Risk Appetite
The Risk Appetite Adventure
(Published: May 5, 2023)
These are my personal thoughts and insights for an enjoyable and successful risk appetite adventure.
Start right.
Like any adventure it’s important to start out right by understanding why and where you want to go. Why is risk appetite important for you and the business? Where do you want to go with defining and establishing a risk appetite? If these are not clearly defined at the beginning, the journey will be bumpy and worse, you may never arrive at your intended destination. Your risk appetite statements will then only be for “window dressing” and end up gathering dust at the bottom of the drawer!
Know yourself and focus on what’s important.
This may seem a given, but to arrive at an effective and workable risk appetite, it is crucial that you must understand your business, the environment it is operating in and to focus on what really matters. For example, the risk impacts on the different risk consequence criteria in a financial institution may look very different from a healthcare facility. It is important to understand the consequences of action or non-action to address risks in the business as this enables focus and prioritisation of management and Board attention and resources.
Out goes the cookie cutter.
Based on the above, there is no cookie cutter solution when it comes to defining and crafting the risk appetite for a business. Googling may let you gather heaps of materials and templates. But you will still need to understand what you are designing and constructing. You will need to assemble the right parts and build something that really works and is suitable for the business it is operating under. My experience is that no risk appetite statement is the same between organisations even in the same industry.
Everyone has different appetites.
Everyone is different. A person’s view on risks is very much driven by different factors. These include age, values, culture, personal and work conditions, individual character, personality, upbringing, experiences, job positions and responsibilities. This cocktail of factors shapes how a person views the impacts and consequences of different risks. There is nothing wrong with people having different appetites. The key is to recognise these differences and to work alongside these conditions to arrive at a risk appetite for the business.
Granularity matters
Data that has a low level of granularity would have small number of individual pieces of information or is summarised, aggregated, and generalised. The granularity of data can affect how it is used and analysed and can impact the accuracy and usefulness of the results and the resulting actions. Some risk appetite statements suffer from a lack of granularity when they become generalised. For example, a statement like “we will continuously adopt effective actions to reduce variation in the delivery of service” does not say or provide adequate daily practical guidance. Immediate questions come to mind like, what is acceptable effective actions and reduction in variance mean and look like? Risk appetite statements need to be succinct yet contain enough details and granularity to be applied on a practical level. Risk impacts can be better understood and appreciated by using appropriate tolerance timeframes, amounts and ranges.
Enjoy the journey and bring everyone along.
Defining and arriving at the risk appetite for a business is a fun and enjoyable journey. My personal experience leading risk appetite adventures with management and Boards is that everyone learns more about the business and gains a better appreciation and understanding of risks from different perspectives, including what types of risks are important and their impacts on the business. It is an enjoyable, inclusive journey as everyone no matter their experience, background or position is brought along for the journey. There is no better satisfaction than seeing management and Board members learning and working together to reach a common goal.
The risk appetite adventure is truly enjoyable and memorable when done right.
Belt up for the ride.
Make sure you have a map.
And please get the help of a competent and experienced driver/guide!