Establishing Risk Appetite is Key to Effective Risk Management

The mission of an enterprise risk management program is to respond to and monitor risks to the enterprise’s operations and objectives. In order to properly respond to and monitor risks, the enterprise must establish risk appetite thresholds. Well-established and well-communicated risk appetite thresholds will ensure that risks are mitigated consistently at all levels of the organization.

Often, the terms “risk appetite” and “risk tolerance” are used interchangeably. However, these terms, while closely related, are distinct:

• Risk Appetite – High-level statement(s) that determines the amount of risk an organization is willing to accept
  Example: Will not accept risks that could result in a data breach
• Risk Tolerance – Typically quantifiable, sets the boundaries that the organization is willing to stray from risk appetite
  Example: Will not accept risks that could result in a data breach of more than 1,000 customer records

In response to findings from a risk assessment, risk owners can make educated risk decisions, utilizing the enterprise’s risk appetite and tolerance as guardrails. Consider two risk assessment findings in the examples below:

1. One million unencrypted customer records are stored on the open network share drive
2. Hundreds of unencrypted marketing materials are stored in a SaaS storage provider

Since both scenarios include a potential risk of data breach, the risk owner will want to ensure that the risk response actions align with the organization’s goals and objectives. By considering the enterprise’s risk tolerance statement, “will not accept risks that could result in a data breach of more than 1,000 customer records,” only the first risk is not within the threshold. Therefore, the first risk should be mitigated until it is within the bounds of the organization’s risk tolerance level.

One of the key challenges is always enforcing and communicating risk appetite across the entire enterprise. First, management must develop risk appetite statements that are relevant to business processes and systems. This will allow business unit leaders to effectively execute and enforce risk appetite statements within risk management processes. Second, management should ensure that risk appetite strategy is consistently reflected in organizational communications, such as business goals, metrics reporting, etc. Business unit leaders will be more likely to implement risk mitigation activities into daily processes if they receive reliable and informative communication from leadership.

In conclusion, establishing enterprise risk appetite statements ensures that business unit leaders throughout the enterprise are operating against the same metrics and goals. Risk appetite and supporting risk tolerance statements should serve as guidelines for both strategic and tactical decision-making throughout the risk management lifecycle.