From Belief Systems To Risk Cultures And Their Role In Business Models

From Belief Systems To Risk Cultures And Their Role In Business Models

Loading
Loading Social Plug-ins...
Language: English
Save to myLibrary Download PDF
Go to Page # Page of 48

Description: The concept of culture is most useful if it helps to explain some of the most seemingly incomprehensible and irrational aspects of groups and organizations. (Schein, 1993:375). Risk culture is not separate kind of thing to culture in general. [] Semantics aside there is no doubt that a risk culture industry has been generated in recent years.

 
Author: Anette Mikes  | Visits: 472 | Page Views: 673
Domain:  Business Category: Leadership & Strategy 
Upload Date:
Link Back:
Short URL: https://www.wesrch.com/business/pdfBU1O8D000YPKI
Loading
Loading...



px *        px *

* Default width and height in pixels. Change it to your required dimensions.

 
Contents:
Anette Mikes

From belief systems to risk
cultures
- and their role in business models

LSE, 14 April 2016

The hold of “culture” over management
scholarship
• “The concept of culture is most useful if it helps to explain
some of the most seemingly incomprehensible and irrational
aspects of groups and organizations.” (Schein, 1993:375)
• “Risk culture is not separate kind of thing to culture in general.
[…] Semantics aside there is no doubt that a risk culture
industry has been generated in recent years...” (Power et al.,
2013)

2

Is culture the culprit?




“When organizations get into trouble,
fixing the culture is usually the
prescription.”
But… culture isn’t something you fix.
Rather, cultural change is what you get
after you’ve put new processes or
structures in place…”

- Jay Lorsch, HBR2016

3

Conceptions of culture in management


“Culture eats strategy for breakfast.”

-

Phrase attributed to Peter Drucker and made famous by Mark
Fields, President at Ford



“The thing I have learned at IBM is that culture is
everything.”

– Louis V. Gerstner, Jr. former CEO IBM

4

Culture – a multi-layered concept
Anthropologists


Customs and rituals that societies
develop over the course of their history.

Organizational scholars,
managers


The shared assumptions, learning,
behaviours and practices that
organizations develop and stabilize over
time.

AND:



The espoused values and credo of an
organization that guide its actions.
- Schein, 1993



Schein argued “that we must avoid the
superficial models of culture and build on
the deeper, more complex anthropological
models.”

5



Develop the “right kind of culture”; develop a
“culture of quality”; develop “risk culture”
There are better / worse cultures; stronger /
weaker cultures, etc.
Culture influences organizational effectiveness.

Culture – a borrowed concept in management
Anthropologists

Management scholars



A group is a culture: culture is a
process, pervasive to the group.





No concern for the culture-performance
relationship.

A group has a culture: Culture is a
manageable entity with performance
consequences





No culture is “better” than another.

“Managerial work can be viewed as
managing myths, images, symbols and
labels” (Weick, 1979)



Peters and Waterman (1982) In Search
of Excellence: culture ought to be
managed.



Schein (1993): “One of the most decisive
functions of leadership is the creation,
the management, and sometimes even
the destruction of culture. […] Leaders
create and change cultures, while
managers and administrators live within
them.”

6

Changing culture is hard to do…
• Intervention 1: to improve listening, communication, conflict
management: “No matter what kind of intervention I
attempted, the group’s basic style remained the same.”

• Intervention 2 to facilitate innovation via lateral
communication: “No matter what I did, I could not seem to get
information flowing, especially laterally across divisional,
functional, or geographical boundaries.”
- Schein, 1993

• Reason: consultant's failure to understand the group’s shared
assumptions and their accumulated shared learning (that
differed from his) -> cultural analysis

7

Culture evolves to be “coherent” (or
not)
• “A group has a culture when it has had enough of a
shared history to have formed a set of shared
assumptions.” (Schein, 1993)
• “Culture implies that rituals, climate, values and
behaviors bind together into a coherent whole. […]
Culture formation is […] a striving toward patterning
and integration.” (ibid.)
• Culture is a moving target – and hard to change.

8

Culture implicated in management
accounting research
• Jeremy Dent’s classic study (AOS 1991)

• Bob Simons’ canon (Simons, 1991 - 2005)
• Focus on: business-model change / implementation

• When business models change, cultures change too
• Certain strategies require certain cultures

9

Culture changed – of Railways and
Accountants
• Dent, 1991. Context: business model change at “Eurorail”
• “Business” culture versus “railway culture”
• Series of contests, won by accountants
• Dominant frame of looking at (or ignoring) things: emerges
over time and becomes accounting
• Culture here is both a management object (it has been
changed) and a manifestation (the organization is a culture).
Caveat emptor:

• c.f. Lorsch and McTague, 2016: “Culture isn’t a final
destination. It morphs right along with the company’s
competitive environment and objectives. It’s really more of a
temporary landing place…”
10

Culture – manageable by accountants/controllers
“Organizational behavior and social psychologists […] take culture as given
and immutable, as did Peter Drucker (“culture eats strategy for lunch”)
because they do not understand or control the levers of management control
processes and measurements that we – as accounting scholars – can design
and implement in organizations to create a new culture for a new
strategy.”
“On culture, […] - you can change a culture with strong leadership, processes,
and measurements. This is the fundamental story behind the success of the
Kaplan-Norton strategy execution system based on strategy maps, scorecards,
and linked management processes.”
(Bob Kaplan, via email, 1 April 2016)



Simons, 1991: belief systems and boundary systems – they are the
“control levers” of shaping culture (in order to implement strategies).



Simons, 2005: levers of organization design: cultural elements will be the
outcome of certain structures, processes and metrics that managers have
to design (in order to implement strategies).
11

Culture controlled – Belief systems
• “A belief system is the explicit set of organizational definitions that
senior managers communicate formally and reinforce systematically
to provide basic values, purpose, and direction for the organization.”
(Simons, 1995:34)

• Credos, mission statements, and statements of purpose
• Core values

• “…so that middle managers can translate those beliefs into actions
and strategies.”
• That transformation happens due to the commitment that
organizational actors have.
• Incentives do not create commitment – inspirational and value-laden
belief systems do.

“Culture is what people do when no-one is watching.”
- Gerard Seijts, Ivey Business School
12

The demise of belief systems…



Lawyers on behalf of Goldman claimed that these statements were mere puffery.
Specifically, they argued that “the vast majority of the supposed ‘misstatements’ alleged
in the complaint—e.g., regarding the firm’s ‘integrity’ and ‘honesty’—are nothing more
than classic ‘puffery’ or statements of opinion.”



Judge Paul Crotty responded in his opinion (June 21, 2012): ”Goldman’s arguments in
this respect are Orwellian. […] If Goldman’s claim of “honesty” and “integrity” are simple
puffery, the world of finance may be in more trouble than we recognize.”
13

Culture controlled – Boundary systems
• “Boundary systems delineate the acceptable domain of activity for
organizational participants. Unlike belief systems, boundary systems
do not specify positive ideals. Instead, they establish limits...”
(Simons, 1995: 39)
• The power of negative thinking
– Business conduct boundaries (overlap with belief systems)
– Strategic boundaries

Opportunity Space
Beliefs System

Domain for Search
and Empowerment
Boundary System

14

The demise of boundary systems…


Individual transgressions (rogue traders)



Professional / network-based transgressions (rate-rigging traders)



Man-made disasters: reveal organizational biases towards the normalization of deviance

Jerome Kerviel, Soc Gen
Kweku Adoboli, UBS
Tom Hayes, UBS and Citigroup
15

Reflection, questions
• In the financial crisis, inter alia, belief systems failed.
• In the LIBOR and other rogue-trader scandals – boundary
systems failed (also).
• There are reactive calls for the fixing of risk cultures.
“The point is, you’re greedy, you want every little bit of money you can
possibly get, because that’s how you’re judged.”
“I probably deserve to be sitting here, I made concerted efforts to
influence Libor, although I was operating within a system.” – Tom
Hayes

• Was risk culture the culprit?
• What is risk culture?
16

Turning risk culture into a
management object…
• Normative beliefs about culture as management
object are now widespread
• BP Deepwater Horizon – safety “culture” failed

• Financial Crisis 2007-9– risk “culture” failed
• Assumption: culture has consequences, and could /
should be managed “better”.
• But the managerialization of risk (culture) in general
is problematic
– C.f. Power, AOS2013: The apparatus of fraud risk
– Power et al., 2013 (interim report) and 2015 (WP): Searching for
risk culture
17

Risk culture - defined
1. Shared assumptions, attitudes, practices, and values
concerning risks and risk management.
-

I argue that this is about the organizational significance of risk management –
and from an accounting point of view, a more familiar and “manageable” concern.
Sociologically speaking, the focus is on risk objects …
…related to a given business model

2. Shared assumptions, attitudes and practices, concerning
the trade-offs among an organization’s pluralistic
values and objectives.
- I argue that in this sense, we must speak of risk cultures as dealing with “values at
risk.”
- Sociologically speaking, the focus is on objects at risk…
- Not only “strategy at risk”, but “values at risk too.”

18

Risk culture, Part 1:

TAKING RISKS, AND RISK
MANAGEMENT, SERIOUSLY
19

Risk culture
• “… is a culture where the organization takes risks
seriously – it’s as simple as that. […] If the chief risk
officer doesn’t seem to be taken seriously, or is not
of the right caliber or is not at the important
meetings, these are just little signs that maybe not
all is well with the risk culture.” – Power: What Matters (interview)

http://youtu.be/Pra_15v1cRg
20

Taking risks seriously: helps or hinders
enterprise?

Hinders…

Helps…

21

The Principle of the Hiding Hand
• Not knowing the risks: “can serve as a stimulus to
enterprise” by encouraging otherwise risk-averse
managers to take on risky projects that in the bright
light of thorough risk assessment would appear
infeasible.

22

The Hiding Hand ill-used – in business
recently and today
• Risk managers are…
– The “business prevention department”
– “Business depressants”
– The “nerds in the corner”…

• Pre-2007: reckless risk-taking in banking
– “Stanley O’Neal, CEO at Merrill Lynch, and Charles Prince,
CEO at Citigroup, pushed their divisions to take on more
risk to avoid being left behind in the race for trading
profits…” (Nocera, NYT, 2008)

23

The Hiding Hand ill-used (cont.’)

24

A different view from NASA(JPL)

“At the start of a project, try to write down everything you
can that is risky. Then put together a plan for each of those
risks, and watch how the plan evolves.”
“JPL engineers graduate from top schools at the top of their
class. They are used to being right in their design and
engineering decisions. I have to get them comfortable
thinking about all the things that can go wrong.”
Gentry Lee – Chief Systems Engineer, JPL
25

Reconciling the two views
Context appropriate for the
Hiding Hand
• “Underdeveloped countries
where confidence in creativity
is lacking.”
• “Where new tasks harboring
many unknowns must be
presented as though they were
all "cut and dried" in order to
be undertaken.”

Context not appropriate for the
Hiding Hand
• “In developed countries less
hiding of the uncertainties and
likely difficulties of a
prospective task is required
than in underdeveloped
countries”

Quotes are from Hirschman, 1967
26

The Principle of the Revealing Hand
• Risk culture in action:
“We argue that corporate risk practices should be
guided not by the Hiding Hand, but by a
countervailing principle that we call the ‘Revealing
Hand’.”
-Kaplan and Mikes (2016): Risk Management: The Revealing
Hand

27

Why the Revealing Hand?
• When managers are systematically
overconfident about their strategies and
projects, early identification and discussion of
risks are required…
• Still, risk management is hard to do… (why?)

28

Why is risk management so difficult?

“Risk mitigation is painful;
not a natural event for humans to perform.”
Gentry Lee – Chief Systems Engineer

29

Biases in thinking about risks
Strong individual biases against “slow
thinking” about risk, bias towards
“thinking fast”:
• (Over)confidence
• Availability

• Confirmation
• Anchoring
Also, organizational biases:
• Groupthink

• Escalation of commitment
• Normalization of deviance
Effective risk-management processes
must counteract those biases
30

System 1 (fast) versus system 2 (slow) thinking:
Tendency of individuals to use System 1 thinking,
which is driven by instinct, emotion, and
extensive practice as opposed to System 2
thinking, which is deliberate, analytical, and
based on evidence (Kahneman, 2011).

The Revealing Hand of Risk Management
• Revealing Hand requires intrusive, interactive, and inquisitive processes to:
(1) challenge existing assumptions about the world within and outside the
organization;
(2) communicate risk information, aided by tools such as risk maps, stress
tests, and scenarios;
(3) draw attention to and help close gaps in the control of risks that other
control functions (such as internal audit and other boundary controls) leave
unaddressed,
(4) thereby, complementing—without displacing—existing management
control practices.

• Risk culture: where the Revealing Hand of risk management enables
individuals to activate “System 2” careful thinking about risks.

31

Exploring the Revealing Hand of risk
management
What we know

What we need to learn

• Most policymakers, regulators,
and agree that greater internal
clarity about and public
disclosure of material risks are
likely to lead to better
decision-making…

• …Still, this is an empirical
question.

• There is less agreement about
how the Revealing Hand of risk
management should go about
its assignment:
– Reliability of quantitative risk
assessments?
– What to do about nonmeasurable risks?
– Black swans?
– What issues to cover or leave
aside?

32

Challenges to the Revealing Hand
• Managerial attention and resource allocation - at “good times”?

• The problem of action-generation in the recovery window
(Edmondson et al., 2005)
• The problem of inaction
• The pluralism of risk perceptions

33

Risk culture, Part 2:

A PLURALISTIC PHENOMENON,
IMPLYING “VALUES AT RISK”
34

Risk cultures – example
Risk
Low

High

Work-hard,
Rapid

play-hard

Tough-guy
macho

culture

culture

Process

Bet-the-

culture

company

Feedback and

reward
Slow

culture

Terrence E. Deal, Allan A. Kennedy,
Corporate Cultures, Perseus, 2000

35

Risk cultures

Stress coming from quantity of work rather than
uncertainty.
High-speed action earns rapid feedback and reward.

Risk
Low

High

Work-hard,
Rapid

play-hard

Work-hard, play-hard culture

Tough-guy
macho

culture

Tough-guy macho culture
Stress coming from high risk and potential loss/gain of
reward.
Focus on the present rather than the longer-term future.

culture

Process culture

Feedback and

reward
Process
Slow

Bet-the-

culture

company

Low stress, plodding work, relative security.
Stress may come from internal politics and rigidities.
Focus on security of the past and of the future.

culture

Bet-the-company culture

Terrence E. Deal, Allan A. Kennedy,
Corporate Cultures, Perseus, 2000

36

Stress coming from high risk and delay
before knowing if actions have paid off.
The long view is taken, but then much work is
needed to make sure things happen as planned.

Risk cultures: JPL? Hydro One?
Risk
Low

High

Work-hard,
Rapid

Tough-guy

play-hard

macho

culture

In Hydro One, it depends
where you look:
1. Operations control
centre
2. Line repair workers
(restoration crews)

culture

3. Billing center

Feedback and

reward
Process
Slow

Bet-the-

culture

company
culture

Terrence E. Deal, Allan A. Kennedy,
Corporate Cultures, Perseus, 2000

37

4. Investment and
asset management

Organizations with risk cultures
• Different people / units hold different perceptions of
risk
• Boholm and Corvellec (2011): The relational theory
of risk. Sources of disagreements about “risk”:
1.
2.
3.

What is at risk? (Object at risk)
What threatens it? (Risk object)
What’s the cause-effect relationship between risk object and
object at risk?

• It is hard to develop an integrated “risk culture” in
Schein’s sense.
• One should expect the presence of many “risk
culture subgroups” – ambiguity and conflict.
38

Risk Culture defined by Risk Appetizing
• Risk appetizing: extending the Revealing Hand principle to “what
is at risk” –
• But the concern of risk management now includes “values at
risk”, not just “strategy at risk”
• Risk appetizing assumes three (interrelated) considerations:
1. Clarity and/or ongoing negotiation about the firm’s objectives,
values, and priorities;
2. Every risk decision is a moral decision
3. Continuous monitoring and benchmarking of a company’s risktaking behavior against its espoused risk appetite.
39

Weick (1998): Organizations are
defined by what risks they leave
unattended, and what risks get
immediate attention and action.

Core-value-based risk-taking
Case: Merck and Vioxx (Simons, 2009; 2010)

“Core-value-based” risk- taking:
– Makes decision-makers aware of the potential conflicts of interests and moral dilemmas in
most difficult decisions and actions;
– Gives decision-makers confidence to defend those decisions and actions.

40

Core-value-based risk-taking

Makes decision-makers aware of the potential conflicts of
interests and moral dilemmas in most difficult decisions
and actions;
Gives decision-makers confidence to defend those
decisions and actions.
How to operationalize this?

Risk management is emerging as a vehicle for business
ethics… (Power et al., 2013)
41

Source: Rob Quail: Defining your taste for Risk, Corporate Risk Canada, 2012
42

Source: Rob Quail: Defining your taste for Risk, Corporate Risk Canada, 2012
43

Source: Rob Quail: Defining your taste for Risk, Corporate Risk Canada, 2012
44

Developing risk culture via risk
appetizing
• The ongoing monitoring and discussion of risk
appetite is of key importance
• It requires trade-offs to be made all the time (due to
conflicting priorities, objectives, stakeholders and
values implicated by business models)
• Prioritization of objectives will (must) change over
time (as do business models do)

45

Managerializing risk culture
• Once created, categories will harden through repetition,
institutionalization and instrumentalization. (Power, 2013)

• Demands to extend SOMEONE’s role to include ever more risk
objects
– Auditors
– Risk managers
– Non-executive directors…

• Risk culture is still being fought over, and the search for its
“manageable categories” is ongoing.
• In summary, it (could) includes:





Incentive systems and multiple trade-offs (Power et al., 2013)
Trade-offs ingrained in professional practice (Dent, 1991)
Core values (Simons, 1991)
Risk appetite (Kaplan and Mikes, 2016)
46

Concluding remarks on banks…
Key questions in Financial Services:

• How to change business models in order to adapt to
changing economic, regulatory and cultural
environments and stakeholder demands?
• What’s the role of different types of banking in
society?
• Depending on the answers, risk cultures will follow.

47

Questions?

THANK YOU.
48