Aligning An Organisation’s Risk Appetite and Exposure
Adopting an enterprise wide integrated approach to risk management has become all the rage in recent times. Not only does it allow companies to align its risk management activities with corporate performance to reduce any risk exposure, it also provides an ideal platform to review and exploit opportunities.
It is with this in mind, that it has quickly become a pre-requisite with many organisations.
This article discusses the importance of balancing an organisation's risk appetite with implementing successful strategies. It encourages senior management to ask themselves:
- What are the organisation's mission and objectives?
- How much risk they are willing to take to achieve them?
- How much exposure are we currently exposed to?
Aligning an organisation's business objectives with its risk appetite can be completed effectively by senior management following a series of steps in a logical, systematic manner. These steps are discussed in more detail below.
Outline the organisation's strategies. Senior management should focus on setting both short term and long term strategies that are congruent with key stakeholder requirements. Defining and communicating precise, strategic goals will help management understand what the organisation is trying to achieve. It also helps focus the team's activities as a goal driven culture becomes embedded within the organisation.
Define the organisation's risk appetite. Senior management should agree upon the levels of risk that are acceptable in their efforts to achieve their objectives.
Identify the organisation's key risks. A key risk to the organisation exists when there is a significant threat that it will fail to achieve its strategic business objectives. Just as important in recognising the presence of negative threats will be to identify opportunities to create additional value for the organisation's owners. This part of the process, when combined with identifying risk appetite, should give senior management a much better understanding of the risks they are willing to take.
Re-assess the organisations' risk appetite. Risk management is a "living" process. As such, senior management's risk appetite may change as they become more familiar with the correlation between risk and reward. Organisations should continue to reassess and modify their risk appetite as the market place changes and management gain a better understanding of risk.
Carry out regular risk assessments. As discussed, risk management is an iterative process. But at the core of it is senior management's ongoing evaluation of the significance (also called impact) and likelihood of each risk materialising.
Document and review any residual risk exposure. This part of the process identifies any significant exposure that the company is faced with. Normally documented via a grid (or matrix) it allows senior management to quickly identify those risks that, if left unmanaged, may hamper the organisation's ability to achieve its business objectives.
Gloss