According to Effective Governance “Strategic Thinking focuses on finding and developing unique opportunities to create value by enabling provocative and creative dialogue among people who can affect an Organisation’s direction. It is input to Strategic Planning. Good Strategic Thinking uncovers potential opportunities for creating value and challenges assumptions about an organisation’s value proposition, so that when a strategic plan is created, it targets these opportunities ….. Finally, strategic thinking is having an awareness of what has not yet taken shape, having foresight.” Risk Informed Strategic Thinking – RiskForesights.COM It is within this context that Risk Appetite and Risk Tolerance Statements / Guidelines have been used for over centuries in Decision Making to ensure Strategic Alignment and support the achievement of an Organisation’s Strategic Objectives and Purpose. Risk Appetite and Risk Tolerance Statements / Guidelines are also used to assess the materiality of anticipated Risks.
Note: Formalation and Setting of Risk Appetite Statements and Risk Tolerance Statetements is not a One Size Fits All Approach but it is dependent on the Context and Types of Decisions they have to applied and should be forward looking.
RiskForesights.COM Integrated Risk Management Guide
Definition of Terms
Risk Appetite:
It is a term derived from the Ordinary Meaning of the Word Appetite and in Strategic Planning it can be used to guide and provide a Framework within which an Organisation’s Strategic and Operational Decisions can be made to ensure Strategic Alignment in pursuit of an Organisation’s Vision.
Risk Appetite Statements are used to define what Opportunities an Organisation can embrace and exploit vs. Opportunities that are Outside an Organisation’s Strategy that an Organisation is not prepared to pursue.
Appetite Ordinary Meaning according to Oxford Dictionary: (1) “a natural desire to satisfy bodily need, especially for food e.g. he has a healthy appetite” (2) a strong desire or liking of something e.g. “her appetite for life”
Risk Tolerance
It is a term derived from the Ordinary Meaning of the Word Tolerance and in Strategic Management Practice it can be used to guide and provide a Framework within which an Organisation’s Strategic and Operational Decisions can be made to ensure Strategic Alignment in pursuit of an Organisation’s Vision and Strategic Objectives.
Risk Tolerance Statements are used to define what Threats and/or Pain an Organisation can Endure vs. Threats and/or Pain it can not ensure in pursuit of an Organisation’s Vision.
Tolerance Ordinary Meaning according to Oxford Dictionary: (1) “the ability or willingness to tolerate the existence of opinions or behaviour that one dislikes or disagrees with” e.g. “the tolerance for corruption” (2) “the capacity to endure continued subjection to something such as a drug or environmental conditions without adverse reaction” e.g. “the desert camel shows the greatest tolerance to dehydration”
It is within this context how to use Risk Appetite and Risk Tolerance Statements to Inform Decision Making in Strategic Planning will be explained using RiskForesights.COM Integrated Risk Management Guidelines.
Where Are We Now vs. Where We Want To be – Strategic Baseline Assessment
Strategy Review
“from a risk perspective review and benchmark your risk management practices vs. risk management leading practices – e.g. to what extent are the Organisation’s decision making and planning processes informed by risk insights and foresights” How Mature Are Your Risk Management Practices?
Where Could We Go – Formulating Strategic Options
Scenario Planning
Some Risk Appetite and Risk Tolerance Considerations to inform your Decision Making to consider are:
“For Each Strategic Option / Scenario use Risk Appetite and Tolerance Statements to assess whether to Go There or Not To Go There (Go or No Go Decisions)
Expanding To New Markets – There is an envisaged Opportunity to Expand Business Operations to Iran or Israel to tap on their Drone Technology Expertise, but the Organisation’s Risk Appetite Statement says – we will not invest or have business associations with oppressive country regimes (Iran and Israel are on that list). What Decision as the CEO before presenting your Strategy to the Board for Approval will you Make?
Introducing New Products – “You are working for a bank that says we do not have an Appetite for Fraud but due to the nature of our business we can tolerate Fraud Losses that are less that 0.001% of our ABITDA. Faced with a Scenario to introduce a Product to the market that will expose the Bank to Fraud Exposure above 0.001% of EBITDA what Decision will you make?”
Where Do We Want To Go – Option Selection
Strategic Objectives and Key Focus Areas
In deciding an Organisation’s Business Value Proposition, which Strategic Objectives to pursue and/or Focus Areas to focus on, an Organisation should partly be guided by its Risk Appetite and Risk Tolerance Statements / Guidelines to make decisions as illustrated on the examples below.
Anticipated Opportunities – Pursuing Business Interests in Israel (a country outside our Investment Appetite) vs in Rwanda (a Country within our Investment Appetite) in the next 3 – 5 Years.
Anticipated Threats – Investing in a War Torn Country Like Syria in the next 3 – 5 Years vs not Investing at all, in deciding on an Organisation’s Expansion Objectives and Focus Areas.
Risk Materiality Assessments should be guided by an Organisation’s Risk Appetite and Risk Tolerance Statements / Guidelines.
What will help us Get There – Resources Mobilisation
What Strategic Projects and Initiatives will be Implemented that will drive the Achievemeent of the Vision and selected Strategic Objectives?
At a minimum Return on Investment Parameters and Guidelines should used to decide which projects and initiatives will be implemented
Budget Allocations are also used to provide guidelines and as well as Debt – Equity Ratio Funding Parameters on which projects will be implemented.
Strategy Blueprint
- Define what new game you will be playing
- How will you Optimise and Exploit Risks
- What are the Risk Appetite & Tolerance Levels
What Do We Do Now – Implementation
Implementation
- Set Annual Performance Plans
- Review Strategy (include risks) Implementation and take correction Action
- Embed Risk Reporting into Strategy Review Reports
- Continuously determine if Decision Making is guided by an Organisation’s Risk Appetite Statements / Guidelines and Risk Tolerance Statements / Guidelines
- Anticipated Risks Materiality should be continuoulsy assessed against an Organisations Risk Appetite and Risk Tolerance Guidelines
Conclusion
Risk Appetite and Risk Tolerance Statements are widely misunderstood by many Risk Professionals and Consultants,t however if properly understood and applied they enhance an Organisation’s Decision Making Capabilities and Strategic Management Practices.
According to J. P Scoblic (2020) – Learning from the Future “In times of great uncertainty, it’s difficult to formulate strategies. Leaders can’t draw on experience to address developments no one has ever seen before. Yet the decisions they make now could have ramifications for decades” He further observed that “The practice of Strategic Foresights offers a solution. It’s aim is not to predict the future but to help organisations envision multiple futures in ways that enable them to sense and adapt to change. (…….). To use it well, organisations must imagine a variety of futures, identify strategies that are needed to to address them, and begin implementing those strategies now.”
