play in guiding organizations as they seek to determine what the right risks and right level of risk taking are required to deliver the strategy . The board and leadership can clearly define the parameters within which the firm can carry out its strategy and manage risk by making a clear declaration of risk appetite . Additionally , it provides the framework for cascading the disciplines of strategy and risk management throughout the business , thereby influencing organizational culture .
Risk appetite shapes the organizational strategy , so it should always be considered first . Unfortunately , the majority of businesses with poor risk management maturity levels also lack a well-defined and widely understood risk appetite . Overall strategic goals will be compromised by senior and middle management ’ s divergent views on risk . Simply put , risk appetite determines the dos and don ’ ts in both short and long-term corporate operations .
Organizations need to clearly articulate the amount and type of risk they are willing to accept and are required to take in order to achieve their strategic objectives and , as a result , produce value for shareholders and other stakeholders . This will enable them to optimize and align their risk-taking to strategy . As a result , we should regard risk appetite as the adhesive that holds strategy and risk management together and permits the complete and effective integration of these two disciplines . Simply said , Industry captains and senior managers are managing their organizations less effectively and with inadequate information when strategy is implemented without paying close attention to risk , particularly risk appetite .
What is commonly referred to as appetite alignment , the process of regularly balancing current risk exposure with the established risk appetite , is a crucial part of “ working within appetite .”
Defining and aligning risk appetite boundaries for all the three components of strategic management ( formulation , implementation , evaluation and control ) and defining the overall risk appetite boundaries within which the organization will operate is critical . This alignment fosters a strong , common knowledge of the strategy , the strategic objectives , and the acceptable and necessary amount of risk-taking for managing strategy and , by extension , achieving organizational goals .
Way forward
The perception that risk management does not add value is still present in many organizations because the leaders of the strategy and business units think they have a thorough understanding of the internal and external environments . As a result , they do not see the benefits of risk management or the need for at least a separate risk assessment process to run alongside strategic management .
Increasing complexity brought on by industry changes , globalization , changes in technology , and changes in economic cycles can result in higher than ever risks associated with strategy . Management may guarantee that new strategic initiatives are linked to appropriate risk mitigation methods by creating a close relationship between an organization ’ s strategic management and risk management processes . The organization will also be better equipped to discover risk-related competitive advantages because of management ’ s ability to ensure that changes in the organization ’ s strategic direction are supported by timely assessments of new or emerging risks .
Reuben Kisigwa is a strategic consultant and a certified competency-based curriculum developer . You can engage him vide mail at : RKisigwa @ gmail . com .
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