What is an Effective Risk Culture?

 
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As we come to the end of our second week in the MoreThanNow Risk Practice, it is interesting to reflect on some of the early conversations. Over the course of a dozen meetings with risk professionals from a variety of backgrounds, one question has come up repeatedly: What do we mean by ‘risk’?

Risk means something different to everyone, to every organisation and often to individuals within an organisation. Here, we present a few observations about what risk means to us. These thoughts are based on a combination of academic research and 30 years of risk experience, but also from the scintillating conversations with our clients over the past two weeks.

Observations on Risk

  • Risk is always in the future. It is the relationship between expected future returns and potential future costs. As soon as a decision is taken, it becomes an outcome. Risk management is therefore more about preparation than it is about execution.

  • Risk is not the same as uncertainty. Risk is about assessing and understanding the possible outcomes of everyday decisions. Risk management is not about predicting the unexpected, it is about creating an environment in which decision makers can operate to the best of their potential and make smart choices with respect to the context.

  • Risk can be good and bad. It can create wealth and it can destroy wealth. It can lead to innovation and discovery and it can stifle creativity. Risk management is about balancing the positive and the negative outcomes in the pursuit of sustainable growth.

  • The idea that greater risk leads to higher returns is wrong. A positive correlation between risk and reward in an organisation is symptomatic of an ineffective risk culture. In an effective risk culture, the relationship between risk and returns is weak. Lower risk should lead to a safer and more effective environment for learning and innovation.

  • A good risk outcome is often no outcome. Due to this, and the fact that risk exists in the future, it is hard to measure behavioural risk. The most effective way to manage it is to create a robust and mature culture that supports effective decision making.

  • When risk goes bad, it is usually down to human factors that traditional models will not predict. Think Nick Leeson, Jerome Kerviel, LTCM or Bruno Iksil (The London Whale). These incidents all began as what should have been manageable failures, but they escalated out of control due to human behavioural biases. Each of them displays clear evidence of recognised cognitive biases; loss-aversion, probability estimation errors due to using a representativeness heuristic or confirmation bias.

What does an Effective Risk Culture Look Like?

An effective risk culture is a mature approach to balancing risk and return. We think it has three key pillars:

  • Effective decision making: Helping decision makers to recognise and understand the heuristics and biases that can affect judgements and decisions and putting processes in place to help them mitigate these.

  • A strong sense of purpose: Ensuring that the wants and needs of the organisation, its employees and its clients are in alignment.

  • Psychological safety: Creating an environment in which learning and innovation can thrive. A workplace in which participants feel empowered to contribute to the discussion, to share knowledge and learning, to express and examine concerns and to explore, manage and learn from mistakes in a constructive and productive way.

Changing Risk Culture with Behavioural Science

Like all types of culture an effective risk culture takes time to evolve. It cannot just be handed down from above, it must be grown organically. Culture is a combination of attitudes and behaviours and that is where #behaviouralscience, #thinksmall and #testlearnadapt come in.

Using the MoreThanNow behavioural science framework, we can identify the individual behaviours that make up the three pillars of an effective risk culture. We can test interventions to establish what really works in changing these behaviours and then we can roll them out with confidence that the new behaviours will sow the seeds of long-term cultural change.

Why not join us on our journey to build a better risk culture for businesses everywhere. You can reach us to join the discussion here: ~

 
 
 
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