Tone from the Top in Risk Management: A Complementarity Perspective on How Control Systems Influence 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 both interactive and diagnostic use of budgets and performance measures
interact with tone from the top in managing risk awareness. Our results show that interactive control
strengthens the effect of tone from the top on risk awareness, while tone from the top and diagnostic
control are, on average, not interrelated with regard to creating risk awareness. To shed light on the
boundary conditions of the proposed interdependencies, we further investigate whether the
predicted interdependencies are sensitive to the level of perceived environmental uncertainty. We
find that the effect of tone from the top and interactive control becomes significantly stronger in a
situation of high perceived environmental uncertainty. Most interestingly, tone from the top and
diagnostic control are complements with regard to risk awareness in settings of low perceived
environmental uncertainty and substitutes at high levels of perceived environmental uncertainty.