Understanding the role of risk appetite in objective-setting and strategy formulation
Risk Appetite should ideally cover the desired organizational behaviours around risk taking in terms of both threats (‘ downside risk ’) and opportunities (‘ upside risk ’). Whilst in the absence of threats the upside appetite would sometimes be unlimited , it is the ability to balance the two that distinguishes the most successful companies .
Staying in business necessitates accepting a certain level of risk , which varies by industry and market conditions . In order to strengthen an organization ’ s competitive position in a fast-changing business environment , the organization must have a unique understanding of risks and the ability to manage them in a variety of situations .
An organization ’ s desire for growth and profitability is reflected in its objectives and in the strategies it decides to pursue . While the general perception of risk vs . reward is influenced by objectives , each strategic option will have a different risk profile , which will influence how an organization deals with uncertain future situations as it works to achieve its vision .
An organization should expect that the strategy it selects will be able to be carried out within the entity ’ s appetite ; that is , strategy must align with appetite . If the risk associated with a specific strategy is inconsistent with the entity ’ s appetite , it needs to be revised , or an alternative strategy needs to be selected , or the appetite itself needs to be revisited .
Overall , the development of Risk Appetite should align with the development of strategy and business plans , otherwise it may appear that views on strategy and Risk Appetite are conflicting .
Conclusion
Organizations take risks to succeed . However , the risks must be managed . Corporate governance , strategic planning , and decision-making all rely on determining and comprehending Risk Appetite . Determining appetite through a performance lens necessitates in-depth discussions with management and boards , as well as permeation of an organization ’ s culture to be effective . In this way , appetite reflects the mission and aligns with objectives , with the ultimate goal of adding value .
Monitoring supports appetite-based decision-making by ensuring that all segments of the company are on the same page . Making risk-aware judgments takes time and effort . Many leaders have witnessed firsthand how appetite can increase depth of consideration in decisionmaking . Given the resultant benefits , the effort is worthwhile .
Reuben Kisigwa is a strategic consultant and a certified competency-based curriculum developer . You can engage him vide mail at : RKisigwa @ gmail . com .