How do you Explain Risk Appetite?

I have had some very interesting conversations lately with Boards, Senior Managers and Risk Managers about risk appetite. Here are some insights:

Describing what we mean by risk appetite: Risk appetite is risk speak, however, it can be easily explained. With private sector firms I tend to describe using dollars as the example - "How much capital are you are willing to risk to try and make your forecast profit?" For not-for-profits I tend to bring it back to values - "What are you willing to do to achieve your mission? What would you not do?" And for the public sector I tend to use their number one objective in their corporate plan - "What are you willing to do to achieve your number one objective? Would a few minor adverse audit findings be OK? Would you be prepared to weather the storm if the media ran with a story about your methods?"

Why risk appetite is important in risk management: I find putting risk appetite in context with how it is used when assessing risk is quite important. I use the example of crossing the road. The objective is the same, however, there is always a reason (running late for a meeting, running late for a hot date, to save your 4 year-old child from being abducted by a stranger). Your willingness to get to the other side based on your assessment of difficulty level to cross the road is an expression of your risk appetite.

Risk Appetite Statements: While risk criteria in the form of likelihood and consequence tables and a risk matrix are valuable expressions of risk appetite, staff who were not involved in the discussions that formulated them are not aware of all of the thinking behind them. Providing additional commentary on each category of risk and on the core corporate objectives will communicate a much clearer message to staff as to what constitutes acceptable behaviour.

 

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Bryan Whitefield works with strategic leaders across all sectors to help organisations harness uncertainty – uncertainty is the strategic leader’s best friend. He is the author of DECIDE: How to Manage the Risk in Your Decision Making and Winning Conversations: How to turn red tape into blue ribbon. He is the designer of the Risk Culture: Build Your Tribe of Advocates Program for support functions and the Persuasive Adviser Program for internal advisers. Both can be booked individually or in-house.

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Comments

  • Sir,

    I am a risk consultant ,adviser to corporate clients of all background.Risk of facing uncertainty is probability (success versus failure and proportion % based) scheme.Most persons wants to be comfort zone,let the company go as it is,why invest in customer satisfaction,quality control,not bothered about pre and post reactive types like class b personalities/with low self esteem/inertia of slackness in thought of past behaviour pattern follow up and risk in normal curve 99% success and 1% failure only they will face and not 95% success and 5% failure.they are arm chair persons and not management by walking and assimilate the situation,taking decision applying the executive power. These behaviour need addressing very much.They will not take the driving seat in crisis and disaster management.

     

    This my humble submission.

     

    Raman

    Director (Risk and Project)

    Mark surveyors LLC

This reply was deleted.

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