How Leadership and Culture shape Risk Management

Management guru and noted author, Charles Handy in his review of the best business books on Leadership for 2009 for the Strategy & Business magazine says the financial crises “did not need to happen. There were warnings enough from observers about troubles ahead but those in power in organizations did not pay heed until it was too late.”

Wisdom gained out of hindsight indicates that many companies did not possess the robust culture and leadership conviction to stay true to their own long term goals. Leaders were swayed by the lure of short term profit taking in what ultimately proved to be an illusionary “pot of gold.”

The CFO of a company recently mentioned that organizational culture in his organization, is viewed as a “soft” issue, one that does not have an immediate tangible impact on his company’s performance.  This view is unfortunate. While quality of leadership and culture does not fit in a neat little box that an auditor or risk manager can check off, its impact on specific areas such as fraud prevention, corporate reputation  as well as the general long term health and success of an organization has been proven during this crises.

Leadership and culture of an organization have always had a profound impact on risk management by:

• Shaping the behavior of people on a daily basis
• Informing the decisions made by managers
• Defining the kind of risks that an organization will accept and the opportunities that it will pursue
• Determining  if a company is willing to swim against the tide, when everyone else in the industry is out there making outsized profits in what might potentially be an unsustainable  bubble.

Culture in turn is shaped by the attitudes,  experiences and mental models of the top leaders of an organization. Do leaders promote an open culture where information flows freely rather than being hoarded?  Are people in your organization afraid to share bad news in the fear that “the messenger will be shot?” These are essential questions that need to be addessed to determine the cultural health of an organization.

The last couple of years have been especially challenging for companies faced with the worst economic crisis in decades. Organizational culture comes under great pressure during times of intense change including downsizing, M&A, layoffs etc.  A manager  at a company going through severe turmoil and layoffs, recently likened the experience of going to work every day to going into a battlefield. He said “you do  not know whose turn it was to get fired, and everyday could well be your last at the company.” Not managing the crises’ “moments of truth” with sensitivity and honesty can expose organizations to risk of depleted employee morale and weakened corporate performance.

Leaders can shine and guide their organizations effectively even in these trying times, by articulating clearly, respectfully and transparently the need for the  changes and how  the organization plans to emerge stronger as a result. Ultimately the key to building a healthy organization culture rests with the leaders and the tone they set for the company. It is therefore essential for leaders to get personally involved in building an ethical, transparent organization where a free flow of ideas and focus on excellence is a way of life.