Where are the profits and where are the risks? Are you taking risks in the wrong area? Or too little risk where the best opportunities lie? Has the board expressed how much risks is too much (or even too little)?
The foundation for deciding how large risks to take is the owner’s or shareholders’ expectation on growth and value creation (e.g. profits). No risk – no reward. But growth and product/service R&D requires capital. How stretched is the balance sheet? What can happen to our capital and cash flow position over the nest strategy planning period? How will our WACC move? If we have the capital, do we have the capacity or capability to act on different strategic choices? What are the restrictions and expectations of other stakeholders? Is our reputation at risk?
Understanding and articulating risk appetite is the basis not only for setting objectives and exploring strategic alternatives, but is also a guide for the whole organisation when making day to day decisions when weighting risks against rewards. A risk appetite statement and a risk policy sets the foundation for the whole ERM-process.
Risk appetite can’t be set in stone. It varies with the environment in which the organisation operates as with internal conditions. There are numerous factors that could lead to a drastic change in risk appetite.
Discussing and agreeing on a risk appetite statement is not an easy exercise for the board. The issue seems illusive and requires structured discussions, ending with practical evaluation. Experienced facilitation could be very helpful. At Allevo we have over the last five years studied the emerging topic of Risk Appetite and researched most white papers that have been released. We have developed our own process for agreeing on an organisations risk appetite.
We can support you with almost any aspect of risk management. Learn more.
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