#LOCKDOWN DAY 19: RISK MANAGEMENT NOTES ABMI ? Practice Guideline B3: Strategic Planning & Risk Appetite Integration

It’s been about five days since my last article. This well-deserved and highly significant break saw some observe the Easter holidays during tough lockdown conditions. This new week was also ushered in with an insightful presentation by Professor Salim Abdool Karim to the nation on the COVID-19 pandemic. I hope, as does most of the word that this pandemic will soon be a thing of the past.

THE SIGNIFICANCE OF RISK APPETITE IN STRATEGIC PLANNING:

At the foundation of risk appetite as a concept is its attachment inherently to any elected strategy and implications thereof. Risk appetite determines the extent and willingness of the organisation to pursue risk relative to its strategic objectives. When understood that way, it means that when an organisation takes less of a specific risk, they inherently lose potential advantages that may accrue from taking more of that risk and in some instances, those potential advantages can quickly dissipate into disadvantages. It is a commonly repeated phrase that “the higher the risk, the higher the reward”. This thinking, by implication means that if you take less risk, you may in actual fact be settling also for a commensurately lower rate of return.

We can learn from common stories or phrases in use out there. One of them says, “if you can’t stand the heat, stay out of the kitchen” and this captures the essence of ensuring that one considers the risk implications of their desired strategy. If you remember, in practice guideline B2 we discussed the aspect of integrating risk into the strategic planning process and one of the elements to be considered in a risk-return analysis was whether the strategic choice and its risks remains within or outside set risk appetite limits. If the elected strategy may result in breach of established risk-taking limits, the organisation should carefully consider whether continuing with that planned strategic intent is appropriate. Where risk is in excess of desired levels, the organisation may elect to pursue the same strategy without variation and subject to a revision and approval of new risk appetite levels or amend that strategy through partial change or total change whichever is seen to work better. In extreme situations where organisations are unable to select their areas of strategic preference, there needs to be demonstration in the strategy design that certain mitigating sub-strategies are in place to ensure that the strategy is delivered under conditions of robust risk mitigation.

RISK MATURITY ATTRIBUTE STATEMENT:

In formulating the strategic plan, risk appetite levels are considered in the selection and assessment of strategic choices. This is in terms of the competence standards of the attribute-based maturity index (ABMI Reference Library, 2018 edition, p9).

KEY SUB-ATTRIBUTES OF B3: RISK APPETITE INTEGRATION

Please note that in terms of the attribute-based maturity index there are 7 core components of risk management that comprise 26 primary attributes. These primary attributes are in turn split up into 93 sub-attributes. Below I analyse the sub-attributes of one of the 26 primary attributes. Keep coming back for more articles that unpack the other elements.

Some elements aren’t explained in full save for the focus item. All elements, however, are explained in detail in the ABMI Reference Library which can be obtained directly using a self-registered user profile on www.abmi.co.za

B:3-1 Consideration of risk appetite in planning

As part of the strategic planning process and the selection of strategic choice/s arising from a risk-return analysis considers whether risks presented by selecting an objective are in compliance with set risk appetite levels of the organisation.

The organisation should ensure that the integrity of the strategic plan as well as organisational performance are not impaired by acceptance of strategic decisions and plans that breach established risk appetite levels. Each strategic decision and objective of the organisation should be assessed to ensure that it does not breach established risk appetite levels of the organisation.

CONCLUSION:

For additional context, register a free user profile via www.abmi.co.za and download our free ABMI Reference Library Preview document or explore additional value-added offerings. Good luck and feel free to share your views. We are all here to learn and no idea is unwelcome!!!