Risk Appetite and Risk Tolerance

The Institute of Risk Management released a consultation paper on Risk Appetite and Risk Tolerance this week. The paper can be found here. I know that there is a wide divergence of views on risk appetite, ranging from outright hostility to making risk management any more complicated (a subject to which I will return in due course) and firm support for the development of thinking in this area. Personally, I believe that it could be a turning point for making risk management an important tool in the management of our organisations.

The paper has been prompted in part by the Financial Reporting Council’s new UK Corporate Governance Code. I am also finding myself debating risk appetite with more and more clients, all of whom are looking for practical and meaningful ways of implementing risk appetite as the next step on their risk management development. In this paper, we have sought to pull together some of the existing thinking in this area, and we have also sought to inject some fresh ideas. Both the IRM and I would greatly welcome your feedback.

I am very conscious of the fact that the document is framed in the context of the UK Corporate Governance Code: it therefore could appear to be (a) UK-centric and (b) only relevant to listed companies. In fact I think it is entirely transferable anywhere in the world and is as relevant to small private organisations and those in government and the third sector as it is to large quoted companies. However, I acknowledge that it will take some interesting further development to stretch the ideas to fit all organisations. But if we keep in mind that the aim is to develop helpful guidance, rather than develop yet another tick-in-the-box approach to governance, we should be able to do that!

The link (http://www.theirm.org/publications/risk_appetite.html) will take you to the IRM website and on that webpage you will find two further links: one for the Executive Summary, and one for the full document (which also includes the Executive Summary). To badly misquote George Bernard Shaw: we could not write a short document until we had written a long one. I hope that this represents a helpful contribution to the debate about the board’s responsibilities for risk appetite and risk tolerance. I do not think that we have written the last word on the subject, but rather I hope that we have set the debate going.

The IRM is circulating this document widely and would very much welcome your views. Does it provide useful guidance to organisations in defining their risk appetite? Does the approach make sense? What is missing? What would you remove? We would very much like to hear.

Please feel free to circulate the document widely within your organisation and then to forward any comments to Carolyn Williams, Head of Thought Leadership at IRM on carolyn.williams@theirm.org by Tuesday 31 May 2011. Needless to say, I am also interested in hearing your thoughts! Personally I am particularly interested in hearing about your experiences with risk appetite and understanding how you have overcome some of the interesting challenges it poses!

We are aiming to publish a final version of the document later in the Summer, taking account of comments received.