More and more companies now find it useful to set a formal “risk appetite” at their firms. This is the total amount of risk that the organization wants to assume in the pursuit of its organizational objectives, and is normally communicated by a statement approved by the board of directors.
This growing trend is reflected in recent data from CEB Risk Management members, with 44% of firms saying they formally articulated their risk thresholds in 2014, up from 30% in 2012.
Cooking up a risk appetite statement isn’t easy, however. It involves a number of stakeholders with different roles and responsibilities who must work together like the components of a favorite dish. If all ingredients are eaten separately, or a few are left out, there is less chance of success
For the sake of illustration we will imagine you’re making a dish of chicken parmesan — in which case, five main items each have a unique part to play on the final plate.
Primary ingredient – chicken: The enterprise risk management (ERM) team is like the chicken breast.
We’re not trying to provoke an existential crisis; the association with poultry is just a reminder of the central role ERM can (and should) play in the creation and implementation of risk appetite statements.
More than half of ERM teams (55%) are in fact taking the lead in conversations about risk appetite statements (see table 1).
Table 1: ERM team’s roles and responsibilities Source: CEB analysis
Secondary ingredient – parmesan cheese: Senior management is like the pivotal ingredient that gives this dish its name.
Just like the parmesan cheese and chicken breast melt together to create a delightful savory flavor, so too must senior management and ERM work together to reach a consensus on the content of these statement(s).
This is a perfect combination. Top leaders inform ERM about the risk-reward trade-offs they face every day, and ERM provides the proper enterprise-wide context for their consideration (see table 2).
Table 2: Senior managers’ roles and responsibilities Source: CEB analysis
Third ingredient – marinara sauce: The directors, who all have individual agendas, are best represented by marinara sauce. From the chopped garlic to the tomatoes and diced onion, each adds a special flavor to the mix. They must simmer together in tandem.
The members of the board must collaborate to assert the project’s importance; they are the ones who put teeth into risk appetite statements.
Chicken parmesan just isn’t the same without the marinara sauce to pull everything together. And ERM and senior management just aren’t as influential without support from the very top (see table 3).
Table 3: Board members’ roles and responsibilities Source: CEB analysis
Essential extras – bread crumbs, egg, and flour: The risk appetite leader is the bread crumb crust round the chicken.
The risk appetite leader is necessary at rollout, but lives on in a different form later on. Some prefer the risk appetite leader to have a light touch, while others prefer a more heavy-handed approach. Regardless of your preference, there are some things every risk appetite leader should do to cook your document to a crispy golden brown (see table 4).
Table 4: Risk appetite leader’s roles and responsibilities Source: CEB analysis
The finishing touches – salt, pepper, and oregano: These are business unit risk appetite champion(s). These essential spices aren’t always the first consideration when making chicken parmesan, but if they aren’t there, people will notice.
And business unit champions should not be an afterthought. You’ll need them to implement the use of your risk statements across the enterprise.
Their role may be less visible, but their mission – embedding the risk appetite process into day-to-day responsibilities – is critical. You need them to make sure that formal risk appetite statements achieve their desired goal.
Table 5: Business unit risk appetite champions’ roles and responsibilities Source: CEB analysis
If you combine all these ingredients together, you will have made good use of the firm’s appetite for risk (and a delicious dish of chicken parmesan).
For more on risk appetite, see this pdf document, and this web page that covers CEB Risk Management’s work.