risk later on as the cycle changes. Some
of the management biases described earlier can facilitate an environment where
risk complacency seeps into the institutional mindset.
Effective Communication
Effective communication pathways regarding risk identification are critical to
addressing risk issues before they have a
chance of flaring up. An important link
in the risk communication chain is the
employee. Ensuring that employees are
empowered to identify and report risk
issues without fear of retribution is a
key ingredient in effective risk management. Boards and senior management
must instill an environment where
unpopular views are vetted in open
dialogue. The existence of informal decision processes can also be detrimental
to a bank’s risk culture because they
condone a lack of transparency and
inclusion among staff and management,
and as a result, discourage broader dialogue on key risk issues.
Social Media
Organizations can no longer afford to
tolerate a deficient risk culture in an age
of social media and smartphones. Dur-
ing the financial crisis in 2008, the CN-
BC coverage of depositors standing in
long lines that wrapped around WaMu
branches, directly led to the destruction
of the bank. Or, as a reminder of the
importance of process and employee fo-
cus on risk, just ask the United Airlines
CEO about the impact of social media
on their recent passenger removal. Had
gate employees been empowered to
make decisions that could lessen the po-
tential for a serious risk event, chances
are the United Airlines outcome would
have ended much differently.
Who Does It Well?
So if these are the traits of poor risk
culture, are there organizations that do it
well? While there are many institutions
that have an engrained risk culture, two
in particular are worth highlighting. The
US Navy’s aircraft carrier flight deck
operations serves as one example and
Southwest Airlines is another. Clearly,
the aviation focus of both organizations
adds a life and death aspect to their risk
management process, and they have
fully embraced a strong risk culture in
all directions within their organizations.
The secret to their success is found in
empowering employees that “safety first”
is of paramount importance. Training
and mission reinforcement serve as a
support mechanism for high level performance and focus on risk. Initiative
and leading by example are also characteristic of both cultures.
Long-term Culture
Development
These are the hallmarks of good risk
culture where the self-identification of
problems is rewarded and mistakes are
teachable moments. Embedding a company reward system that balances business and long-term organizational value
contributions is critical. Effective risk
culture does not instantly spring forth
from an organization but takes years of
nurturing, leadership and courage from
all parts of the organization.
Take a moment and ask yourself,
“What actions can I take today to encourage a solid compliance risk management program, and also collaborate with
peer risk managers across the bank to
promote an enterprise wide understanding of a strong risk culture? ■
ABOUT THE AUTHOR
CLIFF ROSSI, Ph.D., is Professor-of-the-Practice and
Executive-in-Residence at the Robert H. Smith School of
Business, University of Maryland and is Chief Economist
and Senior Vice President of Radian Group Inc.
Prior to entering academia, Dr. Rossi had nearly
25 years experience in banking and government, having held
senior executive roles in risk management at several of the largest
financial services companies. Cliff serves as an advisor to a number
of banks, federal regulatory agencies, private equity investment
companies and hedge funds on banking and regulatory topics and
founded Chesapeake Risk Advisors, LLC. He received his PhD from
Cornell University.
