In this series of five articles, we are exploring the importance of risk culture, distinguishing the risk culture from the organisational culture, looking at the drivers for good and bad cultures, discussing the measurement of culture, looking at the symptoms of a sickly risk culture and drawing some conclusions. Links to the other articles in the series can be found at the foot of this page.
In 300 years of failure: organisational and risk cultures, I expressed the hope that risk culture (as distinct from organisational culture) was beginning to get traction as a concept amongst regulators. In the second part of this five part series I explore the differences between the two cultures and what drives them.
On my travels around the world, I have identified a stark difference between market investor-led organisations and those without the constraints of external parties being imposed on them. In advanced economies such as the UK, the United States of America and most of Europe, corporations are dominated by a short term, financial results-oriented market capitalism that demands instantaneous gratification. Failure to comply with the demands of the market results in directors losing their jobs, so they, the directors, in turn demand results of their managers. And they want those results now! Just look at any of those listed on the wall of shame and you will see pressure for immediate financial results ripping the organisation to shreds.
And yet, there is another strand of capitalism that is less ferocious in terms of short term results, and totally focussed on creating organisations that are sustainable into the long term. This isn’t about the pink fluffy bunny style of sustainability and the rhetoric of Corporate Social Responsibility programmes, this is about organisations that will be here in the long term, building value for their stakeholders: their employees, their shareholders, the societies within which they operate. To these organisations, risk is something that impedes their journey now, just as with the short-termists, but also into the future, whether that is in five or ten or perhaps even fifty years. Equally, better management of risk is how they create value. These organisations are often family-owned, or operate in environments where the dominance of the financial markets is not so over-whelming.
The difference in terms of risk management, and indeed in corporate governance as a whole, is easy to identify. For the short-termists risk is about today, tomorrow, and this quarter. Risk management is a pain, it is a compliance bore they need to do in order to make sure the luvvy corporate governance brigade stay off their backs. Tick the box, colour in the risk maps, keep them at bay. They talk about risk controls in a way that would make the sponsors and authors of COSO Internal Control proud. The banks and their regulators, mimicked by the House of Lords review of the banking crisis, talk about risk controls. Let us not be confused: risk controls are not risk management. Risk controls are what we used to call internal controls: exactly what it said on the can for COSO Internal Control.
On the other hand, the long-termists have a belief that everything they are doing is about risk management. Business is a game of long-term risk management, and you get it wrong at your peril. They seek to learn about how risk can underpin their journey of value creation and they do what they can to work with the communities in which they operate, because it is those communities that consume their products, provide their staff and give them their implied licence to operate. These people embrace risk management and corporate governance because it ensures that there is always a sense check on what is happening not just today, but tomorrow and into the future as well.
There is another difference: the cultures are dramatically different. The short-termists have a culture which is rooted in today, in the “here-and-now”. They are good at resolving issues that impact on performance today, but they tend to have scant regard for performance tomorrow. So when a Chief Executive says I need performance, and I need it today, the short-termists will do everything to pull a rabbit out of the hat, even if, like many from the wall of shame, they end up bringing the house down around their ears. In contrast, the long-termist will be as focused on tomorrow as on the “here-and-now”. The long-termist will be balancing the needs of today against the needs of tomorrow, or indeed five or ten years’ time or longer.
In the third part of this five part series, I will explore some of the issues associated with measuring your culture. If you would like to know more about these issues, continue reading here:
- Part 1: 300 years of failure
- Part 3: Measuring your culture
- Part 4: Signs of problems
- Part 5: Conclusions
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