Operationalising The “A” Word

Appetite is the “A” word. For many it is a vexed issue (see last week’s blog on the benefits of a Risk Appetite Statement).

Operationalisation is the process of translating the board and executive’s appetite for doing business. As is the preference of some, it will be through financial delegations and rates of return on investments, as examples. While many things can be expressed in financial terms, not all can. Even though a project might meet a hurdle rate, it doesn’t mean the whole concept turns your customers away from you, resulting in financial loss that was never contemplated in appetite for risk discussion.

First you need to ensure your risk appetite is expressed based on the risk you are willing to take to achieve your objectives (I’ve said this for more than a decade and here is a COSO paper from 2020 saying the same). Saying you have a low appetite for reputation risk is not helpful. Who doesn’t want to protect their reputation with those they care about?

Assuming you have the right approach to your appetite statement, your first step for operationalising it is to ensure the organisation’s policies, frameworks, processes and systems are aligned. That is, the guidance they provide to staff will help them make decisions within appetite for risk and will guide them to escalate decisions when not. Yes, that includes financial delegations, investment criteria and a host of other finance related artefacts. It also includes everything from recruitment frameworks and performance reviews to stakeholder consultation and external communication frameworks if you have them. The aim is to allow decisions to be made quickly when within appetite, by providing staff with guidance from where they currently seek guidance. It is NOT about expansion of the risk framework!

Next week is stage two of operationalising your appetite for business.