Risk appetite
I think that helping senior management and the board to define the risk appetite is one of the most challenging things that I have to do in my role.
Why?
Because, methodologically speaking, it is quite complex and, because what’s at stake is critical.
What do I mean by this last point?
Even if the risk appetite is not documented, every company and staff, every person even, makes decisions based on a risk appetite. It works as a guiding lighthouse.
For companies, it is even more complex and more important, because the risk appetite guides the senior management, CEO, CFO, etc… in the decisions they make, especially if they would make other decisions should they not have to follow the risk appetite of the shareholders.
Reward
Coming back to setting up risk appetite, this is one of those very challenging things that I like so much about my role.
What seemed to work very well for me, in my discussions with management and the board, was to bring up reward. And I have two examples:
💡 Low reward. When we discuss the appetite for fraud I ask: What is the reward for allowing some level of fraud? What do you win? In our type of activity, the reward is non-existent, so, in general, we come to the conclusion that the appetite is very low, and then we make decisions to reduce the risk of fraud. However, not in all companies accepting some level of fraud risk has no reward. I will give an example in another post.
💡 A high reward. In general, the launch of a new product can bring many risks with it, but the reward is priceless. A new or an improved product yields the business sustainable. So, usually, when we talk about the appetite for product proposition, I generally find that the appetite is (much) higher.
The discipline of risk management is like any other in managing a business. It helps, among other things, in DECISION MAKING.
Posted initially on LinkedIn: Claudia Craia
