RISK APPETITE.

RISK APPETITE.

An organization must consider its risk appetite at the same time it decides which goals or operational tactics to pursue. To determine risk appetite, management, with board review and concurrence, should take three steps:

1. Develop risk appetite

2. Communicate risk appetite

3. Monitor and update risk appetite

Develop Risk Appetite

Developing risk appetite does not mean the organization shun risk as part of its strategic initiatives. Quite the opposite. Just as organizations set different objectives, they will develop different risk appetites. There is no standard or universal risk appetite statement that applies to all organizations, nor is there a “right” risk appetite. Rather, management and the board must make choices in setting risk appetite, understanding the trade-offs involved in having higher or lower risk appetites

Communicate Risk Appetite

Several common approaches are used to communicate risk appetite. The first is to create an overall risk appetite statement that is broad enough yet descriptive enough for organizational units to manage their risks consistently within it. The second is to communicate risk appetite for each major class of organizational objectives. The third is to communicate risk appetite for different categories of risk.

As an organization decides on its objectives and its approach to achieving strategic goals, it should consider the risks involved, and its appetite for such risks, as a basis for making those important decisions. Those in governance roles should explicitly understand risk appetite.

Posted by Mkomweke Zubeda S.