OPERATIONS & SUPPLY CHAIN

Redefining risk management practices: functional and holistic approaches

VILMA NASTECKIENĖ

Objectives. Although the concept of risk is a few millennia old, risk management has been rewarded with increased attention since the 2009 financial crisis, which uncovered the gaps and misconceptions in emerging risk management approaches (Palermo, Power, & Ashby, 2017; Mikes & Kaplan 2013, Bromiley et al., 2015). The resounding failures in the financial sector provided a reason to revisit this topic, raising questions regarding how managers and risk management professionals perceive risk in an organization and how risk is managed in everyday organizational life.

Many authors call for a broader perspective to be applied to risk (Kaplan & Mikes 2016; Power 2008; Power 2016; Bromiley et al. 2015). They argue that risk is to be conceptualized as a manageable object by regulating institutions, whereas in reality each organization constructs their own perception of risk (Mikes & Kaplan 2013; Maguire & Hardy, 2013; Bromiley et al., 2015; Palermo et al.2017). Risk perception drives risk management practices.

A new perspective in risk research is the distinction between the functional and holistic approaches. Some scholars, such as Arena et al. (2010), Kaplan and Mikes (2016), Bromiley et al. (2015) and others, call for a broader view to be applied to risk management, thus implying the existence of a narrow view as well. The narrow approach or, as Kaplan and Mikes (2016) call it, the calculative approach to risk management is henceforth referred to as the functional approach, while the broader approach is called the holistic approach.

Traditionally, empirical ERM research is built around ERM as a formalized framework and toolbox (Bromiley et al. 2014; Palermo et al. 2017). One of the possible reasons behind this is associated with the increased institutionalization of risk management within certain industry sectors, such as the financial services industry and health care. At the same time, there are a number of strong competitive companies that do not emphasize institutional scripts for risk management, but instead work on building management practices (Power, 2016) within their performance management, through which they presumably manage risks. Despite the holistic intention behind it, the implementation of ERM is often executed functionally, i.e., adopting the framework without integrating it into organizational culture, processes and management practices. Although risk research questions and challenges the functional limitations of ERM implementation, a holistic approach to risk management lacks connection with real-world phenomena in risk research

#functional #holistic #risk #risk management practices