Negotiating Risk: The Relationship Between Financial Risk Management and Profit

This paper portrays the role of financial risk managers as negotiating risk with profit. Standard financial and economic theory put forward that when one wants more financial profit, more risk needs to be taken. Financial organisations have a similar division of labour, with risk management separated from the profit makers. In the social studies of finance, the focus has lied on profit making (instruments) in finance. While there has been research on financial risk, it has focused on the concept of risk. The roles of risk managers within large financial organisations remain understudied. Risk management activities could be conceptualised as negative to the profit centres, standing opposite to the risk takers, preventing risky behaviour, but ethnographic data shows a more dependent situation. Based on extensive immersion in both banking and insurance in the EU through two participant observations, network data of observation locations and 72 in-depth interviews, the paper shows that risk management is about negotiating with profit makers. The negotiating tools are influenced by the distance to the profit makers and regulatory pressure. With the help of regulatory legitimacy that is given to risk management in regulatory texts, risk management has obtained legitimacy in the organisation. However this legitimacy does not directly extend itself in a control over financial decisions. A decisive factor in being able to control the transactions is the distance to said profit makers. Being near (relational) gives risk management control over the decisions into the financial product transactions, while distances leave little control on specific transactions. In the negotiations with profit makers, risk managers move in a space between showing independence, loyalty to an organisation with profit making objectives and the possibility of being heard.