The culture of any organization is defined by the summation of its cumulative values and actions. Meaning, that it is comprised of the communal values and conduct of its employees at all levels, as they relate to overall company performance and representation. By embracing the added value of cultural diversity as a human dynamic within its employee base, a company’s overall culture becomes more holistic, balanced, and well-rounded. This is because each culture has differing stances regarding risk aversion or risk assumption
and allows for different perspectives.
Risk culture, however, is what cements together all the separate elements of an organization’s risk management infrastructure as it pertains to evaluating operational risks versus reward. It is the collective ideals, goals, and underscoring practices of an organization and permeates every level of the corporate structure, affecting decision-making and risk management.
An organization’s risk culture is a crucial factor in its ability to adjust itself and respond to an ever-changing environment to remain relevant in the marketplace. Today, as capitalism spreads through the ever-expanding global network afforded by technology, corporate entities are willing to assume more risk in exchange for greater returns on investment (ROI). This willingness is often defined as “risk appetite, ” and as a business grows, its risk appetite tends to scale along with that growth.
To clarify, risk appetite is the amount and type of risks an enterprise is willing to take on, while risk tolerance is simply the amount of risk an organization must endure to meet its milestones and overall objectives. Risk appetite is not something that should be considered entirely with apprehension or avoidance as it is often only because of its willingness to shoulder more risks that an organization can grow.
A tradeoff frequently left unconsidered is the proactive management of risks inherent in a company’s operational environment, regardless of risk appetite. All too often, risk mitigation is thought of only after an incident, lawsuit, or financial loss occurs, and is generally more costly than proactive measures might have been. However, a culture conducive to effective risk management supports open and upward communication from its entire employee base.
By fostering an environment or rather, culture, where employees at all levels are empowered to raise flags regarding risk management shortcomings or recognize achievements in risk reduction, a business ensures its longevity. According to the authors of the aptly titled article, Establishing an Appropriate Risk Culture, corporations who manage to strike the right balance of proactivity and the empowerment of employees, “move beyond awareness, creating an atmosphere where employees are always making risk-informed decisions.” And those decisions ultimately benefit the enterprise as a whole.
Overall, the organizational risk culture which promotes proactive risk management throughout all levels of its infrastructure, with a heightened receptiveness to upward communication, is the most successful. A risk culture that efficiently balances risk appetite against risk management is one of the key components of an organization’s ability to achieve its fiscal objectives while maintaining a strong ROI.
Corporate Vice President
Proactive Risk Management