Risk Management

The article describes measures aimed at counteracting the risk-taking behaviours. Chapman (2006) describes risk management culture as a subset of an organisation's business culture that encompasses the attitudes and judgements that influence employee behaviour towards risk and the way that it is dealt with and integrated into the organisation.

According to Waring (cited in Waring and Glendon, 1998), functionalists see organisational culture as something that 'can and should be, manipulated to serve corporate interests'. However, it isn't guaranteed that management values or changes will be accepted and adopted by employees. If Hosking (2009) is correct in his analysis of the bonus constraints in the code of conduct, there will still be opportunities for employees to find loopholes. However, in placing the largest obstacles in the path of senior management, managers are encouraged to ensure that those less senior avoid such behaviours. Robbins and Smith (2001) recognise the effect that the accountability of managers has on culture, and advocate organisational structures which set appropriate accountabilities reflecting how individual risks are to be managed.

The Walker report, due late 2009, will address and update the Combined Code in light of the financial crisis. In the interim report (Financial Reporting Council, 2009), long-term incentive plans and clawback are recommended to foster a more responsible culture. Kaplan, Mikes, Tufano and Hofman (2009) also link short-term performance incentives to an increased level of risk taking behaviour to generate high returns. By introducing elements of retrievable compensation, restraint and consideration of longer-term prospects should be encouraged. This idea is an important factor in encouraging employees not to hide risk in return for high gains (Taleb, Goldstein and Spitznagel , 2009).

The code of conduct is designed to make employees consider the long term consequence over short term gains. In the past there was little penalty for not complying to guidelines on governance and risk management. The Combined Code (FSA, 2003) requires companies to 'comply or explain', implying that so long as you can explain why, the recommendations do not have to apply. Now, however, if the code of conduct is not signed up to, a real competitive disadvantage will be faced. There is, therefore, more incentive to avoid such levels of risk.

Financial institutions have historically encouraged risk taking behaviour, a culture fostered by significant reward structures for quick wins. According to Robbins and Smith's (2001) threat/opportunity model, the bigger the risk, the more important the opportunity. The commission and structure in place served to encourage traders to take large amounts of risk in order to benefit hugely themselves. It was this risk-taking behaviour coupled with a lack of control system which aided the collapse of Barings Bank in 1995