Oxford Brookes University FACTORS THAT SHAPE AN ORGANISATION‟S RISK APPETITE: INSIGHTS FROM THE INTERNATIONAL HOTEL INDUSTRY Xiaolei Zhang Thesis submitted in partial fulfilment of the requirements of the award of Doctor of Philosophy December 2016 ABSTRACT Since the 2008 global financial crisis, a major challenge for the Board of Directors (BoD) and risk managers of large, public corporations has been to clearly define and articulate their company‟s risk appetite. Considered as a business imperative to ensure successful enterprise risk management, risk appetite has been widely discussed among practitioners and, more recently, academics. Whilst much emphasis has been placed upon defining risk appetite and identifying the ways in which an organisation‟s risk appetite statement can be articulated, the literature has largely ignored the critical idea that risk appetite is not a „static picture‟, but changes over time according to a variety of factors residing in the organisation‟s internal and external contexts. Using the international hotel industry as research context, this study explores the underlying factors that shape an organisation‟s risk appetite. Building on the „living organisation‟ thinking and employing the „living composition‟ model as a conceptual lens, this thesis integrated several strands of literature related to risk appetite, organisational risk taking and individual risk taking, and developed a conceptual framework of factors that shape an organisation‟s risk appetite. Given the scarcity of risk appetite research, an exploratory, qualitative approach was adopted and the fieldwork was conducted in two stages: stage one served to gain a generic-business perspective of the main factors that shape an organisation‟s risk appetite. Data was gathered from ten risk consultants using unstructured in-depth interviews. The findings were subsequently validated and further explored in stage two, which involves a case study of two publicly listed international hotel companies with different risk appetites. Questionnaires and follow-up semi-structured interviews were used to collect data from sixteen corporate executives and risk managers in order to understand the factors that shape their organisation‟s risk appetite. The findings indicated that an organisation‟s risk appetite is collectively shaped by a set of „organisational‟, „environmental‟ and „decision-maker‟ factors. While most factors are shared between the case organisations, the significance of each factor to risk appetite, the ways in which each factor shapes the risk appetite and the interrelationships among different factors are dissimilar. This led to the development of a „living organisation‟ framework of factors that shape an organisation‟s risk appetite, which is a key contribution to knowledge of this study. The findings also revealed how corporate executives and risk managers understand the concept of risk appetite, thus contributing to the literature with an „end user‟ perspective of risk appetite definition, as well as a unique „black hole‟ analogy of risk appetite. Not only can the findings facilitate a more accurate and meaningful articulation of an organisation‟s risk appetite statements, they also highlight the need for corporate executives and risk managers to regularly monitor and update their organisations‟ risk appetite. To this end, the „living organisation‟ framework of factors that shape an organisation‟s risk appetite provides a basis for the development of a risk appetite monitoring system, as well as a tool for modifying the risk appetite. i DEDICATION To my wonderful wife, Luna, who sacrificed so much to enable me to embark on, continue, and finish this research; To my beautiful children, Max and Lisa, for their love and understanding of a Daddy who always worked at the weekends; To my parents in-law, for their selfless support with the housework and childcare, when I couldn‟t do my part; To my parents, for their unconditional love and belief in me; And finally, To my beloved grandma, who could not see me completing this journey. I love you all. ii ACKNOWLEDGEMENT The completion of this thesis would not have been possible without the generous support of many great people. First and foremost is my Director of Studies Professor Alexandros Paraskevas. Sometimes he is like a friend; sometimes he is like a father. Words cannot describe how much influence he has had on me during the last ten years of knowing him. I would not have entered the academia and be where I am today if it was not for him. I am also indebted to Mr David Bowie, whose timely entry into the supervision enabled me to see the light at the end of a very dark tunnel. His intelligence and shrewd judgements have always provided a solution when issues arise. His style and approach to work and life is what I aspire to as an academic. I would also like to thank Professor Conrad Lashley for his invaluable guidance and support at the early stages of this study. His encouragement has given me the much-needed confidence to thrive in academia. I would like to thank all the participants of this research, without whom this research would not have been completed. I know how busy you are, and you do not have to help me; but you took time and kindly shared your knowledge and experience, for which I am truly grateful. Thanks must go to all my colleagues within the Oxford School of Hospitality Management. They rarely failed to offer me support, and their kindness has given me a sense of „family‟. I must thank the Head of School, Mr Donald Sloan, for his belief and patience in me. Thanks to Professor Levent Altinay and Dr Maureen Brookes for their support and encouragement, and the occasional push for me to complete as soon as possible, and to Dr David Bowen for his wise words and sense of humour. To my fellow PhD students, it was great to share our struggles - you are almost there! iii TABLE OF CONTENTS ABSTRACT i DEDICATION ii ACKNOWLEDGEMENT iii CHAPTER ONE INTRODUCTION 1.1 Problem definition 1 1.2 Key concepts underpinning the research 5 1.3 Research context 8 1.4 Research aim and objectives 10 1.5 Structure of the thesis 11 CHAPTER TWO LITERATURE REVIEW 2.0 Introduction 12 2.1 Understanding risk, risk taking and risk appetite 14 2.1.1 The concept of risk 14 2.1.2 Risk taking 17 2.1.2.1 Individual risk taking theories 18 2.1.2.2 Organisational risk taking theories 21 2.1.3 Risk appetite 24 2.2 Exploring the factors that shape an organisation‟s risk appetite 28 2.2.1 Evidence from the practitioner risk appetite literature 28 2.2.1.1 Organisational factors 29 2.2.1.2 Decision-maker factors 32 2.2.1.3 Environmental factors 32 2.2.2 Evidence from the organisational risk taking literature 35 2.2.2.1 Four prominent studies of factors that influence organisational risk propensity 35 2.2.2.2 Organisational factors 43 2.2.2.3 Decision-maker factors 48 2.2.2.4 Environmental factors 51 2.2.3 Evidence from the individual risk taking literature 55 2.2.3.1 Biopsychosocial factors 56 2.2.3.2 Environmental factors 60 iv 2.3 The „Living organisations‟ thinking and „living composition‟ model 64 2.3.1 The „living organisations‟ thinking 64 2.3.2 The „living composition‟ model 65 2.4 Towards a conceptual framework of factors that shape an organisation‟s risk appetite 69 2.4.1 Identifying the parallels between individual factors and organisational factors 69 2.4.2 The conceptual framework 73 CHAPTER THREE METHODOLOGY 3.0 Introduction 75 3.1 Purpose of the study 75 3.2 Research philosophy 76 3.3 Research approach 78 3.4 Research strategy 80 3.4.1 Document analysis of case organisations‟ risk appetite 83 3.5 Sampling 85 3.6 Data collection 88 3.6.1 Stage one 88 3.6.1.1 Data collection method 88 3.6.1.2 Gaining access to risk consultants 89 3.6.1.3 Collecting data from risk consultants 90 3.6.2 Stage two 92 3.6.2.1 Data collection methods 92 3.6.2.2 Gaining access to case organisations and recruiting corporate-level participants and analysts 93 3.6.2.3 Collecting data from independent analysts 95 3.6.2.4 Collecting data from corporate participants of case organisations 97 3.6.3 Ethical considerations during the research process 101 3.7 Data analysis 102 3.7.1 Data analysis approach 102 3.7.2 Manual versus Computer-assisted analysis 103 3.7.3 Analysing the questionnaire data 104 3.7.4 Analysing the interview data 107 3.8 Ensuring research quality 110 3.9 A reflective account of the research process 110 v CHAPTER FOUR FINDINGS 4.0 Introduction 113 4.1 „Stage one‟ findings: Unstructured interviews with risk consultants 113 4.1.1 Factors that shape an organisation‟s risk appetite 115 4.1.1.1 Organisational factors 116 4.1.1.2 Decision-maker factors 123 4.1.1.3 Environmental factors 126 4.1.1.4 Interrelationships among identified factors 127 4.1.2 Enriching the conceptual framework 130 4.2 „Stage two‟ findings: The case study 133 4.2.1 Evaluating the case organisations‟ risk appetite with financial analysts 133 4.2.2 Exploring the factors that shape an organisation‟s risk appetite from corporate executives and risk managers 137 4.2.2.1 Risk appetite conceptualisations from the perspective of corporate executives and risk managers 137 4.2.2.2 Factors that shape the case organisations‟ risk appetite 140 4.2.2.3 Interrelationships of risk appetite factors 171 4.3 Summary 172 CHAPTER FIVE DISCUSSION 5.0 Introduction 174 5.1 Conceptualising the risk appetite 174 5.1.1 Quantitative versus qualitative nature of risk appetite 175 5.1.2 Dispositional versus situational nature of risk appetite 178 5.1.3 Risk appetite analogy