An effective risk management framework is critical for the sustainability of any corporation - small, medium and large. The Committee of Sponsoring Organizations (COSO), has focused on improving the management of corporate risks through the development of frameworks over the past 36 years. The latest proposed framework introduced in 2017, includes five components to facilitate the creation and implementation of a risk framework for the corporation. These components are:
Governance and Culture
Strategy and Objective Setting
Performance
Review and Revision
Information, Communication and Reporting
In this article, I will focus on discussing the culture component and also proposing an enhancement to a risk culture framework, because of the relevant impact that risk culture has not only on the enterprise risk management framework but also on the overall sustainability of the corporation.
The Institute of International Finance defines risk culture as “the norms and traditions of behavior of individuals and groups within an organization that determine the way in which they identify, understand, discuss, and act on the risks the organization confronts and the risks it takes”, it is possibly because of this reason that organizations mainly focus on incorporating, managing and controlling behavior and norms at their risk culture framework. Notwithstanding, from my experience, the framework is missing three key aspects that should be incorporated urgently for making risk culture more effective: attitude, emotion and failure. Excluding attitude, emotion and failure at the culture risk framework has severe costs for the corporation, see for example the next cases.
Unfortunately, cases like the above are a constant reality hence, yet the corporation hardly manage and control them, through my engagement with many businesses, I have experienced how the corporation is negatively impacted, reason why, I am convinced that by adding the management, control and awareness of attitudes, emotions and failure to your risk culture framework, your enterprise risk management framework very likely, will be catapulted to greater levels of effectiveness subsequently, influencing positively your business bottom line. Next, I provide brief definitions and feasible guidelines to integrate attitude, emotion and failure to you culture risk framework.
Attitude
Attitude is an evaluation of an object of thought. Attitude objects include anything an individual hold in mind, from the ordinary to the abstract such as people, situations, circumstances, groups, and ideas.
Positive attitudes include (list not conclusive): Cooperative, decisive, flexible, honest, humble, realistic, reliable, sincere, sympathetic and unselfishness.
Negative attitudes include (list not conclusive): Aloof, arrogant, combative, deceiving, dishonest, inconsiderate, intolerant, narrow, secretive and pessimistic.
Emotion
Emotions are state of affairs that are typically experienced as beyond personal control (passivity), that involves evaluative judgements (subjectivity), and are not readily explainable in a strictly logical way (non-rationality).
Positive emotions include (list not conclusive): Pleased, joy, and compassion.
Neutral emotions include (list not conclusive): Greed, surprise, amazement, and bored.
Negative emotions include (list not conclusive): Anger, frustration, contempt, envy, jealousy, sadness, hopelessness, grief, shame, guild, fear, and anxiety.
Failure
Failure is a deviation from expected and desired results it includes:
Avoidable Errors.
Unavoidable negative outcomes such as experiments and risk taking.
Misunderstandings.
Conflict at relationships
Due to earth’s sustainability, owners and investors are comprehensively focusing on the truthful implementation and disclosures of environmental, social and governance (ESG) factors by the corporations they owned or have investments with. For owners and investors, the risks associated by their corporations with the lack of genuine and appropriate implementation of ESG factors, may have a serious and negative impact on the ability of the firm to conduct its business in consequence, maximizing risks related to long term value and associated operational and financial (dividends) performance. I propose that controlling and managing such risks for owners and investors related to financial performance, a robust risk management framework is required, to enhance the risk management framework an effective culture risk foundation is crucial. To strengthen the foundations of culture risk, the addition of attitude, emotion and failure, can be a compelling addition to your risk culture framework.
If you or your corporation need assistance to assess, review, reinforce, or implement your attitudes, emotion and failure to effectively enhance your risk culture framework, get-in-touch! I will be delighted to discuss issues that are important to you.
Alberto R Melgoza PhD, FGIA