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FRM Part II · FRM Exam Part II · Risk, Regulation and Organizational Structure

Which practice most strongly supports a sound risk culture in an investment management organization?

Using risk-adjusted performance in compensation, clear escalation channels, and leaders who visibly act on risk concerns best supports sound risk culture. These align incentives with the board's appetite and encourage transparency, while short-term return pay, restricted reporting or sole reliance on the risk department undermine it.

  1. ACompensation tied solely to short-term absolute returns to motivate performance
  2. BRisk-adjusted performance metrics in compensation, with unambiguous escalation channels and leaders who visibly act on risk concernsCorrect
  3. CRestricting risk reporting to senior management to avoid confusion
  4. DDelegating all risk responsibility to the risk management department

Explanation

Sound risk culture aligns incentives with risk-taking, encourages open escalation, and has leadership modeling the behavior (tone from the top). Short-term return pay encourages excess risk, restricted reporting reduces transparency, and the first-line business must own risk rather than delegating it entirely.

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