 Risk management and managerial mindsetRonald William Eastburn and Alex Sharland Journal of Risk Finance, 2017, vol. 18, issue 1, 21-47 Abstract: Purpose - This paper aims to determine why so many banks do not recognize in a timely manner the inherent risks and imbalances with their risk/reward decision trade-offs, to elevate the risk conversation by embracing a more strategic and adaptive behavioral perspective and to show how an effective risk management organizational mindset is a definite solution for mitigating risk. Design/methodology/approach - A direct-mail questionnaire survey was designed with the unit of analysis US community bank (under US$1.5bn in assets) and its risk performance. We used quantitative methods using previously tested scales for main constructs and FDIC bank data for performance measures. To gauge the models capacity for determining discriminatory value, results were also measured against relative peer financial performance. Findings - The findings established that an effective risk management process that assimilates risk tolerance, risk propensity and risk practices into a managerial mindset offers a sound solution for mitigating risk. By envisioning risk as a “conceptual model of thinking” and interpreting it as a “predictable business process”, and by offering specific “decision enablers” that complement the corporate mindset, it creates a safety net against unsafe risk practices. As a result, it allows for an appreciation that current financial performance is a direct measure of management’s risk decision capabilities. Research limitations/implications - The sample size (n= 151), although adequate for our purpose was relatively small, was restricted to US community banks (less than US$1.5bn in assets) and single-informants (CEOs), thereby providing a somewhat narrow focus. Also, the survey was conducted during a slow economic period, and results may be different during a growth period. We see ripe opportunity for further research, especially related to money-center and regional banks and the next level of management as well as the behavioral influences that frame the risk/reward opportunity. Research on other industries, small businesses, etc., would be valuable because risk permeates all decisioning. Practical implications - From a practitioner perspective, providing guidance on risk oversight allows for improved financial performance. The findings should be of interest to financial industry leaders, policy makers and regulators as understanding how an active orientation of risk tolerance, risk propensity and risk practices are coordinated across the organization is vital. Also, managers need to understand how characteristics of risk management manifest itself within their organization in terms of productivity and financial performance. Originality/value - This paper is the first comprehensive empirical study that incorporates a conceptual approach that uses outcome history, behavioral influences and operational dimensions to identify risk management capabilities in community banks designed to increase risk/reward awareness. Keywords: Risk governance; Decision framing; Banking; Behavioral risk; Managerial mindset (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eme:jrfpps:jrf-09-2016-0114 Access Statistics for this article Journal of Risk Finance is currently edited by Nawazish Mirza More articles in Journal of Risk Finance from Emerald Group Publishing Limited |
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