Walking the Talk in Risk Management : A Complementarity Perspective on How Tone from the Top Influences Risk Awareness

Prompted by the weaknesses of standardized risk management approaches in the aftermath of the 2008 financial crisis, scholars, regulators, and practitioners alike emphasize the importance of creating a risk-aware culture in organizations. Recent insights highlight the special role of tone from the top as crucial driver of risk awareness. In this study, we take a systems-perspective on control system design to investigate the role of tone from the top in creating risk awareness. In particular, we argue that interactive control and risk-based diagnostic control complement tone from the top in increasing risk awareness. We further investigate whether the predicted interdependencies are sensitive to the level of perceived environmental uncertainty. Based on survey data from 198 small and medium-sized companies, we show that interactive control strengthens the effect of tone from the top on risk awareness, and that firms also tend to adopt these two choices in combination. These results indicate that indeed the two control practices complement each other in increasing risk awareness, and that firms, on average, take this complementarity into account in the design of the control system. Contrary to our expectations, we find that tone from the top and risk-based diagnostic control are substitutes with regard to creating risk awareness. We still find that firms, on average, treat tone from the top and risk-based diagnostic control as complements in their control system design choices. This implies that firms' control system design choices with regard to these practices are not consistent with their effectiveness in managing risk awareness