Unfortunately, I am still often talking to executives or board members who are skeptical about the value of documenting their risk appetite. I point out to them that in the absence of a properly thought through and compiled risk appetite statement, all you have is an implied level of suitable risk taking. And that employees will have different interpretations of what is implied.
To make my point, I often ask them to discuss the implied level of risk our society has chosen in areas like healthcare. Take ambulance services for example. We all would love an ambulance waiting at the end of the street, just in case, right? But as a society we have settled for less.
Has anyone written down our society’s appetite for risk? Should we? Would we? How might we word such a statement, for it not to cause concern for the public?
This is a vexing question for politicians. Similarly for some organisations. Management and/or the board either choose not to document their implied risk appetite, or write down what they believe is palatable, rather than state the truth. What they end up with is a risk appetite statement of convenience.
This is a mistake. Because a strong AND operationalised risk appetite statement means faster and better decision making. It provides more decision makers with more clarity about the boundaries within which they can safely operate.
Like much guidance to staff, how the guidance on risk appetite manifests in day-to-day decision making does not happen by simply publishing the guidance. It needs to be operationalised, that is, embedded into the DNA of the organisation.
For more on risk appetite, here is a chapter from my book Risky Business: How Successful Organisations Embrace Uncertainty.
Next week’s blog will be on operationalising your risk appetite statement.