Navigating Institutional Complexity: The Production of Risk Culture in the Financial Sector

• Author: Tommaso Palermo,Simon Ashby,Michael Power
• Published date: 01 March 2017
• DOI: http://doi.org/10.1111/joms.12241
• Date: 01 March 2017

Navigating Institutional Complexity: The Production

of Risk Culture in the Financial Sector

Tommaso Palermo, Michael Power and Simon Ashby

London School of Economics and Political Science; University of Plymouth

ABSTRACT Following the financial crisis, financial sector organizations faced increased

pressures to reform their ‘risk cultures’. In this paper, we argue that the emergence of

regulatory and managerial attention to risk culture is symptomatic of pressures to redefine the

fundamental ends of financial institutions and to rebalance the pre-crisis emphasis on a logic

of opportunity and risk-taking with a logic of precaution and risk control. Based on the

analysis of normative practitioner texts and on extended contact with regulators, advisers and

corporate actors in the UK financial sector over four years, we show how this initial

complexity of ends is translated into uncertainty and conflict about the means through which

risk culture might become an object amenable to intervention. On this basis, we contribute to

the growing literature on ‘institutional complexity’ by showing how organizational actors

address conflicting pressures about both ends and means, and by discussing some key

implications of their simplification strategies. Our analysis also contributes to recent studies of

‘means-ends decoupling’, showing how means, ends and the object of intervention itself – risk

culture – co-evolve as they are reconstructed by organizational actors via their everyday

practices.

Keywords: risk culture, financial sector, institutional complexity, means-ends decoupling,

workstreams

Address for reprints: Tommaso Palermo, Department of Accounting, London School of Economics and

Political Science, Houghton Street, London WC2A 2AE, UK. (t.palermo@lse.ac.uk).

This is an open access article under the terms of the Creative Commons Attribution License, which

permits use, distribution and reproduction in any medium, provided the original work is properly cited.

Earlier versions of this paper were presented at the EGOS 2014 Colloquium, at research seminars at

Copenhagen Business School and HEC Lausanne, and, under the title ‘Searching for Risk Culture’, as a

keynote address at the SAMS/JMS annual conference on Managing Complexity Within and Across Organiza-

tional Boundaries at Cambridge University, March 2014. The authors are grateful for the helpful com-

ments of Mats Alvesson, Roger Friedland, Matthew Hall, Silvia Jordan, Steve Maguire and Iain Munro,

as well as the editors of the special issue of JMS on Managing Complexity. The authors gratefully

acknowledge the financial support of the Economic and Social Research Council (ESRC), the Chartered

Insurance Institute (CII), the Chartered Institute of Management Accountants (CIMA) and the Lighthill

Risk Network.

V

C2016 The Authors

Journal of Management Studies published by John Wiley & Sons Ltd and

Society for the Advancement of Management Studies

Journal of Management Studies 54:2 March 2017

doi: 10.1111/joms.12241

INTRODUCTION

Reaction to the financial crisis of 2009 has focused to a large extent on the need to

improve the ‘risk culture’ of banks and other financial organizations (e.g., CRO Forum,

2015; FSB, 2014, 2013; IIA, 2014; IIF, 2009; IRM, 2012). This policy emphasis on risk

culture reflects a post-crisis aspiration to rebalance two logics of risk-taking which exist

in tension with one another. One, which might be called a ‘logic of opportunity’, is

revealed in the history of innovation, risk-taking, business adventures and entrepreneuri-

alism (e.g., O’Malley, 2004). The other – a ‘logic of precaution’ – emphasizes control,

safety and risk avoidance and has a distinctive history within risk regulation and public

safety (e.g., Hutter, 2010). The relationship between these two logics reflects a duality

(opportunity vs. harm avoidance), which is inherent in the concept of risk itself (see

Power, 2014).

Seen in these terms the financial crisis and the emergence of risk culture represent a

prima facie case of ‘institutional complexity’, whereby an event rearticulates social

expectations about the fundamental ends of financial institutions and exerts normative

power in reorienting organizational practices (Greenwood et al., 2011; Thornton et al.,

2012). A growing body of actor-level accounts of responses to institutional complexity

(e.g., McPherson and Sauder, 2013; Smets and Jarzabkowski, 2013; Smets et al., 2015;

Smets et al., 2012; Voronov et al., 2013) would suggest that the logics of opportunity

and precaution, and the complexity deriving from their incompatible prescriptions

about organizational ends, become woven into the work of the actors who seek to

improve their organizations’ risk cultures.

As part of a longitudinal study of risk culture in financial organizations operating in

the UK, we had the opportunity to explore what organizational actors do when they

confront such an emergent complexity of ends. Our initial analysis of data collected

through a review of normative guidance documents written for practitioners and

extended contact with regulators, advisers and corporate actors suggested that the com-

plexity of ends was also amplified by a tension between apparently incompatible ways to

define the means of intervention. In short, organizational actors seemed to navigate a

constellation of means-ends logics rather than responding directly to the shifting binary

logics of ends.

In the analysis which follows, we explore and explain how organizational actors navi-

gate complexity at the level of both ends and means and how they perceive and construct

their repertoire of responses. Our hunch is that, by exploring the dynamics of such a

means-ends constellation of logics, we can extend the literature on organizational

responses to institutional complexity in combination with recent studies that postulate

an increasingly opaque relationship between means and organizational ends (see

Bromley and Powell, 2012; Dick, 2015; Wijen, 2014).

To probe our hunch, we develop and appeal to the notion of workstream to emphasize

that our unit of analysis is a dynamic and most likely unstable flow of organizational

activities that respond to, and mediate, means-ends complexity. Drawing on an exem-

plar workstream within our broad set of data, we analyse in detail the means through

which organizational actors respond to the complexity of ends and how means change

over time in relation to those ends. As part of our analysis, we inductively derive two

155Navigating Institutional Complexity

V

C2016 The Authors

Journal of Management Studies published by John Wiley & Sons Ltd and

Society for the Advancement of Management Studies