Risk Appetite & Tolerance

Risk Appetite & Tolerance

3 minute read

Reflections of a pragmatic practitioner.

If you find yourself regularly helping teams to understand and describe risk appetite and tolerance in their business you know you’re never far away from a discussion that mimics Abbott and Costello’s famous ‘Who’s on First’ skit.

 

So, why is it so and what can be done to avoid that tragi-comic outcome?

Here’s a couple of thoughts.

What is Risk Appetite and Tolerance?

Be wary of anyone who argues there is only one view – theirs!

The truth is there is no one definition. Different standard setting organisations can’t agree, nor can any number of organisations that claim ‘peak body’ status.

Different organisations and different industries such as financial services look at these concepts very differently.

There is no one size fits all.

So, what do you do?

Firstly, be clear on why you’re tackling this as an organisation?

Hopefully it’s because as leaders you see the value in a process that helps to establish acceptable boundaries for risk taking in your organisation. But, even if the true motivation is born of a regulatory requirement, or a Board Chair with an itch to scratch, the path to success should still be the same.

1. Pick your definitions – then stick to them!

Let ambiguity be liberating!

The risk profession can’t agree so there is no prescribed definition to be followed. That means, within reasonable parameters, you’re free to land the definitions that best suit your organisation’s context and risk profile.

The key of course is that once you’ve done that be clear and consistent.

2. Communicate, communicate, communicate!

Any way you look at it, setting risk appetite and tolerance is fraught with subjectivity. Being prepared to bring people along, respect and respond to alternative views – whilst sticking to the definitions you have agreed – to achieve an agreed outcome is tough and time consuming – but worth it.

3. It’s like painting the Sydney Harbour Bridge!

Whether true or myth it is said that the hallmark of painting the bridge is that as soon as you reach one end it’s time to start again from the other end.

Changes to the external environment, changes to strategy, changes to business operations – these are constant so setting risk appetite and tolerance needs to be similarly dynamic.

So, if you’re interested in finding a pragmatic approach to setting risk appetite and tolerance in your business – let’s talk.

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