The Knowledge Exchange / Risk Management / Cut the double talk

Cut the double talk

Analytics and a clear risk appetite message reduces risky behavior

Clark Abrahams, Chief Financial Architect, SASIn a recent Risk Management Knowledge Exchange post by James Lam, Lam outlines five behaviors for avoiding risky behavior, including establishing a risk appetite statement and setting explicit risk tolerance levels to avoid critical risks. I think that there is an obvious sixth rule: Cut the double talk.

Take a look at the news lately and you’ll see several big names struggling to recover from serious reputation damage. Why? Unclear messages were received by employees about how the organization wanted to take on risk.

Here’s how it happens: Top management communicates its goals, and the messaging about what is expected is cascaded down the management chain to employees. During that process, and over time, employees are often confronted with double messages.

Double messaging can be in the form of body language when the message is delivered – sarcasm, intimidating body language, tone. The body language conflicts with the message. In a corporate setting, double messages are more often coming from different departments, like when the sales manager says that “feet will be held to fire” to make quotas. Another example might be when the risk management department prohibits business deals that are considered too risky, but there aren’t enough business opportunities with acceptable risk to satisfy the goals. I’m sure you can think of many other messaging dilemmas.

Win-win, right?

There can be many reasons for the double-message strategy, and it can begin anywhere along the chain – even at the top! It may even seem like a winning strategy. Take the C-suite who goes on record as promoting ethics and implementing a risk strategy that’s good for both the shareholders and the public interest – behind the scenes, he does nothing to support a vital risk culture. Or how about this scenario: The chief bond trader knows the bank’s risk policies, but his superior has made it clear that his promotion and bonus are at stake. In each case, the message is delivered because of the belief that corporate goals cannot be achieved unless you risk much.

At the Board level, the corporate risk appetite is determined.  Over time, it is subject to push and pull from all directions. For example, there is a natural bias by management to favor near term goals over longer term value.  The Board, on the other hand is in place to see to it that management does not pursue a course that might prove limiting in the future, or possibly come back to haunt, such as lenders pursuing volume for volume’s sake at the ultimate cost of portfolio quality.

In such a case, the Board may adjust the risk appetite to reflect more steady and controlled loan growth in the strategic plan and the coming year’s business plan, and the result might be a shift, e.g. relative to the previous visual.

The Board and management must “say what they mean and mean what they say!”  Unfortunately, “pretend risk cultures” are not uncommon. We’ve seen evidence of it all over the news lately, and look at the damage it can do to your reputation and your organization’s reputation.

This comes at a high price, but it’s not necessary to merely pretend to care about risk. A balanced risk profile will actually help your organization gain competitive edge. A solid analytical framework will assist executives, directors and managers with risk management. Analytics can also detect ethics violations or suspect patterns, provide an audit trail, register issues and promote action plans for fixing problems.  Last, but certainly not least, analytics can help ensure that the risk a firm takes on is in keeping with its risk appetite.

If you are interested in more information about the damage double messaging can cause to your reputation, read my blog post Reputation is key to sustainable financial success.

 

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One Trackback

  1. By Accountable to whom? - Risk Management on September 18, 2012 at 8:01 am

    [...] I am interested in how accountability relates to risk management and the risk culture in firms.  I believe that a firm’s approach to accountability impacts an organisation’s risk management universe.  A valuable management tool expressing leadership view on risk is known as the risk appetite statement. [...]

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