Thursday, 9 April 2015

What is your organizations' risk appetite?

How calculated are risks?
Understanding the unknown :
Calculated risks are an oft repeated term that organizations resort to in day to day operations and business. But how calculated are these risks and what is the risk appetite of the organization?

Risk, by itself, in more ways than one is generally perceived with a negative connotation. In order to understand the gamut of risk from a business perspective it is essential to demystify "business risks" from those risks that a business exposes itself due to inaction or ignoring the obvious.

Risk appetite, when properly articulated, is both a measure of identifying and mitigating risks as well as enhancing the overall organization's performance and competencies.

In summation, risk appetite may be defined as extent or quantum of risk an organization is willing to undertake in pursuit of its strategic goals. There is no "one size - fits all" when it comes to risk appetite and as a rule is "tailored to suit".

Tenets of risk appetite :
The organization, in general, has to go through the following steps in sequence :
  1. Define Strategic goals/objectives - What will the organization go after - Revenue growth, Profitability, Return on Investment, Geographical expansion etc. This is most crucial step in determining the risk appetite of the organization.
  2. What is the ask?- How the organization needs to recalibrate and reposition itself from a risk taking ability standpoint by utilizing both its monetary and non-monetary resources for attaining the objectives. .
  3. Risk thresholds & tolerance - It is of prime importance that the organization evaluates and determines its risk threshold and tolerance. An ill designed threshold could result in more damage than benefit. Organizations have lost it all when they did not know when or where to stop.
  4. Effective communication - It is not enough if a risk appetite document is created and circulated with the Board. For it to be percolated and implemented in spirit, the do's and dont's, the thresholds and operational paradigm are clearly articulated across the length and breadth of the organization.
  5. Accountability - It is imperative that accountability is the cornerstone for risk taking and risk appetite of an organization as it is likely to expose the company to a path less traversed and hence the business should build appropriate accountability and responsibility metrics in defining its risk appetite.
  6. Measure - A sustained review process and mechanism for measurement needs to be instituted for measuring outcomes, results, hits/misses etc., so that appropriate course corrections can be made immediately.
In order to harness the benefits of calculated risk to propel the organization in the direction of greater glory, it is essential that corporate behavior and responsibility are consistently reinforced.

The corporate environment should foster and encourage the stakeholders to bet on the company to constantly review and increase its risk appetite for the greater good. Greater the risks better the rewards, so long as the risk appetite is clearly defined, deployed and implemented.

(This blog post is authored by Venkatesh Nagarajan, Co-founder at SansPareil -

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