Tone from the Top in Risk Management: A Complementarity Perspective on How Control Systems Influence Risk Awareness

Prompted by the weaknesses of standardized risk management approaches in the aftermath of the 2008 financial crisis, scholars, regulators, and practitioners alike emphasize the importance of creating a risk-aware culture in organizations. Recent insights highlight the special role of tone from the top as crucial driver of risk awareness. In this study, we take a systems-perspective on control system design to investigate the role of tone from the top in creating risk awareness. In particular, we argue that both interactive and diagnostic use of budgets and performance measures interact with tone from the top in managing risk awareness. Our results show that interactive control strengthens the effect of tone from the top on risk awareness, while tone from the top and diagnostic control are, on average, not interrelated with regard to creating risk awareness. To shed light on the boundary conditions of the proposed interdependencies, we further investigate whether the predicted interdependencies are sensitive to the level of perceived environmental uncertainty. We find that the effect of tone from the top and interactive control becomes significantly stronger in a situation of high perceived environmental uncertainty. Most interestingly, tone from the top and diagnostic control are complements with regard to risk awareness in settings of low perceived environmental uncertainty and substitutes at high levels of perceived environmental uncertainty.Series: Department of Strategy and Innovation Working Paper Serie

Walking the Talk in Risk Management: A Complementarity Perspective on How Tone from the Top Influences Risk Awareness

Prompted by the weaknesses of standardized risk management approaches in the aftermath of the 2008 financial crisis, scholars, regulators, and practitioners alike emphasize the importance of creating a risk-aware culture in organizations. Recent insights highlight the special role of tone from the top as crucial driver of risk awareness. In this study, we take a systems-perspective on control system design to investigate the role of tone from the top in creating risk awareness. In particular, we argue that interactive control and risk-based diagnostic control complement tone from the top in increasing risk awareness. We further investigate whether the predicted interdependencies are sensitive to the level of perceived environmental uncertainty. Based on survey data from 198 small and medium-sized companies, we show that interactive control strengthens the effect of tone from the top on risk awareness, and that firms also tend to adopt these two choices in combination. These results indicate that indeed the two control practices complement each other in increasing risk awareness, and that firms, on average, take this complementarity into account in the design of the control system. Contrary to our expectations, we find that tone from the top and risk-based diagnostic control are substitutes with regard to creating risk awareness. We still find that firms, on average, treat tone from the top and risk-based diagnostic control as complements in their control system design choices. This implies that firms’ control system design choices with regard to these practices are not consistent with their effectiveness in managing risk awareness

Walking the Talk in Risk Management: A Complementarity Perspective on How Tone from the Top Influences Risk Awareness

Prompted by the weaknesses of standardized risk management approaches in the aftermath of the 2008 financial crisis, scholars, regulators, and practitioners alike emphasize the importance of creating a risk-aware culture in organizations. Recent insights highlight the special role of tone from the top as crucial driver of risk awareness. In this study, we take a systems-perspective on control system design to investigate the role of tone from the top in creating risk awareness. In particular, we argue that interactive control and risk-based diagnostic control complement tone from the top in increasing risk awareness. We further investigate whether the predicted interdependencies are sensitive to the level of perceived environmental uncertainty. Based on survey data from 198 small and medium-sized companies, we show that interactive control strengthens the effect of tone from the top on risk awareness, and that firms also tend to adopt these two choices in combination. These results indicate that indeed the two control practices complement each other in increasing risk awareness, and that firms, on average, take this complementarity into account in the design of the control system. Contrary to our expectations, we find that tone from the top and risk-based diagnostic control are substitutes with regard to creating risk awareness. We still find that firms, on average, treat tone from the top and risk-based diagnostic control as complements in their control system design choices. This implies that firms’ control system design choices with regard to these practices are not consistent with their effectiveness in managing risk awareness

Walking the Talk in Risk Management: A Complementarity Perspective on How Tone from the Top Influences Risk Awareness

Prompted by the weaknesses of standardized risk management approaches in the aftermath of the 2008 financial crisis, scholars, regulators, and practitioners alike emphasize the importance of creating a risk-aware culture in organizations. Recent insights highlight the special role of tone from the top as crucial driver of risk awareness. In this study, we take a systems-perspective on control system design to investigate the role of tone from the top in creating risk awareness. In particular, we argue that interactive control and risk-based diagnostic control complement tone from the top in increasing risk awareness. We further investigate whether the predicted interdependencies are sensitive to the level of perceived environmental uncertainty. Based on survey data from 198 small and medium-sized companies, we show that interactive control strengthens the effect of tone from the top on risk awareness, and that firms also tend to adopt these two choices in combination. These results indicate that indeed the two control practices complement each other in increasing risk awareness, and that firms, on average, take this complementarity into account in the design of the control system. Contrary to our expectations, we find that tone from the top and risk-based diagnostic control are substitutes with regard to creating risk awareness. We still find that firms, on average, treat tone from the top and risk-based diagnostic control as complements in their control system design choices. This implies that firms’ control system design choices with regard to these practices are not consistent with their effectiveness in managing risk awareness

COVID-19 als Impuls für ein effektiveres Risikomanagement

Die COVID-19-Pandemie stellt Unternehmen vor neue Herausforderungen. Besonders im Risikomanagement liegt es nahe zu fragen, ob dieses Pandemie- "Szenario" für Unternehmen vorherzusehen war und wie man als Unternehmen auf einen derart großen Anstieg der Unsicherheit vorbereitet sein bzw reagieren kann. Die Relevanz dieser Fragstellungen gab uns den Anlass gemeinsam mit dem Controller Institut, eine Studie zu den Risikomanagement-Ansätzen im Sommer 2020 durchzuführen. Insgesamt nahmen 142 österreichische Groß- und Mittelstandsunternehmen teil. Unsere Resultate zeigen, dass sich die Integration von Risikomanagement und strategischer Planung sowie der Einsatz von Advanced-Analytics-Verfahren im Risikomanagement positiv auf die wahrgenommene Risikomanagement-Effektivität auswirken. Damit verbunden ist, dass eine hohe Verflechtung zwischen Risikomanagement und strategischer Planung mit einem stärker ausgeprägten Risikobewusstsein der Mitarbeiter und einer höher entwickelten Fähigkeit, sich an Veränderungen im Unternehmensumfeld anzupassen, einhergeht. Die teilnehmenden Unternehmen erkennen auch, dass es notwendig ist, zukünftig auf neuartige Risiken wie COVID-19 mit Notfall- und Kontingenzplänen besser vorbereitet zu sein

Academy of Management Annual Meeting Proceedings

In this study, we theoretically argue for a potential trade-off between risk information integrated into the strategy and the use of advanced analytics for risk management purposes with regard to the adaptive capacity of organizations. Furthermore, we investigate whether the adoption of an advanced analytics strategy helps overcome this suggested substitutive interrelationship by giving direction and communicating a clear strategic focus to employees, including senior management. To test our hypotheses, we collected survey data in summer 2020 from 174 non-financial companies that allows us to exploit the challenging setting of the Covid-19 pandemic for organizations and their risk management. Our results support both the substitutive relationship between strategy integration of risk management and the use of advanced analytics for risk management purposes, as well as the three-way complementarity between the two risk management design choices and advanced analytics strategy with regard to adaptive capacity. Thus, we contribute to the literature with new insights into the potential benefits of linking risk management practices to business intelligence and analytics in light of better decision-making and control