An investigation of the impact of psychology of leadership on effective enterprise risk management behaviour

Abstract

This research examined the psychology of leadership with respect to Enterprise Risk Management (ERM). ERM a risk management process that has been developed to enable organizations to minimize internal and external risks and exploit opportunities for gain. Despite the prevalence of several ERM frameworks for various kinds of risk, their implementation has been at best, partially effective. Given that the implementation of ERM’s is the responsibility of senior management / leaders of organizations, it was assumed that one of the reasons for the faulty ERM implementation may be attributed to poor leadership. The literature indicated that the psychology of leadership related to implementation of risk management programmes refers to the ability to make rational decisions under condition of risk and uncertainty and the ability to influence others in the organizations to adopt and develop a risk management culture. However, the elements of a psychology of leadership that would lead to effective ERM implementation have been largely ignored in the literature. The gap in the literature this research attempts to bridge. The abductive pragmatic approach was used using qualitative and quantitative methods and primary and secondary data. The analysis of the secondary data led to the formulation of a framework containing various psychological factors related to decision making, leadership style and organisational culture. Qualitative data was collected through semi-structured interviews with 42 respondents from private organisations operating in the Saudi oil and gas sector, whilst quantitative data were gathered from 100 respondents from private organisations operating across various sectors in Saudi Arabia. The analysis of primary data collected from the empirical survey and the information gathered from the literature review corroborated all the factors identified in relation to decision making, leadership style and organisational culture. The key factors found to impact psychology of decision making included risk perception, psychometric paradigms, bias, culture, gender, emotion, decision-making style, attitude and protective zones. The factors impacting psychology of creating organisational culture of risk included leadership style, development, communication and appetite for monitoring risk, the development of an ethical organisation, role identification, the transformational leadership style and facilitation of the emergence of champions at all levels of the organisational hierarchy. One of the key findings of this research highlighted the occurrence of bias or heuristics that can impede rational decision making under condition of risk and uncertainty. The most important of these include representation, availability and anchoring, which can lead individuals to overestimate or underestimate the consequences of their decisions, and make decisions that do not lead to the desired outcomes from occurring. Another finding is the corporate environment in Saudi Arabia related to risk management. It was found that women in Saudi Arabia are more risk averse than their male counterparts. Findings suggest that this is the outcome of social prescriptions related to the role of women and indicate that steps must be taken to break down cultural barriers that prevent female participation in decision-making processes. In this connection, it was also found that in Saudi Arabia there is low tolerance for uncertainty and ambiguity, high tolerance for hierarchy, that values the community over the individual and that is more masculine than feminine in its worldviews. All of these have resulted in a risk averse management culture in Saudi Arabian organizations. It was also found that it is the transactional leadership style that is better suited to risk management activity than authoritarian, individualistic or transactional leaders. These finding are relevant as they constitute a framework or model of ERM implementation that may be used by any organization that seeks to effectively implement ERM frameworks. The leaders of these organizations can use this framework to understand the mental processes that they undergo when they have to make rational decisions under condition of risk and uncertainty as also how to leverage various psychological factors in creating an organizational culture of risk. The key limitation of this research is that it does not conduct statistical tests to explore positive and significant links between the various dimensions of the psychology of risk leadership and the benefits of an effective ERM implementation. The recommendations aims to help improve ERM implementation in Saudi Arabia and a future research for those interested in investigating the influence the psychology of leadership on ERM in a context of a particular sector.