RISK MANAGEMENT
Should We Spend Time Worrying About The Risk Appetite For Our Business ?
By Reuben Kisigwa
Should we spend time worrying about the risk appetite for our business ? The answer is yes if an organizations ’ purpose is to deliver on its vision .
“ Good business leaders create a vision , articulate the vision , passionately own the vision , and relentlessly drive it to completion ,” according to Jack Welch - Chairman and CEO of General Electric ( GE ) between 1981 and 2001 .
Strategy then becomes an organization ’ s plan to achieve its vision and apply its core values to drive performance and value . Hence in relentlessly driving the vision to completions key for leaders is to ensure strategies that guarantee achievement of short-term objectives , long term goals and eventual realization of the vision are insulated against adverse impacts of inherent risks that the organizations takes on willingly or unwillingly . In managing these risks , leaders should not befall into the trap of only focusing on downside risks , they should also remember the opportunities facing a business . This then suggests that a business has to define to what extent it wishes to accommodate the risks that shall see it deliver on its vision - hence the term Risk Appetite . We can give further meaning to this term using a combination of qualitative and quantitative statements and say that Risk Appetite is the amount and type of risk that an organization regards as appropriate for it to accept in order to execute its strategy . Granted , an organization ’ s appetite for risk will change over time as its strategies evolve . This then compels leaders to ensure their teams are applying appetite to successfully create and protect the value of their enterprises and enhance relationships with their stakeholders .
‘ Risk Appetite ’ vs . ‘ Risk Tolerance ’. What ’ s the Difference ?
Though Risk Appetite and Risk Tolerance sound similar , they are not the same . Whereas Risk Appetite speaks to the target level of loss exposure that the organization views as acceptable , given business objectives and resources , Risk Tolerance speaks to the degree of variance from the organization ’ s risk appetite that the organization is willing to tolerate .
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Risk appetite is an integral link between an organization ’ s objectives and its overall risk management profile . When clearly articulated to all levels of an organization , risk appetite can create a positive culture of risk awareness and accountability .
Consequently , while risk appetite can be thought of as a line drawn in the soil that helps to set expectations , risk tolerance can be thought of as the variance from appetite that drives day-to-day decisions to operate differently . Risk tolerances will emerge naturally from your overall risk appetite , but both must be in line with your company ’ s goals and the amount of risk the company is willing to take . When Risk Tolerances are linked with both overall Risk Appetite and strategic goals , they can reduce residual risk and help you meet your strategic risk management objectives .
The benefits of establishing a risk appetite
Indeed , Compliance stands strong within Corporate Governance . However , complying with Risk Appetite requirements should not be viewed simply as a tick-box exercise for funders , auditors , or other oversight organizations . Instead , a leader should see successfully implementing risk appetite as a way of enhancing the organization ’ s ability to efficiently manage risks and achieve its goals thus reaping maximum benefits .
Risk appetite is an integral link between an organization ’ s objectives and its overall risk management profile . When clearly articulated to all levels of an organization , risk appetite can create a positive culture of risk awareness and accountability .
The accruing benefits of Risk Appetite will include the following : Assisting the organization in achieving its strategic goals by taking the appropriate risks at the appropriate levels , with the appropriate risk responses in place .
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