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In the years since the financial crisis, financial (and non-financial) institutions face intense pressure to strengthen their risk management controls—but there are still questions about implementation. In my mind, one element of risk management that is too often ignored is the subjectivity of risk management. How strictly do firms actually adhere to the policies and procedures that they have in place? Is risk clearly communicated throughout the various layers of management, or is communication more relaxed? Furthermore, to what extent are attitudes toward risk management informed by cultural norms and biases in each firm’s home country?

U.S. financial regulators who examine a cross section of foreign banks with operations in the US often comment (albeit behind closed doors) how firms from different countries are likely to manage their risk in accordance with their cultural norms. For example, when a Japanese trading firm sets limits for traders, it may set the limit so high that a trader would never exceed it. While this may appear positive, from a regulatory perspective, limits that are set too high are effectively not limits at all. However, from the perspective of the risk manager, this high limit protects them from the appearance of a mistake, failure, or losing face (“kao”) by asking senior management for limit extensions. Losing “kao” or face in Japan can have disastrous consequences for a business relationship.

These observations are not intended to ascribe any value to culturally informed attitudes towards risk management. Instead, should we examine the different ways in which cultural norms may (or may not) be expressed through risk management?

For example, Dutch social psychologist Geert Hofstede developed a Power Distance Index that measures hierarchy within a particular society. According to Hofstede, hierarchy influences how problems are communicated, shared, and resolved. In countries ranking high on the Power Distance Index, there tend to be greater hierarchy and reluctance to report problems to senior management. Conversely, countries ranking lower tend to exhibit power relationships that are more consultative.

If you have thoughts on this, we’d love to hear from you.