Operationalised Risk Appetite!

I’m recently often struck with the emerging clarity as to what a good Risk Appetite Framework looks like. Language is becoming clearer as practices improve over time. In terms of what good looks like I like:

1. The Financial Stability Board Risk Appetite Framework (http://www.fsb.org/wp-content/uploads/r_131118.pdf)
2. The European Central Bank’s perspective of … ‘’Children sometimes eat too much. Their eyes can be bigger than their stomachs. The result can be quite unpleasant. For banks, it’s much the same. They sometimes take on more risk than they can stomach. The results, however, can be worse than just a bellyache. Banks that take on too much risk can get into financial trouble and fail, and, in some cases, they might even damage other banks and the economy.’’ https://tinyurl.com/y7tfmecx, and
3. EY Global’s Risk appetite: The strategic balancing act https://tinyurl.com/yazwc7os ‘’Best-of-class companies do not discuss and design their risk management as an isolated add-on process, but as an integral part of their strategy design and execution. New strategic initiatives may open enticing opportunities, but the expected rewards have to be balanced against the related risks.’’

Clearly, ‘The What is Risk Appetite’ has been worked out. I have two questions:

• Why are organizations still struggling to get from ‘’The What’’ to ‘’The How’’? and
• What does ‘The How’ look like?

I think that much of the answer lies in automation vis a vis automated (machine learning technologies etc.):

1. Dynamic communications, from board room to operational front line decision-makers, and
2. Decision supports,

To operationalise Risk Appetite one first needs to understand that Communications is the Mother of all Root Causes of Human Successes, and Failures.

This, in my humble opinion, is one of the most profound fundamental truths which cuts across all aspects of life.

It is inherent in both healthy and dysfunctional families, communities, businesses and teams of all types and sizes.

It starts with a clear statement of purpose/mission/vision (different organizations frame their fundamental truths differently), for example:

1. Those which are love centric as powerfully articulated by Bishop Michael Curry in his homily at Harry and Megan’s wedding,
2. Unilever: ‘’Adding vitality to life. Meeting everyday needs for nutrition, hygiene, and personal care. Helping people feel good, look good, and get more out of life’’
3. Hikma: ‘’A healthier world that enriches all our communities. Throughout our last 40 years, we’ve been guided by the simple belief that when world-class medicine is put within people’s reach, it has the ability to transform their lives and their communities’’

Once purpose is made clear, and people genuinely committed to its achievement, the next step is framing it through:

1. Policies vis a vis Talking the Talk, for example vows, risk appetite statements, monitoring and reporting policies, and
2. Practices vis a vis Walking the Talk, for example; operationalized corporate governance and risk appetite statements.

To ‘operationalise’ something means to build it into everyday ‘objective centric’ thinking, talking and decision making.

Operationalised risk appetite for example means building in “optionality” in day to day objective centric thinking, talking and decision making whilst striving to achieve more upside than down; with the caveat that all foreseeable downside scenarios are reasonably covered with sufficient reserves to continue with the mission, even if the worst happens.

Producing and refining risk appetite statements (talking the talk) is infinitely easier than operationalizing risk appetite (walking the talk). Why?

The conditions precedent to operationalized risk appetite include:

1. Commitment to the achievement of a clearly stated purpose,
2. Positive ‘no blame’ decision making cultures, where decision-makers are supported when acting on evidence that business assumptions etc. are not as sound as others thought,
3. Technology-enabled (machine learning etc.) ‘distributed decision making’ where strategic leadership(s), confidently oversee the sharing of mission-critical information, decision making, and adjustments as operational front line decision-makers accelerate plans that are working, and pausing/stopping plans which aren’t.

These points are wonderfully reinforced in a CEB (Now part of Gartner) blog 3 ways to ensure business decisions align with risk appetite (https://tinyurl.com/ybrto9yu).

I’d welcome your views, and challenges!

Peadar

Peadar Duffy is Founder Director of SOLUXR www.soluxr.com (An Irish and Latin blended word meaning ‘to illuminate’) which provides expert automation and augmentation solutions for burning strategic issues facing complex networked/distributed organizations.

*This article was first published on May 26, 2018