Organisation’s Culture Towards Risk:
Definition of Organisational Culture:
Organisational culture is defined as the organisation’s beliefs and behaviours which devote them to being unique in a social and psychological way within its environment.
It involves the company’s experiences, philosophy, expectations and values which bind it together in order to be able to interact with the outside world. People within the organisation share their characters, judgements, customs and written and unwritten rules that have been developed throughout the years and are considered to be within the standard of the company.
Organisational culture is shown in a variety of ways. Firstly, in the fashion it conducts its business, that is, the way it treats its employees, customers and its overall stakeholders. Another way it is clearly shown is in its freedom of decision making. This means the degree in which the company is free to make its business decisions; for instance establishing new ideas for potential products and services that the company may cater for in the future.
The third way culture is identified within the organisation is in the flow of power and information through its hierarchy. For example: through the bottom-up and top-down approaches, one can identify how information is being distributed amongst the various categories of employees.
Finally, the approach in which employees make commitments towards mutual goals and agreements. A good example of this is, the employee’s responsibility to being punctual.
The culture of an organisation also influences its efficiency and effectiveness towards providing the goods and services to its customers. Furthermore, it ensures that its employees abide to the company’s regulations. The culture also affects the safety procedures that a company maintains in order to be environmentally cautious.
The repeated behaviour of the employees give rise to organisational culture. The values, principles and manners outline these behaviours which arise from the natural characteristics of the employees but affected by the organisational culture itself. This means that the behaviours of the individual employees all affect each other until the organisational culture is formed. This organisational culture is subject to various sequences or cycles which can be either honourable or wrong for the organisation as a whole. For example if a manager in a specific division of the company resigns and a new manager is engaged who has different values from those of the precedent manager, this would affect the culture of that specific division by time, which would then affect the overall organisational culture.
Therefore, the main concluding point in defining the culture of an organisation is present in Schneider’s theory which states “the people make the place”. Basically, this means that the employees within the organisation provide the fundamental characteristics which make up the organisation itself.
The IRM Model
The Organisational Level:
The Institute of Risk Management (IRM) Model has been developed to “provide advice to organisations wanting greater understanding of their own risk cultures and to give them some practical tools that they can then use to drive change.” Figure 2 below shows that the IRM Model represents risk culture as five connected layer.
Risk culture is influenced by the four inner layers.
Definition of Risk Culture in an Organisation:
The risk within the company’s culture is formed from the management and employee’s beliefs and behaviours when carrying out risk decision making. Employees must ensure that they all have a common perception of the company’s goals and principles. Therefore all employees should follow risk and compliance rules that the organisation implements. This comprehension of the organisations risk can verify that the company will do the right thing and can practice efficient Enterprise Risk Management (ERM). For there to be a good risk culture within the organisation, proper training should be provided to the employees in order for them to make knowledgeable risk-related decisions that are in conformity with the organisations consistent risk behaviour.
Leadership must be the driver of favourable risk management practices. The board of directors together with the top management should have adequate risk management training and sufficient education in order to set the tone of the risk culture to the rest of the employees. They should also be able to follow and consider the risk management policies of the organisation and the decisions that pertain to them.
For risk culture to be modified, management should constantly remind their employees that they have daily responsibilities which consist of managing risk. To ensure how risk information is shared amongst the organisation, good communication skills should be present. By this communication, the worker should be able to distinguish the business lines and the risk function separately but also should be able to understand their integrated relationship. A key factor for a strong risk culture is ethical behaviour. In fact, studies show that when there is formal guidance for ethical behaviour, employees tend to abide by those guidelines.
There are various other essential factors in forming a strong risk culture of an organisation. Firstly, when hiring new employees, the organisation should make certain that the candidates will fit into the company’s risk culture. This means that a the beginning, a candidate should know what a company stands for, the boundaries within which it can operate and that they take part in achieving the company’s long-term strategic goals. Another factor is that once the right candidate is hired, he or she should be given incentive programs to act as ground rules for ethical behaviour. Incentive programs should act as a reward for the long-term ethical behaviour of that employee which complied with the risk appetite and strategy of the organisation.
Moreover, there should also be a formal process in order for employees to follow when considering risks during decision-making. This will aid the organisation in having a consistent approach which will enable executive management to be comfortable with decisions made by the lower management and their subordinates. For example, a step-by-step guideline that can be easily adhered to would be the following:
Identify the problems
Choose the best alternative
Apply the alternative
Assess the outcome
The above mentioned steps can be once again repeated if one realises that the outcome is not in the company’s best interest.
The final factor is that employees must understand that risk culture is not focused solely on internal matters but also be broadened outside the company. This means that the risk culture can be applied to third party suppliers and partners. In other words, employees should assist third parties in reaching their own risk management standards. For instance, in insurance, when there are a lot of injury claims, it is in the best interest of the employer to ensure that the injured employee must be medically fit to resume duties. When an employee resumes duties before the certified date, an insurer must assist the third party i.e. the employer to not accept this practice as this will prejudice his position.
Risk Culture Scandals:
On the occasion that management do not acknowledge the above mentioned factors, then this will lead them to possible company scandals. In other words, these scandals result from unethical behaviour which might lead to illegal activities.
A perfect example of scandal due to corporate culture is that of ‘Volkswagen’. For decades, Volkswagen has been a very reliable company at providing state-of-the-art German engineering vehicles. However, it was recently reported that the company deceived regulators over emissions from its diesel cars. This has completely ruined its reputation like other internationally known companies such as Enron, Worldcom, Lehman Brothers and Deutsche Bank which all became identical in the eyes of their stakeholders due to their bad practices.
Volkswagen had created a software known as a ‘defeat device’ in diesel engines that could identify when the vehicle is being tested which will make it alter the testing results. This means that the emissions will show a cheated result i.e. it would be better than it actually was in reality. This scandal had arose from a huge marketing campaign which advertised their cars’ low emissions. This acted as a major drive towards selling these diesel cars in the United States and Europe.
The Environmental Protection Agency (EPA) found a total of 11 million cars worldwide that included vehicles from its subsidiary companies Audi and Porsche together with its own vehicles models (Jetta, Beetle, Golf and Passat) which were all fitted with this ‘defeat device’.
Volkswagen admitted that they found inconsistencies in tests to compute carbon dioxide emission levels which could affect a great deal of the vehicles that it produces each year.
When breaking down this scandal, one must not only consider the technological factor that contributed to this scandal, but also the culture of the organisation. The exact reason as to why this scandal occurred is still unclear. However, there is a tendency that somebody got too eager and greedy. This greediness led to an economic phenomenon which managed to trick the public into thinking that the low emissions generated by the diesel cars were genuine. Unfortunately, constraints by regulatory institutions and competitors as well as opportunities within the company, may lead to unethical behaviour which will then make or break a culture. For example, in this case the constraints to reduce emission levels and the opportunities that the ‘defeat device’ offered led to this illegal and unethical behaviour in the organisation as a whole.
Moreover, Volkswagen was longing for the number one position in the global car market whilst competing Toyota and General Motors. Since it is based in Europe, the only place for it to grow substantially was to target the United States market due to the tax incentives in Europe and the benefits that diesel cars have over greenhouse gas rules.
Volkswagen’s cultures was described as “North Korea without the labour camps” by a German newsmagazine called Der Spiegel. This goes to show that the behaviour of the person who initially came up with the idea to falsify the emission results, had a ripple effect on the behaviour of the other employees. As a result, this affected how people acted in front of others, how information was exchanged, how their thoughts had to be kept to themselves and how they experienced a communist environment without questioning it.
One thought on resolving this problematic culture is as stated by Osterloh (chief of the Volkswagen) “We need in future a climate in which problems aren’t hidden but can be openly communicated to superiors. We need a culture in which it’s possible and permissible to argue with your superior about the best way to go”. Therefore, Volkswagen must provide more transparency and accountability to its stakeholders in order to regain its reputation. In other words, it must pay attention to forming the best possible culture for its internal society for it to benefit in the long-run and make genuine profits which do not result from fraud.
Cultural Theory of Risk:
The Cultural Theory of Risk developed by Mary Douglas and Aaron Wildavsky, proposes that people tend to perceive danger in the world around them and acknowledge risk in different ways. These various ways contribute in the development of different social structures. In other words, the theory suggests that this is largely determined by social aspects and cultural adherence. This theory can be explained in terms of a structure which consists of ‘group’ and ‘grid’ as shown in figure 1 below.
The group dimension describes how strongly people are bonded together. When people group together, laws can be more easily followed for example hierarchy and egalitarianism. Moreover, when relationships are weaker for example fatalism and individualism, individuals need to have more self-control over their actions in order for them to survive in their society. Therefore, when it comes to weak groups, efficient management of resources is more challenging whilst for stronger groups, it can be done more effortlessly.
On the other hand, the grid shows how different people take on different roles and positions within the group. Weak grid means that a person can have the least amount of restrictions on choosing their roles. This means that access to roles does not depend on any assigned characteristics of birth or rank. On the contrary, the grid would be strong when roles are distributed on the basis of explicit public social classifications for example race, gender or position in a hierarchy.
The following four cultures can be defined as disagreements that may arise in different cultures in defending their risk perspective:
In conclusion, for an organisation to have the optimal risk culture, it must have all the above four cultures present. Sometimes, one of these four culture may be more dominant than the others however, this does not mean that it will remain dominant as any other of the remaining three cultures, may replace it in its dominant position. Cultural dialogues as described by Mary Douglas, are debated that these cultures will inevitably have between them due to their opposing views and behaviours.
Risk Culture Mapping: ask stephanie and …
Risk mapping is an illustration (which aids in analyzing, prioritizing and quantifying the risks that an organisation encounters) of the possibility and impact of risks that come about from the individual employee’s day-to-day risk decision making. In other words, all the individual risk characteristics that each employee has across the organisation or within departments will have an overall ripple effect on the risk decision making and long-term culture of that company.
The risk culture may can have a number of different aims. One of them, is to enhance the company’s insight on its risk profile and recognise its own appetite. It also simplifies the reasoning of the nature and impact of risks, along with, improving the risk assessment methods of a company. Furthermore, it prepares management for potential emphasis or biases that may occur within the organisation. Lastly, risk mapping is important when it comes to comparing the company’s position and its competitive advantage or disadvantage with that of other similar companies within the same industry.