14/09/11

By Tom Bovingdon

A successful risk appetite strategy should create tension in the boardroom, according to a new whitepaper from the Institute of Risk Management (IRM).

The Risk appetite and tolerance whitepaper, launched this evening (14 September) at the BPP Business School in the City of London, called for risk appetite to go beyond a “mere tick-box activity” in order to influence board level decisions.

Put together by an IRM working group led by Richard Anderson, deputy chairman of the institute and managing director of Crowe Horwarth Risk Consulting, the whitepaper looked at organisations’ risk appetites in relation to the UK Corporate Governance Code, which states that “the board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its objectives”.

Anderson said: “This is about helping boards to steer their organisations in achieving their objectives, as well as complying with corporate governance requirements. In the corporate world this will result in more sustainable, long term value creation and in the public sector or not-for-profit world, it will result in better social outcomes."

According to the whitepaper, there are five tests that directors should apply to review their organisation’s risk appetite framework. They are:

• are both managers and executives clear that risk appetite is not constant?
• are risk decisions made with full consideration of reward?
• do executives understand their aggregated and interlinked level or risk so they can determine whether it is acceptable?
• do the board and executive leadership understand the aggregated and interlinked level of risk for the whole organisation?
• do the managers making decisions understand the degree to which they are permitted to expose the organisation to the consequences of an event or situation?

Supported by the Chartered Institute of Internal Auditors (IIA), the Chartered Institute of Management Accountants, the Institute of Chartered Secretaries and Administrators, The Chartered Institute of Public Finance and Accountancy, and public risk management association Alarm, the whitepaper warned that risk appetite is not a “one-size-fits-all approach” and needs to change over time.

Neil Mockett, CTO at Charterhouse Risk Management, said the paper “sends out a clear statement that the principle of risk appetite emanating from the board is the only effective way to initiate an ERM implementation”.

Jackie Cain, policy director of the IAA, said: “Anything that stimulates debate on the practical challenges of risk management is to be welcomed”.

The IRM paper Risk Appetite and Tolerance is available for free download at
http://www.theirm.org/publications/risk_appetite.html

Other stories you may find of interest:

Solvency II ‘boom’ for risk professionals
The fast-approaching Solvency II regime is driving demand for risk professionals in the insurance industry, according to a new survey.

Risk Management Awards 2011 - winners revealed
The best international risk management talent was honoured last night (16 November) as the winners of the Risk Management Awards 2011 were announced at the Lancaster Hotel in London.

Executives ‘still unconvinced by risk management’
Many senior executives at UK and Irish companies do not believe that risk management shielded them from the worst effects of the recession, a Grant Thornton survey based on a study of 465 British and Irish senior executives suggests.