Managing operational risk: Creating incentives for reporting and disclosing

Abstract

Operational risk management is acutely related to the management of people. This paper gives a systematic overview of the important incentive conflicts in managing and reporting operational risk to achieve internal as well as external risk transparency. Approaches from outside stakeholders and insurance companies are assessed and taken as inspiration for handling firms' internal obstacles. The paper focuses on firms' risk management, organisational architecture and possible incentive schemes to improve internal reporting. Monetary and non-monetary motivational aspects, sanctions and the level of monitoring linked to the source of risk are discussed. It is shown that these elements have to be balanced in order to let the incentive mechanism work.