by Noriyuki Morimoto
The core factor of the risk appetite framework is the creation of a risk culture. Culture is the scope within which various values are shared. Conversely, a culture cannot exist without shared values, and within a culture, the shared values are obvious even without objective indicators such as the description of definitions or quantitative criteria.
Talking about risk culture, financial institutions must establish value judgments such as good/bad, attractive/unattractive, and beautiful/ugly as an organizational culture that functions as an objective set of values with regard to various risks. Out of the chaotic mixture of all kinds of risks, the organization is to construct a good, attractive, beautifully ordered system of risks through the natural collaboration of its members, even without a description of definitions or quantitative criteria.
The first step in this challenging task is to establish a common language to discuss risk. Language is the symbol of culture, and cultures can exist only when the same sense of beauty can be shared by the word beautiful. However, there is nothing more in discord with the concept of enactment than language. Language is language only because it is established naturally and shared naturally, and that is also why it is a symbol of culture.
It is essential to have a common language to talk about risks within an organization. However, artificially establishing the common language is the same as describing the definition of risk and developing quantitative criteria, which is not to foster risk culture. Therefore, the very first step should be the creation of an organizational culture in which a common language is naturally born.
Then, how can we build an organizational culture where a common language is born naturally? Leaders of financial institutions who raise such a stupid question should retire immediately. This is because the responsibility of management is first to clearly identify the target of one’s inherent risk taking, and secondly, to foster a risk culture through organizational culture reform. Those are the only two that matter.
That said, unfortunately, there are probably only a handful of business leaders in the world who can do both.
Chief Executive Officer, HC Asset Management Co.,Ltd. Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (now Willis Towers Watson) in 1990.