The Construction of Risk Management Credibility Within Corporate Boardrooms

Abstract

Despite various corporate collapses over the last decades, risk management is increasingly influential across organizations worldwide, as if the apparatus’ credibility was impermeable to scandals that, from critical angles, cast doubt on its efficacy. Relying on a cultural perspective of analysis highlighting the range of social processes that protect prevailing institutions’ legitimacy from aberrations, we examined the sense-making approaches employed by corporate boardroom actors to maintain their confidence in the credibility of the risk management apparatus despite being exposed to a continuous flow of corporate failures pointing to risk management efficacy limitations. Specifically, we conducted 35 interviews with corporate board stakeholders, mostly board members and corporate consultants. Our analysis indicates that actors involved in risk management processes tend to interpret aberration cases through perspectives that put the blame on some implementation deficiency, thereby ensuring that risk management's core assumptions are not questioned. These perspectives point to a defensive system of thought grounded in the director and consultancy communities, whose main referents are subject to intense work and re-conceptualization in the aftermath of aberrations, thereby providing community members with the means to make sense of the frictions of organizational life in ways that maintain the legitimacy of the risk management apparatus.

Acknowledgements

We thank board members, consultants and other stakeholders who participated in the interviews for this study. We benefited from the comments made by Associate Editor Ingrid Jeacle, two reviewers, Salvador Carmona, Delphine Gibassier, Hélène Löning, Laura Spira, Joni Young and workshop participants at the University of Ottawa, London School of Economics and Political Science, and Arizona State University. We also acknowledge the comments from participants at the 2014 Congress of the Association francophone de comptabilité (Lille).

Notes

1 Our first interviews confirmed that participants largely view risk management as a trustworthy apparatus.

2 In the eyes of Denzin and Lincoln (1998, p. 4), ‘the product of the bricoleur’s labor is a bricolage, a complex, dense, reflexive, collagelike creation that represents the researcher's images, understandings, and interpretations of the world or phenomenon under analysis'.

3 One recent exception is Ailon's (2012) study, which examines how confidence in the risk order is regained following scandals, through an analysis of journalistic commentaries made in the Wall Street Journal.

4 Furthermore, while Hayne and Free (2014) examine the role and actions of active proponents in designing and legitimizing a dominant risk management standard (i.e. COSO), our study relates to the role of corporate actors as reflexive risk management ‘participating audiences’ in legitimacy-building processes. The notion of participating audiences reflects the blurry role of corporate directors and consultants as users, conveyers, promoters, translators and implementers of risk management ideas.

5 An emerging segment of accounting and corporate governance literature relies on Douglas’ ideas on purity and danger to better understand the construction and consequences, in practice communities, of social boundaries aimed at regulating purity and impurity (Durocher & Gendron, 2011; Gephart et al., 2009; Linsley & Shrives, 2009; Young, 2014).

6 This point is consistent with Foucault (1975), who adds that expert-based institutions will endeavor to change deviants into normal individuals.

7 The notion of sense-making is increasingly influential in the accounting and management literature (Colville, Brown, & Pye, 2012; Gendron & Spira, 2010; Kouakou, Boiral, & Gendron, 2013; Weick, 2012).

8 As maintained by Stein (2004), individuals generally tend to make sense of disturbing events by relying on their existing interpretive schemes, without questioning the underlying principles upon which the latter are based.

9 Ideology consists of a relatively coherent set of beliefs, values and norms that bind a number of people together and help them to make sense of reality. Theory of action relates to practice-based knowledge that is built as people encounter situations. Story relates to the promotion of some ‘remarkable’ experience that aims to guide conduct (Weick, 1995).

10 Three interviewees provided a revised transcript. Only minor alterations were made in the revised transcripts, most of them being of a clarifying nature.

11 We conducted about two-thirds of the interviews in French and transcribed them, based on the interview language. We ultimately translated into English the excerpts that are incorporated in this manuscript.

12 In particular, we asked questions, during the interviews, on the Global Financial Crisis and a recent scandal at Swiss bank UBS, which announced in September 2011 that the bank lost $2 billion as the result of unauthorized trading by one of its traders (Simonian, 2011).

13 This backward reasoning echoes Bergson's (1969) critique of the notion of ‘the possible’: it is retroactively that we construct the meaning of ‘possibility’. The misleading idea, according to Bergson, that the possibility of something precedes its existence leads us to believe that the future is foreseeable because it is ‘dormant’ in the past and waits to be activated. This kind of explanation arguably strengthens confidence in risk management reliability; it also secures and even expands its domain of practical intervention.

14 Accuracy refers to the concordance of one's reflexive accounts to ‘reality’. Weick argues that sense-making is about plausibility, not accuracy.

15 We are grateful to one of the reviewers for having made us aware of this important point.

16 For a persuasive criticism of such temporal assumptions, see Bergson (1969).

17 The hard core of financial accounting research would be something like aggregate market reaction constituting a reliable indication of the usefulness of accounting data (Gendron, 2013).

18 In the policy-making literature, corporate boards are increasingly represented as prominent monitoring entities – as ramparts of rectitude in regulatory discourses and policies privileging, from a neoliberal viewpoint, private-sector self-regulation (Ayres & Braithwaite, 1992). Our conclusion that board members, when confronted to potentially destabilizing events, extensively seek to protect the credibility of the risk management apparatus rather than challenge some of its underlying claims may be of interest to policy-making stakeholders – given today's fashion surrounding self-regulatory mechanisms (Power, 2007).

19 As stressed by one of the reviewers, putting the blame on implementation rather than on idea/standard/systems conception is in line with a strand of accounting research informed by actor-network theory (Skærbæk, 2009; Skærbæk & Christensen, 2014).

20 Again, we owe this point to one of the reviewers.

Additional information

Funding

We acknowledge the financial support of the Social Sciences and Humanities Research Council of Canada and the Fonds de recherche du Québec – Société et culture.