Everybody is talking about risk culture, from regulators to chief executives and the mainstream media. From financial services to our most trusted consumer brands, the headlines are filled with scandals of employee misconduct and mass cultural failings. So why are organisations doing nothing about it? And who is responsible?
An organisation’s risk culture is more than the sum of its rule books
We have witnessed a heavy investment in policies and procedures designed to ensure employees follow the rules. An organisation’s risk culture is more than the sum of its rule books; in order to influence employee behaviour, we must first truly understand the attitudes, beliefs and motivations of employees, and thus what drives their behaviours and attitudes towards risk.
For many organisations, this topic can be seen as too big to tackle. We have worked with experts and business leaders across sectors to distil risk culture down to four actionable pillars. These are designed to help organisations and their leaders to understand and create the right risk culture and, most importantly, ensure that employees’ day-to-day actions support it.
Tone from the top
This is the first pillar. Before assessing their impact on the organisation’s risk culture, leaders must start by determining exactly what level of risk can be tolerated in order to balance growth and innovation with safe behaviours. Once leaders know what they are trying to achieve, it is then time to turn the lens on themselves.
Through their own attitudes and behaviours, leaders play a key role in determining the way in which employees perceive their responsibilities for managing risk.
Julia Graham, technical director of Airmic, agrees that managers are key to risk culture, stating: “Leaders who have strengths in tune with the risk culture of the organisation will have the courage, empathy and ability to take risks in harmony with the organisation’s objectives and will be the foundation for tomorrow’s corporate success.”
Psychometric testing of executives as individuals and as a group is the most impactful way of identifying a leader or team’s strengths while recognising the effect they have on an organisation’s culture when overplayed.
Understanding employee opinion
As mentioned by Ms Graham: “One of the key challenges with asking your people what they think is listening to what they say and then doing something about it, so they can see that time invested in commenting wasn’t wasted.”
A simple, anonymised survey allows organisations to gain open and honest insights into how employees receive messages about culture through policies, procedures and their deployment on the ground.
It is important to consider the world from the employee’s viewpoint and be aware that the company may be sending mixed signals about appropriate behaviour. For example, consider the issue of performance management. Are the targets set for employees across the organisation achievable through safe and reputable practices? It is important to consider the way that accountability is managed—complex matrix structures and reporting relationships may dissuade employees from feeling accountable for their own decisions.
Employees also need to be given the right tools—without them the company is inadvertently encouraging them to develop their own processes to get the job done. And above all, there is the question of leadership. Managers must be equipped with the skills not only to get results but to drive the right types of behaviour.
Employees also need to be given the right tools - without them the company is inadvertently encouraging them to develop their own processes to get the job done
However, managing the outputs is as crucial as asking the questions. Airmic’s Ms Graham emphasises that understanding employees’ views is a large issue to tackle, especially with the emergence of the digital age, “Wilful avoidance or asking for views of employees and then remaining silent and inactive is worse than not asking at all.” She continues: “If this is too big to tackle today, then the digital age offers no comfort to those who struggle now. The digital age will magnify the imperative to address the issues highlighted under the four pillars.”
Companies in all sectors primarily promote and reward employees based on outputs, with little focus on behaviours. Experts and business leaders believe these should be tackled through three core areas.
The first is alignment with the business and risk strategy. Incentive structures often focus on rewarding employees based on short-term results, with little connection to an organisation’s longer-term strategy and stated risk appetite.
Then there is the question of incentives at board level. Board members should be incentivised based on their own responsibilities and objectives, as well as achievement of common goals. Incentive structures (and not just key performance indicators) must reflect each board member’s contribution to the organisation’s strategy, not just its financial success.
The third issue to consider is that of appropriate KPIs and metrics. Despite mounting public pressure, companies continue to reward employees on short-term financial returns rather than broader success factors that align with the organisation’s strategy and influence its longer-term success. This increases risk by focusing employees on hitting short-term numbers.
Governance and controls
The problem is rarely what’s on paper. Regulatory pressure and compliance standards ensure that most organisations meet required standards for adequate controls. The problem is seen in the implementation of these controls in the daily life of the organisation.
What factors affect adherence to controls? There is a lot to consider. First, look at the individual responsibilities and supervision—how clear are they? Then look at decision-making and authority across the business—is it clear and do managers have the right skills?
It’s also important to look at workload to make sure overloaded employees aren’t taking the path of least resistance—with potentially harmful consequences. Related to this is the issue of organisational structure, to make sure this too doesn’t encourage rule-breaking or corner-cutting.
And, of course, it’s vital to examine the compliance and risk functions, to make sure they have the right capabilities.
By focusing on these four key pillars, organisations will equip themselves with the ability to both influence, measure and develop the culture required to achieve safe and sustainable success.
Mercedes Powell is a project manager in Willis Towers Watson’s Talent Management and Organisation Alignment Practice in London. Richard Veal is a Willis Towers Watson director who leads its UK Talent and Rewards business.