18 October 2012

CRE: IRM launches risk culture guidance to bridge ERM gap

The Institute of Risk Management (IRM) this week issued two guidance documents to help risk professionals and their organisations tackle the difficult topic of risk culture - described by the institute as the 'missing link in the successful implementation of Enterprise Risk Management (ERM)'.

Inadequate risk culture is increasingly blamed for the spate of recent corporate meltdowns and international scandals such as Deepwater Horizon, Enron's collapse, the closure of the UK's News of the World newspaper and Libor-fixing, said the IRM at the launch of its latest thought leadership offerings.

"Problems with risk culture are often blamed for organisational difficulties, but, until now, there was very little practical advice on what to do about it", said Richard Anderson, Chairman of the IRM. Its new guidance, in the form of a short document for boards and a detailed resource document for risk practitioners, aims to address this deficiency.

The two documents, 'Risk culture: resources for practitioners', and 'Risk culture: under the microscope - guidance for boards', follow nine months of research and consultation with international risk experts on the root causes of organisational underperformance. The research provides practical models, tools and techniques that can be used to measure and improve the management of risk culture within organisations. It considers whether the different aspects of culture make it harder or easier to manage risk.

It also stressed that whilst the guidance offers the tools to improve risk culture, there is not a one-size-fits-all approach and no quick fix. Risk professionals must take the advice and tailor it to their individual needs.

According to the IRM, risk culture describes the values, beliefs, knowledge and understanding of risk shared by a group of people with a common purpose, in particular the employees of an organisation, or of teams or groups within an organisation. In order to move from a vicious to virtuous cultural cycle, remuneration and risk-taking should be linked, with those who take inappropriate risks being sanctioned and those who choose smart risks rewarded.

"Historically, remuneration and risk management policies have not been aligned. The banking sector demonstrated the effect of incentivising staff to take significant risks to secure high returns without due consideration of the impact on balance sheet and long-term reputation", the IRM said in its guidance.

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