Articulating Risk Appetite – Tips and Traps

James Lam, a pioneer in the field of enterprise risk management, has defined risk appetite as “the types and aggregate levels of risk an organization is willing to take on to actively pursue its strategic objectives”.

The value of articulating risk appetite is hotly debated among risk management experts and practitioners. Some say risk appetite is just a fad promoted by consultants. And, of the organizations that have embarked on a journey to clarify their risk appetite, many struggle to apply it to improve decision making. We believe its worth persisting on the journey because getting clarity on risk appetite is critical for aligning risk-taking with the organization’s core values.  

Executives often face a thorny challenge when weighing different decision alternatives. Comparing decision alternatives is complicated when each alternative has a different combination of risks and rewards. The situation gets even stickier when there are multiple and competing objectives to be satisfied by the decision. The decision-maker needs to unravel the trade-offs between different combinations of risks and rewards and also be transparent about why one alternative should be selected over all other alternatives considered. Articulating risk appetite is about getting clarity on how to apply an organization’s values in decision trade-offs in a manner that is effective and internally consistent.

If an organization hasn’t explicitly and clearly expressed its risk appetite, decision-makers are left to make those trade-offs based on what they infer the risk appetite is. That invariably leads to a situation where decision makers across an organization do not make risk/reward trade-offs in a consistent way. As a result, decisions don’t align as well with strategy as they could. That impairs both effectiveness and efficiency of decisions and ultimately the value delivered.

In this workshop Diana Del Bel Belluz and Craig Mitchell will take you through a practical approach to conduct a risk appetite workshop. We’ll illustrate the approach with real world case studies. For example, we’ll share how one company found articulating their risk appetite enabled the board and executive team to finally align on the firm’s growth strategy, something that had previously evaded them. The newfound clarity on risk appetite emboldened the company to quickly and confidently decide to pursue an acquisition opportunity that doubled the company’s market cap. We’ll also share tips from risk management executives who have led the process in their organization and have firsthand experience on how to avoid the common pitfalls along the way.