In 2012, a major international bank disclosed a multi-billion-dollar trading loss on its synthetic trading portfolio. By its own admission, the events that led to the company’s losses included inadequate understanding by the traders of the risks they were taking; ineffective challenge of traders’ judgment by risk control functions; weak risk governance and inadequate scrutiny.
The bank’s trading loss demonstrates a truth that is often lost in the regulatory clamour for banks to hold ever more capital; the driver of bank failure is rarely insufficient capital, but rather bad risk culture.
What elements does an effective risk culture include?
An effective risk culture is one that enables and rewards individuals and groups for taking the right risks in an informed manner.
A successful risk culture would include:
- A distinct and consistent tone from the top – the board and senior management – in respect of risk taking, making clear which risks are positive and potentially beneficial and which are negative and should be avoided or controlled.
- A holistic approach, ensuring governance and control systems and risk parameters are aligned with HR programmes, bonuses and other non-monetary incentives.
- Consideration of wider stakeholder positions in decision making.
- A common acceptance throughout the organisation of the importance of continuous management of risk, including clear accountability for and ownership of specific risks.
- Transparent and timely risk information flowing up and down the organisation with bad news rapidly communicated without fear of blame.
- Encouragement of risk event reporting and whistle blowing, actively seeking to learn from mistakes and near misses.
- No process or activity too large, too complex or too obscure for the risks to be readily understood.
- Appropriate risk taking behaviours rewarded and encouraged, and inappropriate behaviours challenged and sanctioned.
- Risk management skills and knowledge valued, encouraged and developed, with a properly resourced risk management function and widespread membership of and support for professional bodies. Professional qualifications supported as well as technical training.
- Sufficient diversity of perspectives, values and beliefs to ensure that the status quo is consistently and rigorously challenged.
- A commitment to ethical principles.
- Alignment of culture management with employee engagement.
Up next in the series – Influencing risk culture within the transport industry where we’ll apply the methods outlined in previous blogs to drivers within fleet operators in order to influence risky behaviours.
For more information on risk culture, please contact your local Willis Towers Watson office of visit www.willistowerswatson.com.