Why a Financial Risk Management Culture is Important

Why a Financial Risk Management Culture is Important

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One of the most difficult tasks for any CFO is managing financial risk at a corporation. Oftentimes, some of the greatest opportunities offering the best rewards come from investments that also have the greatest amount of risk. It’s the typical problem of risk versus reward.

In 2007 and 2008, we saw what happens when financial risk management takes a backseat to the desire for greater and greater rewards. As the financial crisis caused the housing market and other markets to drop in value precipitously, people quickly realized that ignoring risk simply can’t be done, no matter how great the rewards.

Why Create a Risk Management Culture?

To defend your company against all forms of excessive risk, one of the best methods is to develop in the entire corporate culture a recognition of risk management. This means including all employees, from higher level management to the lowest paid workers.

Almost half bank executives surveyed blame a lack of risk culture in causing the financial crisis. Risk culture is defined “as the system of values and behaviors present throughout an organization that shape risk decisions.” These beliefs and values are the core behind ensuring decisions are made after taking ample time to weight risk and reward.

These values involve ensuring that everyone knows the rules apply to them, and that they are there to make decisions that better the company and put them at less risk than if the decision wasn’t made.

Management in a Unique Role to Implement Culture Change

The process can be a long one, but upper level management positions are in the prime position to institute changes of this sort. They ultimately benefit the health of the company in the long run, even if change is opposed initially. CFOs, in their increasing roles as advisors and knowledge sources, can play a vital role in implementing new risk management culture in a company. They have the trusted knowledge of corporate finances and their opinions matter.

It takes a strong, continuous, and repetitive effort of management to push this new culture for it to work on a company. When change comes from the head of an organization, the rest will follow. You should consider taking a look at your company’s perspective and values towards risk and evaluate whether they could gain from a renewed campaign to improve the company culture.

What do you think about changing a company’s risk management culture?

Comments

  1. In my research, I noticed that the same patterns of supporting a ‘buy-in’ risk management culture continue to resurface.

    Based on the articles recently published by McKinsey and PwC on the topic, it seems to earn greater focus for institutions that are highly dependent on risk policies and governance.

    Essentially, instead of avoiding risk topics, the goal is to transform the risk culture into a more transparent and communicative environment so that risks can be examined proactively.

    What are your thoughts on managing risk culture?