How Risk Appetite Statements Lead To Good Decision Making
In the same way that Utilising Risk Management frameworks can empower business, alignment with a clearly defined risk appetite statements can provide a useful tool for enabling organisations to make good decisions, and encourage taking calculated risks. Traditionally, risk appetite statements have been seen as a mechanism to control or limit risk-taking. This viewpoint of seeing risk as a ‘wet blanket’ can manifest in an “us and them” attitude towards the risk function/team within your business. In order for organisations to grow and evolve, we need to shift this mindset.
How can we approach Risk Appetite Statements more positively?
We can think about risk appetite as defining our “sweet spot”, where organisational strategy resonates with operational effectiveness, and the range in which the organisation is aiming to operate. Sure, some organisations will be more risk-averse (and have a lower appetite for risk), but it’s important not to see this ‘negative’ or ‘limiting’. Obviously, the appetite for each organisation will vary based on market factors, strategic goals and (- if we’re really honest about it –) sometimes even internal personalities and politics.
It’s not what you say, it’s how you say it
The risk appetite and operating range then becomes a guiding tool to enable the organisation to make good decisions – to see the opportunities behind each scenario, and how this could help achieve strategic goals. It’s not about limiting your options, it’s about providing clear guidelines to make decisions that will benefit the organisation.
Accommodating ongoing change
Realistically, none of us operates in an environment with zero internal or external change. There will always be factors outside our control that will influence the environment that our organisation operates in. To factor this in, we need to manage the risk of this change, and how we’re going to operate when it inevitably happens. The concept of tolerance allows organisations the flexibility to operate for a brief period outside the limits of the “sweet spot” range – it’s not where we want to be, but we can tolerate being in this zone for a short period. You’d be looking to take action fairly quickly to get out of this area, and back into your defined operating range.
Regular review for ongoing success
With ongoing change, its important that we regularly review our risk appetite statements, to ensure this continues to help the organisation operate effectively and make good decisions to support our strategic objectives.
Can we use risk appetite statements to help the organisation make good decisions? Absolutely! Challenge accepted.
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