-taking relative to the company's business model, the overall risk-reward balance and related metrics. Effectively communicating leadership's risk preferences can help shape the behaviors and decisions made by rank-and-file employees.

One company's ERM team addresses this by using a quantitative approach. They follow a four-step process to present a variety of situations to risk owners and collect their feedback. First, a survey is distributed to senior leaders and business unit risk committees with a message about ERM's approach and what they hope to achieve by collecting perception data. Next, a draft risk appetite framework is developed based on completed survey analysis. Specific data cuts for lines of business, geographies and data-mining are then collected to inform senior leaders about the varied perceptions of risk. …

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