Risk is inseparable from the modern business landscape. Every company requires an effective risk management program to identify, assess, manage, and mitigate risk. To meet these objectives, it must have robust processes, strong internal controls, and an enterprise-wide framework and methodology to identify best practices, share knowledge, and track metrics.
But there’s another critical element to risk management that binds all the other components together. This element is risk culture.
The Institute of Risk Management (IRM) defines risk culture as “the values, beliefs, knowledge, attitudes, and understanding about risk shared by a group of people with a common purpose.” It encompasses every aspect of risk, including:
- Which risks are relevant to the organization
- How these risks will be managed
- Risk appetite and tolerance
- How risk-related decisions will be made
A strong risk culture means that everyone understands the organization’s risk approach, adheres to risk management policies and practices, and takes responsibility to manage risk.
Why a Strong Risk Culture Matters
A strong risk culture matters because ultimately people are what makes effective risk management possible. A risk-aware culture promotes a shared understanding about risk and supports the organization’s strategy, business model, operational practices, and even competitive advantage.
When firms don’t foster a risk culture, they struggle to manage risk. They are vulnerable to potentially crippling consequences. They may make poor decisions that prevent them from achieving their strategic, tactical, and operational goals; in the worst cases, damage their financial standing, compliance posture, and reputation.
An effective risk culture enables organizations to design appropriate risk management processes, mechanisms, and policies; and assures that the organization can respond quickly. Accountability for risk management and decision-making is improved across every level, and ultimately drives the success of the enterprise risk management (ERM) program.
Creating a strong risk culture starts with assessing the current risk culture and evaluating the risk intelligence of the workforce.
How Risk Intelligent is Your Workplace?
When evaluating the risk culture and the risk intelligence of your workforce, it’s essential to assess several factors.
Risk Messaging and Communication
A strong risk culture promotes uniformity in risk messaging and a shared understanding of risk across the enterprise. Recurrent, clear communication using a shared risk vocabulary improves risk understanding, intelligence, and culture across the organization.
If this messaging is inconsistent, however (and especially from leadership or senior management), it creates confusion among the broader workforce and weakens overall risk management.
Understanding of the Value of Risk Management
In a risk intelligent culture, people understand risk and see the value of risk management. Moreover, they take responsibility for risk management and encourage others to do the same. They feel comfortable challenging authority figures (respectfully), who in turn recognize that such challenges can help strengthen the risk culture, and therefore respond positively.
Risk Governance Structure
The enterprise risk governance structure influences risk management and risk intelligence. This structure should include risk management policies, procedures and oversight activities, risk assessment processes, risk indicator reports, and code of conduct and ethics programs.
Alignment of Individual Interests and Organizational Risk Strategy
When individual interests and values align with corporate values, risk appetite, tolerance, and strategy, it usually indicates an extremely risk intelligent organization. A commonality of purpose, ethics, and approach among individuals and the enterprise can help minimize risk and ensure optimal decision-making.
Regulatory Requirements and Other External Attributes
Regulatory and compliance requirements and the expectations of customers, investors, and other stakeholders can affect risk culture. If the organization aligns its processes with these expectations, it can strengthen its risk culture and improve its risk resilience.
Critical Elements of a Strong Risk Culture
A strong risk culture is characterized by these key characteristics:
- An enterprise-wide definition of risk and a risk “vocabulary”
- A common risk management framework supported by standards and controls
- Clearly-defined roles, responsibilities, and decision-making authority
- A workforce that takes individual and collective responsibility to manage risk
- A robust infrastructure to help business units meet their risk management responsibilities with full accountability
- Full transparency and visibility into risk management practices, particularly for governing bodies like audit committees and the Board
- Shared functions such as IT, legal, HR, and finance help business units manage their risks in alignment with the overall enterprise risk program
- Compliance, internal audits, and risk management teams continually monitor the risk function and report on its effectiveness and performance to the leadership, the Board, and other governing bodies
- Learning is encouraged to manage risks more effectively and avoid repeating mistakes
- Decision-making is guided not only by organizational strategy, but also by ethics
5 Strategies to Improve Risk Culture
A strong risk culture can strengthen risk management and improve risk-related decision-making. Building that effort, however, requires time and patience. Fortunately, an organization can create the desired risk culture if it follows these five strategies:
Start From the Top Down
Risk culture depends upon the support and involvement of executive leadership. C-suites and the board must themselves be convinced of the value of a good risk culture, prioritize it, and communicate its tangible value across the workforce. They must build a consensus about the type of culture they want, why they want it, and how it can be enhanced.
Finally, leadership must lead by example and demonstrate desired risk-related behaviors and business decisions.
Employee Risk Awareness Training
To improve risk awareness, leadership should communicate using a common risk management vocabulary. Risk management roles, responsibilities, and accountability structures should be set up and shared. If possible, employees should receive customized training based on their role and business unit. Risk management education should be included in new employee training.
Increase Risk Visibility
When employees have better visibility into risks, they can understand individual and collective actions necessary to manage it. Take advantage of having well-informed employees and proactively seek employee feedback.
Employee involvement can strengthen the risk culture significantly. Establish robust protocols to define potential risks associated with specific activities, policies to guide actions, and communication flows to share risk information.
Align Risk Performance Metrics With Incentive Systems
Rewards, recognition, and incentives are powerful ways to drive and reinforce positive employee behaviors. Embedding risk performance metrics into motivational systems and compensation structures can help drive positive risk-related behaviors, and ultimately, strengthen the risk culture.
At the same time, it’s also important to hold people accountable for their actions and quickly to address gaps that harm risk management and weaken risk culture.
Evaluate and Report Progress with Quantitative and Qualitative Metrics
The effectiveness and performance of the organization’s risk culture can be evaluated with metrics or indicators such as:
- Effectiveness of risk governance
- Risk management ownership by business units
- Level of leadership and board support and sponsorship
- Results of critical risk-related decisions
- Use of risk appetite and tolerances in decision-making
- Alignment of risk management policies with strategic planning and risk culture with organizational culture
As risk appetite, risk tolerance, or business strategy change, these metrics should be modified to support ongoing risk culture evaluations.
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ZenGRC provides multivariable scoring to help you evaluate risks across connections. Identify and remediate threats in real-time with its intuitive workflows and automated alerts that support continuous risk monitoring.
Solve your risk management challenges and understand what you need for a thriving risk culture with ZenGRC. For a free demo of this unified risk management tool, click here.