Contrary to popular belief, building a risk culture is not a difficult thing to work at: but there are some misconceptions which, if understood, make it an easier task. In this article Alexei Sidorenko, CRMP, explains what these misconceptions are and provides some ideas which will help.
Building risk culture does not have to be difficult! Before I explain, let me first look at various misconceptions about risk culture that I have come across:
Making decisions under uncertainty is not natural for humans
Back in 1970s scientists had a breakthrough in understanding how the human brain works: what influences our decisions; how cognitive biases impact on our perception of the world; and so on. Daniel Kahneman and Vernon Smith received a Noble Prize in Economic Sciences 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 misconceptions around is that most business processes already take into account risks; and 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 percent of the companies, existing processes and management tools ignore or even 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. But then again, they may not. Because the rest of the company is fine with how things are and will do everything to stop risk managers from getting involved.
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’s the end result. I mean 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 that: most managers ignore risks and take uncalculated risks for a reason. Most, 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
Hopefully by now, after reading everything I have tried to communicate above, 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 really cares. 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 and corporate governance; 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.
Ideas for successfully building a risk culture
Despite everything I have written above, building risk culture is not rocket science. Risk managers just have to realize that they won’t be able to convert everyone; and 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. Hence it can be equally applied by large corporations and small and medium sized businesses.
- Develop a high-level risk management policy - it is generally considered a good idea to document the organization’s attitude and commitment to risk management in a high-level document, such as for example a Risk Management Policy. The policy should describe the general attitude of the company towards risks, risk management principles, roles and responsibilities, risk management infrastructure as well as resources and processes dedicated to risk management. Section 4.3.2 of the ISO31000:2009 standard-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: I've no idea why, but this worked like a miracle for me personally!
- Include risk management roles and responsibilities into existing job descriptions, policies and procedures and committee charters; rather than into 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.
You can find more ideas about integrating risk management into day to day operations and building risk culture in Alexei's new book, which can be download for free here.