At its core, risk appetite is critical to organizational success. Articulating risk appetite for your organization will provide board members and senior management with important
insight. We hope to improve that understanding and promote risk appetite as an integral part of decision-making.
The COSO Enterprise Risk Management—Integrating with Strategy and Performance defines risk appetite as:
The types and amount of risk, on a broad level, an organization is willing to accept in pursuit of value.
Inherent in this definition are several key points. Risk appetite:
- Is intentionally broad to apply across an organization, recognizing that it may differ within various parts of the organization while remaining relevant in changing business conditions.
- Focuses on risk that needs to be taken to pursue strategies that enhance long-term success.
- Recognizes that risk is more than individual decisions.
- Links to value—it is tied to the choices the organization makes on how it creates and preserves value. This thought paper is intended to help directors and executives answer the following question:
How will a better understanding and communication of risk appetite help our organization succeed?