OPINION MICHAEL POWER
The nature of risk T
HE CAUSES OF the financial crisis of 2009 have been extensively discussed and researched. Failure of systemic risk oversight by regulators is clearly cited as
a major contributor to the crisis but also the central role of defective organisational culture in general, and risk culture in particular. Interest in this idea of risk culture continues and problems of risk culture have been referred to extensively in official reports, such as the US Senate report into the ‘London Whale’ at J.P. Morgan and the analysis of problems at HBOS in the United Kingdom. In November the Financial Stability Board published a consultation document on risk culture and the Financial Reporting Council published a revised version of its guidance to
“ Focus on risk culture is a
symptom of how society has reacted to the financial crisis
Directors on risk management – formerly the Turnbull Report – which includes a new focus on risk culture. Internal auditors are also being drawn into the discussion as they come under pressure to audit the risk culture of financial organisations. There are many definitions of risk culture and
”
they generally refer to the organisational norms, habits and attitudes which inform the actual taking of risk, and the actual operation of related controls and mitigation. In our ESRC co-funded project on risk culture in financial organisations, carried out over 18 months, we focused mainly on the risk management function as an important but not unique contributor to the risk culture*. Working inside several banks and insurers – and an airline for comparative purposes – we identified a number of key cultural trade-offs that are important for risk taking. Despite widespread agreement on the
importance of risk management, and the crowded advisory market and regulatory interest in promoting risk culture improvement programmes, we found that risk culture remains an elusive managerial and regulatory object. Within the banks and insurers we studied we found much enthusiasm to improve management of risk but also great variety of practices to change risk culture. One of the key issues and potential indicators of the condition of an organisation’s risk culture is the extent to which risk appetite and related key risk indicators are understood, owned and actioned within business units. This may depend in part
14 SOCIETY NOW SPRING 2014
What exactly is risk culture in financial institutions and who is responsible for managing it? Professor Michael Power explains
on the authority of the risk function within the organisation and its ability to manage the role of providing valued advice while acting as an overseer. Rather than attempting an overarching account of culture as a whole, our pragmatic approach looked at cultural encounters and actions inside organisations – close to the ‘joining the dots’ approach advocated by the UK Financial Conduct Authority. The focus on risk culture is undoubtedly a
symptom of how society has reacted to the financial crisis and the demand for more security. Many respondents in our study associated risk culture with taking less risk and this poses a challenge for regulators in the future to distinguish a good risk culture from that of a highly precautionary culture. Our research suggests that a good risk culture is less to do with the level of risk-taking as such, and more to do with the self-understanding, transparency and information quality within organisations about critical risk and control trade-offs. We also found that risk culture is unlikely to be only entity-specific; there seems to be a community of actors across organisations such as consulting firms, regulators and financial organisations who share values of compliance, process clarity and auditability. Since it is widely recognised that the financial crisis was made worse by too little variety in risk management systems, which made all banks react in the same way under stress, it would be ironic if the current interest in risk culture resulted in similar pressures for homogeneity. n
*Risk culture in financial organisations by Michael Power, Simon Ashby and Tommaso Palermo is available at www.
lse.ac.uk/researchAndExpertise/units/CARR/pdf/Final-Risk- Culture-Report.pdf
i Contact Professor Michael Power, London School of
Economics and Political Science Email
m.k.power@lse.ac.uk Telephone 020 7955 7228 Web
www.lse.ac.uk/accounting/facultyAndStaff/profiles/power.aspx
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32