Relationship between Power and Risk Management in Organizational Context - Case Study Example

RЕLАTIОNSHIР BЕTWЕЕN РОWЕR АND RISK MАNАGЕMЕNT IN ОRGАNISАTIОNАL СОNTЕХT INTRODUCTION Organisations will always be exposed to risk because of the dynamic environment in which they are operating. This means that the management of organisations must be prepared to deal with any kind of risk; in fact, everyone in the organisation must be aware of the kind of risk that their organisation is likely to encounter in order to identify the risk and deal with it. But how effectively this will be achieved depends on the distribution of power within the organisation to deal with the perceived risks. Different organisations have different organisational structures and these structures determine how power is spread among different departments or individuals and hence how prepared the different organs or individuals are to deal with risk. If the structure of the organisation is such that every organ or individual is empowered to identify the risk areas, then it will generally be easier for such an organisation to perceive the various risk areas and find ways to deal with the specific risks. On the other hand, organisations in which power is located at a central area seem to be biased since the identification of risks will always be a province of a particular organ or department – meaning that some risks may not be noticed in time to avert them or deal with them effectively. Such distribution of power also implies that staff in other departments will be hesitant to report any risks they perceive since it will always be deemed that identifying risks is not within their line of duty. In recognition of such differences, this essay discusses the relationship between power and risk management in the context of organisational settings. DEFINITION OF TERMS Power Power is a term used to describe the potential capacity of a person or a department to persuade other people or other departments to act as they are directed (Daft 2009, p. 497). It can also be defined as the capability to accomplish objectives or outcomes that holders of power wish to meet (Daft 2009, p. 497). In their discussion, Waring and Glendon (1998, p. 89) employ the definition suggested by Weber (1947) which is that power is the possibility that an individual can carry out his or her own choice in spite of resistance. Thus, the definitions can be summed up to imply that power is the capacity of an individual or a unit within an organisation to persuade other individuals or departments to attain desired results. It is also the capacity to persuade others within an organisation with the objective of achieving desired results for holders of power (Daft 2009, p. 497; Robbins 2009, p. 351). Risk management Risk management refers to the process of systematically identifying, examining and responding to risks throughout an organisation (Waters 2007, p. 75). This involves the practice of seeking to eradicate, reduce and generally manage pure risks like those caused by fire, natural hazards, security breaches, environmental risks and those caused by lapses in general safety; and to increase the gains and avert loss from speculative risks such as economic investment, marketing, human resources, IT strategy and commercial risks (Waring & Glendon 1998, p. 3). In business context, risk management involves all efforts to preserve the assets as well as earning power of an organisation (Longenecker et al. 2006, p. 464). RELATIONSHIP BETWEEN POWER AND RISK MANAGEMENT From the definitions above, power implies the ability of individuals or departments in an organisation to influence others to act in order to meet the desired organisational objectives. In terms of the utilisation of resources in an organisation, power is seen as the ability to manage all types of resources to attain something that is valuable to an organisation (Vallabhaneni 2009). This means that the ability of an organisation to deploy resources in various areas is determined by the capacity that various individuals or departments have to do so. Power influences organisational members in three areas: behaviour, decision making and situations (Vallabhaneni 2009). For instance, in an organisation where the management is very strict on pilferage, the members will try to avoid stealing at all costs and one member is likely to report another in case he or she sees him or her stealing in the organisation. Similarly, most organisations that understand the risks that they are exposed to are likely to have risk management plans to avert risk or deal with the outcome of loss in case of any. The effectiveness of such risk management plans is determined by the decisions made at different levels of the organisation – and this ultimately relates to the influence of power in the organisation. Organisations that fear risks and those which are not open to change are perceived to be restraining the exercise of power (Bal et al. 2008, p. 16). The definition of risk management as stated above implies that risk management is a process, which is shaped by the various decisions made in an organisation. This brings into perspective the three areas in which power influences organisational members: behaviour, decision making and situations. Ideally, the management must influence the behaviour of an organisation’s members so that they are able to identify potential risks; the management must make critical decisions with respect to areas such as preparing risk management plans; and they must identify different situations in which risk may arise. It is therefore evident that the approach taken by an organisation in terms of how it uses power will determine its preparedness to manage risks by having tools such as risk managing plans. It is therefore important to analyse the role of power in an organisation and how this translates to areas such as risks management. Role of power in an organisational context Power and leadership are interrelated. Leadership is defined as the art of inspiring a group of people to take action towards attaining a common objective (Talent Intelligence n.d, p. 2). Different leadership styles lead to different ways of distributing power in an organisation. The different leadership styles also create support and certain behaviours in their followers (Dickson & Terwiel 2011, p. 83). For example, autocratic and authoritarian leaders beget followers who grudgingly do what the leaders ask them to. On the other hand, servant leaders focus on the role of serving and meeting the needs of others (Murray, Poole & Jones 2006, p. 299). Further, Dickson and Terwiel (2011, p. 83) argue that charismatic and expert leaders encourage others to freely and enthusiastically follow and do more than they are asked to do. In all these leadership styles, the leaders use power differently and this determines the effectiveness of the management styles in critical areas such as risk management. As Dickson and Terwiel (2011, p. 83) point out, different styles of leadership have costs and benefits that will affect an organisation, and the different leadership styles may be appropriate for different times. For instance, an authoritative leader may be suitable in a high risk operation, such as a military operation. In such a scenario, the commander has all say on whether the platoon has to surge forward, shoot or retreat. The members are not expected to ask questions but act as they are instructed by the commander. The fact that many military and police operations are conducted this way means that an authoritative use of powers works in such organisational contexts. The downside of adopting such an approach relates to how the followers will act in case the leader losses control or dies. This then means that having too much power at one point in an organisation may not do good to the organisation with respect to long-term risk management, especially when the leader leaves the organisation. On the other hand, a charismatic leadership style may inspire action beyond what people think is possible (Dickson & Terwiel 2011, p. 83). For instance, in an organisation where all employees are empowered, they are better able to identify the risks inherent in their specific areas of operations, which can then be included in the risk management plan for planning purposes. For example, at Virgin Atlantic Airways, which is one of the examples of organisations with charismatic leadership, the young and enthusiastic employees are encouraged to interact freely with customers (Appelbaum & Fewster 2004, p. 72) – meaning that they are able to identity the problems that customers have with the company. Further, successful organisations such as Southwest Airlines, Duncan Aviation and Delta Airlines pay a great deal of attention to organisational culture (Appelbaum & Fewster 2004, p. 72-73). Employees of these organisations are empowered, participative, motivated and committed so as to be more customer-centric (that is able to identify customer-perceived value and customer-perceived risk) (Appelbaum & Fewster 2004, p. 73). This means that such organisations are better placed to identify any risks associated with customer services and act on such risks before significant losses are incurred. The process of risk management and its relationship with power The whole exercise of risk management denotes the use of power in an organisation. Leaders can use any of the three forms of power suggested by Fairholm (2009 p. 72) to plan and manage the risk management process. First is coercive power, which helps leaders to get compliance when they have control over sanctions that are important to the target. Second is remunerative power, which is illustrated when a leader controls important and required resources and uses them as rewards for compliance. The third form of power is normative power, which describes a situation where a leader controls resources that have a high symbolic value (Fairholm 2009, p. 72). This form of power is particularly important when the leader has to control over ideas, ideals, goals, values, or approaches that have an emotional appeal (Fairholm 2009, p. 72) – such as those relating the risks that an organisation is exposed to. Risk management involves five to six steps; this is determined by how the organisation chooses to split these steps. To achieve all these steps, an organisation will have to select a group of people to manage the risk management process. These groups will hold meetings and discuss various areas, including resource allocation to manage risks. During such interactions, decisions will be made depending on how some individuals are able to present their arguments and mobilise sufficient support from others who may initially present some resistance (Kwon, Clarke & Wodak 2009, p. 275). In this essay, a five-step model of risk management highlighted by Longenecker et al. (2006, p. 464-465), Waters (2007, p. 76-77) and Kavaler and Spiegel (2003, p. 4-7) is discussed: Step 1: Identification of the risks It is important that an organisation is aware of the risks that it faces. To lower the chance of failing to notice significant risks, the organisation should establish a systematic strategy of identifying pure risks. Such methods include the use of insurance policy checklists, assessment of financial records, questionnaires, and meticulous scrutiny of the firm’s operations. Step 2: Evaluating risks Once the different risks have been recognised, there is need to evaluate them with regard to the possible magnitude of each loss and the likelihood that the loss will arise. To start with, risks should be categorised into three clusters: critical risks such as those that could result in bankruptcy, important risks such as those that would necessitate investment of extra capital to sustain operations; and unimportant risks such as those that could easily be covered with current income or assets that are readily available within the organisation. Step 3: Selecting methods to manage risk An organisation can choose to adopt risk control or risk financing methods to deal with risks. Risk control is designed to minimise loss through deterrence, avoidance and or loss reduction. Risk financing involves making funds available for losses that cannot be eradicated by risk control. This involves transferring the risk through methods such as insurance or retaining it, where the organisation absorbs any loss by deploying its operating revenues or retained earnings. Step 4: Implementing the decision Once a decision has been about which technique or techniques to adopt to manage an organisation’s risks, it must be followed by action such as purchasing insurance or setting a side a certain sum of money to facilitate coping with any risks that have been retained. An organisation that fails to implement any methods of managing risks will remain exposed to some risks that could be fatal. Step 5: Evaluating and reviewing the process Evaluation and review of the selected risk management technique are important because conditions keep on changing. As such, new risks arise and old ones disappear. The organisation must then formulate ways to deal with the new risks. Additionally, reviewing previous decisions to use certain methods may lead to identification of mistakes made previously. The steps above are illustrated in fig. 1 below by Epstein and Buhovac’s (2006, p. 7) diagram. Epstein and Buhovac’s illustration of the risk management process however has six steps. Fig. 1: Six steps of the risk management process Source: Epstein & Buhovac (2006, p. 7) For the process illustrated in fig. 1 to be successful, those charged with the process have to make decisions sequentially, with many groups or individuals taking part. According to Jain (2005, p. 159), the decision-making process creates additional power differences among the groups or individuals involved. This is because different groups or individuals come up with various suggestions which they analyse to come up with conclusive decisions. Jain further notes that the notion of decision-making as power implies that people and groups hold power to the level that they influence some component of making decisions. These individuals’ or groups’ suggestions might influence the goals being developed, the premises upon which decisions are made, the alternatives being considered, the results of the projected commitments and so on (Jain 2005, p. 159). For instance, Barclays Bank’s risk management team comprises people with technical skills across a wide range of disciplines. These people have to evaluate all possible risks in a wide array of areas such as operational risk, market risk, credit risk, economic and capital analytics, fraud risk management, environmental risk, reporting and operations (Barclays 2012). It is noteworthy that in order to conduct their functions effectively, those involved must have adequate power to make decisions on what to investigate, the measures to put in place to mitigate risks and to advise Barclays Banks’ senior executives on the correct approaches of managing risks. The power bestowed upon the individuals or groups charged with the risk management process influences their organisational behaviour in that they aim to provide solutions that assist managers to attain better outcomes (Buchanan 2006). Essentially, risk management units such those highlighted at Barclays exist because responsible managers aim to use their power to turn the unknowns into possible risks and deal with those risks (Wang 2011, p. 90). The same case applies for GlaxoSmithKline’s (GSK’s) risk management policy. The policy states that GSK is “committed to having an effective risk management process” and that this makes it possible for the managers to operate a risk-oriented strategy in creating internal control systems to efficiently mitigate or manage considerable risks (GSK 2009, p. 1). See fig. 2. Fig. 2: An excerpt of GSK’s risk management policy Source: GSK (2009, p. 1) Still on GSK, one of the objectives of the risk management policy is to make sure that risk management and compliance is a fundamental component of decision-making (GSK 2009, p. 2). This expressly shows the connection between power and management of risks because power affects the level of decision-making in an organisation. As well, GSK has different units such the Each Risk Management and Compliance Board, Risk Owners, and the Risk Oversight and Compliance Council to identify and manage risks of varied nature at different levels (GSK 2009, p. 2). This shows that for effective risk management, power must be delegated to different levels to make the individuals or groups involved efficient at service delivery. CONCLUSION Power and risk management are closely linked because power is about the potential of an individual or group to persuade others within an organisation to act in with an objective of attaining the desired goals of the of the organisation. The role of power is significant in risk management because this process involves the systematic identification, assessment and response to risks throughout the organisation. The relationship between power and risk management is particularly evident in the risk management process since risk management is a detailed process involving many individuals or groups and decision-making steps. The success of this process is influenced by the level of power that those involved have to identify potential risks and find possible ways to mitigate them or manage the risks. This has been illustrated using examples of organisational decision making at Virgin Atlantic Airways and other airlines, Barclays Bank and GlaxoSmithKline. References Appelbaum, S H & Fewster, B M 2004, ‘Human resource management strategy in the global air line industry – a focus on organisational development’, Business briefing: Aviation strategies: Challenges and opportunities of liberalization, pp. 70-75, viewed 05 December 2012 Bal, V, Campbell, M, Steed, J & Meddings, K 2008, ‘The role of power in effective leadership’, A CCL Research White Paper, viewed 05 December 2012 Barclays 2012, ‘Risk’, viewed 06 December 2012 Buchanan, L 2006, ‘A brief history of decision making’, Harvard Business Review, January 2006, viewed 06 December 2012 Daft, R L 2009, Organization theory and design, 10th edn, Cengage Learning, Stamford, Connecticut. 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