A "snapshot" of talk by James C. Allison, Manager, Global Risk, ConocoPhillips, on RISK APPETITE
Ensuring Risk Appetite Is Properly Articulated, Embedded, Understood & Respected
Throughout The Organization & Is Fully Integrated Into Strategic Planning &
Decision Making:
Working Definitions
• Risk Appetite:
– A strategic statement describing what risks will be
intentionally borne, for what purpose, in what
amounts, subject to what controls.
• Risk Capacity:
– An analytic conclusion of the amount of risk that can
be realized before financial distress is triggered.
• Risk Management:
– The collection of business processes designed to
assure that Risk Appetite is constrained to be less
than Risk Capacity with some targeted probability.
Working Definitions
• Risk Appetite:
– A strategic statement describing what risks will be
intentionally borne, for what purpose, in what
amounts, subject to what controls.
• Risk Capacity:
– An analytic conclusion of the amount of risk that can
be realized before financial distress is triggered.
• Risk Management:
– The collection of business processes designed to
assure that Risk Appetite is constrained to be less
than Risk Capacity with some targeted probability.
Risk Capacity:
Theoretical Approach
• Identify how financial distress will manifest itself: Which
variables, at what levels?
• Measure the effect of risk realizations on these variables,
after reflecting natural offsets (e.g., if prices drop, cut
capital spending).
• Be sure to include the effect of exogenous events, e.g., a
banking crisis that otherwise doesn’t affect you but that
causes a necessary line of credit to fail.
• Estimate the cumulative distribution of the critical
variables.
An analytic conclusion of the amount of risk that can be realized
before financial distress is triggered.
What portion of this is feasible? What else must we do?
Risk Adaptation
• Manage the crisis
• Adapt to the disruptive event
• The work in complex systems analysis provides some
hints at helpful elements:
– “Sensing the environment” A good Enterprise Risk process
should provide a comprehensive picture of the risks facing the
enterprise.
– “Self organizing with simple rules” Organizations that have a
clear, shared vision and sense of mission, coupled with authority
and accountability delegated as close to the work as possible,
seem to be better positioned for disruptive events.
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