Allowing for improved strategic decision-making by requiring senior management and boards to consciously analyze and express the level and type of risk they are willing to pursue and accept .
Facilitating tactical or operational decision-making in line with organizational strategy by requiring management to consider risk type and level as defined in the risk appetite statement . An example of this is when deciding whether or not to proceed with a project and the secondary risks that may be introduced through implementation of related mitigation measures .
Ensuring that risk-related decisions are made consistently at all levels of the organization , including when and how to escalate risks . Making it possible for early detection of risk that exceeds permitted levels and prompting quick actions - meaning the ability to take prompt corrective action . Communicating the organization ’ s targeted risk level to the whole organization ( as well as key external stakeholders ) thus allowing for timely decision making .
Protecting the organization - by enhancing the organization ’ s ability to lower the severity of critical risks to an acceptable level or to prevent them from crystallizing . Another benefit is the enhancement of total organizational performance through risk management that is acceptable and within risk appetite .
In listing these benefits it ’ s important to mention that the gains come about because of organizational risk appetite guidelines that move from the conceptualization point to articulation in a document that we call Risk Appetite Statement - this is also known as an “ Opportunity Statement ”. These benefits do not come easily as there are certain key prerequisites that need to be in place for your organisation to realize the mentioned benefits .
If the potential benefits of Risk Appetite are to be fulfilled , the following prerequisites must be met :
The risk appetite of the organization must be supported by the governing body / board and top management . There must be clarity on who will ultimately be accountable for risk appetite and how senior management ( and eventually the board ) shall be involved in reviewing the organization ’ s risk maturity and risk appetite . It must be crystal clear how Risk Appetite will be communicated to business units .
Leaders must ensure the environment remains flexible and adaptable enough to address changing operational and strategic conditions ( both internal and external ) while informing decision making . The questions that leaders must ask at this point are “ how will risk appetite be tailored to the organization ? How will Risk Appetite allow for divergent perspectives at the strategic , tactical , and operational levels ?
There should be well-defined and explicit strategic objectives , with senior management and staff being sufficiently informed of current risks , risk management concepts , and the organization ’ s processes and systems . Defining the levels and type of risk an organization is willing to assume in pursuit of its strategic objectives should be clear and measurable . With this in mind , leaders must remember to keep the risk appetite forward-looking and in line with the organization ’ s strategic objectives . Similarly , the organization should determine how risk trade-offs influence the levels of various risks that are connected to various strategic goals .
The organization ’ s risk appetite should be integrated and aligned with the wider control framework , Enterprise Risk Management ( ERM ) framework , decision making processes and organizational culture . At this time , critical questions come to mind fast . How will risk appetite influence decision-making , enable measurable actions , and support monitoring ? How will risk appetite be established in the context of the organization ’ s control framework and culture ?
Leaders must ensure there exists fundamental risk management governance and accountability mechanisms with a procedure and repository for collecting and assessing risks and risk information across the organization allowing for risk trade-off decisions to be made . Additionally , the organization must have the capacity to report on actual risk levels in a timely manner using measurable indicators and to respond quickly and effectively to reported risk information . It should be clear how Risk Appetite shall be communicated transparently within the organization , and what key information will be shared with relevant stakeholders ( both internal and external , as appropriate ). Another important consideration is having clarity on the processes the business units are to follow for communicating when Risk Appetite is nearing a breach or is breached and when requesting for technical assistance to respond .
If an organization tries to implement Risk Appetite without these requirements in place , there ’ s a chance it won ’ t reap the benefits while still incurring costs , which could lead to more pushback from process owners .
What must the Risk Appetite Statement communicate ?
A well-developed Risk Appetite Statement should in essence communicate the organization ’ s : Corporate Values : these values should speak to risks the organization is unwilling to take and risks that should be avoided ; Strategy : outlined here are risks that are inherent to the corporate strategy ; Stakeholders : here the statement details the amount and type of risk the organization can take on with regards to stakeholders ; Capacity : a very critical area detailing the amount of risk the organization can absorb .
In order to precisely determine what to express in these four areas , leadership must ensure the following areas are also accurately defined : Risk profile : the top risks of the organization and the controls to mitigate those risks ; Risk capacity : amount of risk the organization can absorb ; Qualitative risk assessment : the ranking and categorization of the organization ’ s risk , taking into account controls and risk / reward relationships ; Quantitative risk analysis : the types of analysis that establish boundaries within which management can operate .
After analysis of the above , management should be able to articulate the organization ’ s Risk Appetite in writing . The statement should guide organizational behavior and strategic decision-making ; it should begin at the top of the organization and work its way down to all levels . There should be additional granular tolerance thresholds in addition to the broad Risk Appetite declaration . These risk tolerance boundaries help lower-level managers seize opportunities and avoid unnecessary risks . Finally , proper training should be provided so that decision-makers have a thorough understanding of the organization ’ s risk appetite .
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