Corporate Culture and Risk Management

According to an April New York Times article, “Uber’s core company values included making bold bets, being “obsessed” with the customer, and to “always be hustling.” The company emphasized meritocracy, setting employees up as rivals and overlooking transgressions of its high performers. At its worst, Uber maintained an “unrestrained culture” that has since resulted in several allegations of harassment. A published blog post by engineer Susan Fowler, indicated that “the culture was stoked—and even fostered—by those at the top of the company.”

Adoption of a strong risk culture
An effective risk culture is not a matter of risk assessment or level of compliance; it is a matter of “conviction” – a corporate state of mind where human beings can take well-informed risk decisions because they want to, not because they have to.—@RiskCultureBuilder on Twitter

The “tone at the top” describes the climate and overall philosophy set by the board of directors and executive team to drive the culture and behaviors of all employees. In companies ranging from Uber to small businesses, this tone permeates the enterprise in a number of ways, including executive communications and onboarding and learning programs, as well as the policies and procedures designed to empower and/or control employee decision-making. The right tone stresses a high standard of ethics and a culture of compliance, but should be balanced with a message that empowers managers to take risks—appropriately—in the pursuit of short- and long-term rewards for the business.

Translating the tone into a strong risk culture requires reinforcement to employees defining how their decisions and actions affect the broader mission of the company. Then, through change management and strong accountability, culture and risk management can be aligned to keep everyone “rowing in the same direction.”

Drivers of risk culture
Many companies today have defined a “culture statement,” put it down on paper, and socialized it to employees. This is only the first step in driving employees to make the right risk management decisions, however. Consider a few of the levers that companies can pull to drive behaviors towards a stronger risk culture:

  • Performance management and compensation – Are corporate and employee goals tied to desired risk management outcomes?
  • Corporate governance – From the board of directors down, are enough questions being asked? Is there too much reliance on historical data?
  • Management reporting – Is attention to certain metrics—often short-term in nature—driving decisions that could cannibalize long-term outcomes?
  • Investor Relations – Are reasonable expectations being set with a company’s shareholders when it comes to risk versus reward?

While company leaders can help drive the desired corporate culture, this alone will not guarantee good risk management decisions every day. All employees must be taught risk management techniques, and relevant risk management skills should be built into the company’s overarching competency model. A risk culture that positions employees as an integral part of risk management will drive more successful and predictable business outcomes.

During his keynote presentation at the 2016 TMG Executive Summit, cybersecurity expert Brian Krebs reinforced this point when referring to the risk culture needed to deal with cyber risk: “…layers of technology are not enough to stop a data breach…security is only as effective as the people managing it.” Although achieving a strong risk culture is no small undertaking, the benefits will be significant as more and more risks are mitigated before impact.

Creating a Risk Intelligent Organization

Many organizations spend time and effort building and developing robust risk mitigation frameworks and strategies to handle business-specific risks. In spite of constant monitoring through dashboards and reports, many companies still face major and unexpected issues. One of the main reasons for shortfalls in risk management is the general attitude towards risk mitigation. Although companies are well-prepared with an infrastructure in place, they often struggle when cultivating a sense of risk awareness, responsibility and intelligence into and across the fabric of an organization, which results in gaps and deficiencies.

Every organization realizes the significance of risk intelligence, but they frequently face issues in the initial stage of their transition. Developing a risk culture is frequently viewed as just a requirement to be fulfilled rather than something that adds value to an enterprise. Without a clear agenda, many companies find it impossible to cultivate risk-taking capabilities into its employee base.

Risk intelligence demands that every individual in an organization take responsibility for managing risks in the day-to-day operations. Senior management should assess the existing risk management strategy and gauge its effectiveness in alleviating risks as well as developing awareness throughout the organizational structure.

Factors Influencing Risk Culture

For a smooth journey in risk intelligence, the senior management has to be completely aware of the levers influencing risk-taking behavior of their employees. Some of the major factors that impact smart risk-taking decisions include talent management, training and education, qualification of staffs, incentives, leadership at the top of the organizational hierarchy, and the ability of an organization to take risk-based decisions.

To develop a risk-intelligent structure in business enterprises, organizations should perform a thorough assessment. This can be achieved by setting up objectives, conducting surveys and interviews, analyzing gaps, prioritizing actions, incorporating recommendations and keeping track of the effectiveness of the strategy. Comparing the existing culture against other influential factors such as governance, policies and procedures, competence, relationships, performance, and accountability will help the top management understand the current state of culture and the level of contribution of existing risk initiatives to create a positive impact on the business’s risk culture.

Conducting gap analysis around the influential factors will offer a better understanding of what needs improvement. To create an effective risk culture and make it work successfully to the benefit of an organization, management should continuously improve it to fit the changing business objectives and requirements.

Strengthening Risk Culture through Technology

Leveraging technology to create a centralized framework for capturing risks and organizing data elements will strengthen the risk culture to a greater extent. A risk management framework should speak a common language that is well understood throughout the organization, including stakeholders. Developing a technically assisted risk management strategy will eliminate the most common challenges faced by an organization.

A centralized data model will aid in managing risks that may arise due to external and internal events. It will also give the organization a top-down view of the business goals, global risks and controls associated with it.  A common risk environment enables effective monitoring and reporting of the gaps and risks using heat maps, dashboards, and charts. This will enhance the organization’s risk intelligence by providing real-time visibility into scores, its risk appetite, as well as limitations towards risks.

Risk and security officers will be able to get a better picture through trend analysis and obtain useful insights. A flexible framework that is developed on the basis of industry standards will provide a strong foundation for risk intelligence and aid in timely capture and categorizing of risks and initiate appropriate corrective actions.

Key Elements of a Risk Intelligent Organization

  • A risk intelligent organization follows a unified and standardized risk framework that speaks the same language across the entire organization. A framework that follows a common language is easy to understand and helps mitigate risks in a timely manner, thereby driving value.
  • Successful creation of risk intelligence defines roles, responsibilities, and the hierarchy structure in an enterprise.
  • A centralized framework will also bolster support to business operations and a wide array of functions.
  • Creating risk intelligence will enhance performance and accountability.
  • A risk intelligent organization will be able to strike a perfect balance between risk and reward.
  • Risk intelligent architecture offers the executive management, board members, stakeholders, and audit committees the ability to effectively perform their duties by promoting a greater level of transparency. Executive management is assigned with the task of developing, incorporating, and maintaining a robust and efficient risk management strategy and improvise it on a regular basis it to fit the changing requirements.
  • Business units are obligated to monitor the performance of their respective units and their approaches to managing risks as specified by the risk management and independent assurance functions, as well as oversight from executive management.
  • In a risk intelligent organization, finance, legal, HR, and IT units offer support to the individual departments in the organization in their efforts to mitigate risks.

The role of the internal audit is assigned with providing independent and unbiased assurance to the senior management by assessing the efficiency of the risk management practices and finding ways to enhance those strategies.

RMORSA: Risk Culture and Governance

The National Association of Insurance Commissioners adoption of the Risk Management and Own Risk and Solvency Assessment Model Act (RMORSA) requires insurance organizations to take a broader approach to risk management. As U.S. insurers begin to mobilize their efforts to comply with the regulation by the 2015 deadline, it’s important for them to take a step back, leverage their existing risk management operations, and develop their RMORSA efforts with a mind to the future.

The groundwork for RMORSA was laid with International Association of Insurance Supervisors’ (IAIS) Core Principle 16 – Enterprise Risk Management – and much of the ORSA requirements can be fulfilled with the adoption of an ERM framework that addresses:

• Risk culture and governance

• Risk identification and prioritization

• Risk appetite and tolerances

• Risk management and controls

• Risk reporting and communication

Before you scoff at the scope of these requirements, consider that the ORSA Guidance Manual stipulates that insurers with appropriately developed ERM frameworks “may not require the same scope or depth of review” as organizations with less defined processes.

As defined by the NAIC, risk culture and governance defines roles, responsibilities, and accountability in risk-based decision making. In effect, the principle builds off of a 2010 SEC mandate requiring corporate boards to document their role overseeing enterprise risk. This rule extends the board’s role in risk oversight from C-level risks, activities and decisions to now having accountability at the business process level. Boards are explicitly given a choice between either having effective risk management, or disclosing their ineffectiveness to the public. Doing neither is considered fraud or negligence. Enforcement actions by the SEC have doubled in recent years, so it’s likely your board has already established risk management as a priority, but what does this mean for your organization?

The first practical issue is that it is no longer sufficient to rely on the audit function as a hub for risk management. Risk responsibility has always been the responsibility of process owners, and ORSA is now mandating better oversight under the guidance of a risk management function. For many organizations, the critical first step has been taken by establishing executive responsibility in a chief risk officer (a CRO is actually required to sign off on the ORSA assessment), but without the appropriate tools to make risk management actionable, accountability beyond the CRO is never properly defined. Front line managers hear “risk responsibility” and take the same action they would for other lofty strategic initiatives—that is to say, they take no action at all.

To engage process owners in a risk culture, each business area must take ownership for a subset of the enterprise risks. Risk managers, in effect, do not own the risks to the organization; on the contrary, they own the ERM process. Their primary role is to lay the groundwork for risk assessments, aggregate risk intelligence for board reports and create actionable initiatives for business areas in need of oversight.

Engaging process owners has the dual effect of permeating an enterprise-wide risk culture, while also creating a sense of shared responsibility. The structure defined above also creates three levels of defense, a concept adopted and well-articulated by the Institute of Internal Auditors. The operational risks are owned by the process owners. The risk management function provides guidance and strategic alignment. And finally, internal audit ensures adherence to the proper policies and regulatory standards.

Risk culture and governance cannot be accomplished overnight, but significant progress can be made by adopting and articulating the best practices outlined above.

For more information on engaging process owners, implementing a standardized risk assessment process, and reporting this information to the board, download LogicManager’s complimentary eBook, Presenting Risk Management to the Board.

How Strategic Risk Management Improves a Company’s Competitive Standing

A recent survey of risk experts revealed some familiar findings: economic uncertainty, market volatility, regulatory risk and cybersecurity are among the top threats facing businesses in 2012. But according to responses gathered by PricewaterhouseCoopers, which released the results of its first annual “Risk in Review” two weeks ago, there is another concern with which companies are increasingly concerned: competition.

This certainly does not fall into the “emerging risk” category that so many analysts spend their days brainstorming about. In fact, in a sense, this survival of the fittest threat goes back to the primordial days before human—let alone mercantile—history ever began.

But it is something that few in this corner of the world discuss in terms of being an actual risk, most likely due to the fact that it isn’t something anyone has considered an issue that risk management could help curtail.

Until now.

Nearly two-thirds (60%) of the more than 1,000 executives and risk management leaders surveyed believe competition is on the rise, and almost three-quarters (73%) of those who work for technology, information, communications and entertainment companies named increased competition as the most critical risk they face. PwC credits this to falling trade barriers and the proliferation of digital platforms that allow easy market entry for everyone from multinational corporations to startups to a single individual working from hom. And it suggests that strategic risks management is the means to combat this competitive risk.

“In this new risk era, corporate boards and senior management have a crucial role to play to ensure they set the right culture and align their strategy to risk imperatives,”said Dean Simone, leader of PwC’s risk assurance practice in the United States.

More than just suggesting a solution, PwC offers some advice. The key means to better strategic risk management it lists are elevating the chief risk officer, increasing the board’s involvement, integrating risk management into the decision-making process, and bolstering IT’s ability to inform business leaders (through generating better data quality, reporting, forecasting and scenario analysis).

Combined, this can be overwhelming, but it’s the only way to stay ahead of the Joneses. “Risk management leaders have their work cut out for them,” said Simon.