Revolution from recognising risk culture

Developing a way to assess risk culture

The global financial crisis of 2007-2009 triggered not only financial collapse, mass layoffs, insolvencies and expensive government rescue packages of banks that would otherwise have failed, but the emergence of a new area of research that focuses on risk culture within an organisation.

It has resulted in a new tool to assess this. The 4-factor Macquarie University Risk Culture Scale (MURCS) was developed and validated by a team of researchers, headed by Professor Sheedy. The work produces impact that’s difficult to quantify but undeniably important.

“The benefit of sound risk culture is avoiding disaster and achieving your objectives,” Sheedy says.

Sheedy’s work with financial institutions started with the validation of the MURCS and evaluation of risk culture in seven of the world’s biggest banks. In many cases the risk culture was found to be wanting.

“There’s now massive interest in the issue. Everyone in an organisation is considered a risk manager,” says Sheedy.

Banks are working to enhance risk management at all levels, from on-boarding processes, specific training, risk management systems, databases and risk event reporting structures.

“Customer complaints are taken more seriously, as is cyber risk, and other non-financial risks. Whistle-blowing mechanisms have been set up to reduce incidents affecting their reputations.”

If you ‘see something, say something’ has been embraced by organisations, with processes to make this easier. The revolution has also produced modifications to reporting lines, and a growth in risk and compliance specialists as a profession.

“We’re now looking at risk from all different dimensions,” Sheedy says.

The work has wider impacts too: it’s on the radar of regulators and superannuation funds, and ways of assessing risk culture have evolved to not only improve outcomes for the finance sector, but to have application to other organisations, such as government, public sector organisations, and casinos where money laundering and infiltration of organised crime are risks.

Reliable assessment of risk culture creates opportunities to intervene before serious problems emerge. Avoiding disaster is a key impact of this research, but the financial sector has recognised that good risk culture helps firms achieve their financial and social goals.

Work is ongoing and impacts of the research have global reach, with presentations by Sheedy to bankers and regulators from the US and Europe.

Sheedy also produced Auditing Risk Culture: A practical guide, co-authored by Elizabeth Arzadon and Reg Du Preez. It has been downloaded more than 5000 times, and translated into several languages.

Meanwhile MURCS has been embraced by financial and public sector organisations world-wide since becoming available online in late 2021, .

The multi-disciplinary team of Macquarie University researchers that has contributed to the work on risk culture includes: Professor Elizabeth Sheedy, Department of Applied Finance; Professor Barbara Griffin, School of Psychological Sciences; Professor Patrick Garcia and Professor Denise Jepsen, both from the Department of Management; and Dr Lyla Zhang, Department of Economics.