RISK APPETITE IN BUSINESS MANAGEMENT
Risk appetite is a term commonly used in financial investment. It can be considered as the level of risk that an investor is willing to accept in pursuit of their financial benefit goals.
Financial investment always involves risks, and higher returns are often associated with greater risks, and vice versa. Therefore, investors often set goals for their business strategies, such as at what profit level to sell stocks, or at what loss level to sell stocks to cut losses.
In the past 10 years, management scholars have conducted numerous studies on risk appetite in business management. The concept applies to four main types of objectives: strategic risk appetite, operational risk appetite, compliance risk appetite, and financial risk appetite.
4 CONTENT FOR RISK APPETICS
Management researchers suggest that the more these four risk appetite objectives are internalized and share common ground within the organization, the better the business operations will be. To achieve this, managers must first understand the level of risk they can accept when considering tasks to accomplish their set goals.
Risk appetite is very broad, but risk tolerance is tactical and individual, each person has their own risk appetite. Therefore, managers need to implement the following three strategies in the enterprise:
1. Develop risk appetite
2. Communicate risk appetite
3. Monitor and supervise risk appetite
DEVELOPMENT OF RISK APPETITE:
Developing risk appetite involves managers establishing risk appetites for the objectives they aim to achieve. The phrase “developing risk appetite” implies researching, exploring, and logically envisioning potential risks in the work. Since there is no standard risk appetite, the following approaches are commonly used to develop risk appetite:
+ Gathering statistics based on practical experience
+ Creating an environment that encourages people to discuss risks
+ Assessing which risks are acceptable and which are not
COMMUNICATION OF RISK APPETITE:
Communicating risk appetite means informing all employees in the company about any potential changes in order to achieve the company’s objectives within the risk limits that the manager has established.
There are three approaches to communicating risk appetite:
+ First, make an overall risk appetite statement that is broad and descriptive enough for all units and departments to understand and manage risks consistently together.
+ Second, communicate the risk appetite for each of the company’s key objectives.
+ Third, communicate the risk appetite for each different type of risk.
MONITORING AND SUPERVISION OF RISK APPETITE:
After developing and communicating the risk appetite, business managers need to closely monitor and supervise the implementation process.
If the risk appetite has been approved but the implementation process does not bring the desired effect, the manager needs to make adjustments to align it with the business operations.
If the risk appetite has been approved and brought good results to the business, managers should also monitor closely and update regularly to ensure the business operate more effectively over time.
Theory shows that risk appetite depends on a business model of the enterprise; however, in reality, a bit of luck is also involved, and the most important factor is likely the human element. Leaders give the strategies to achieve goals based on their risk appetite, and those who implement them, after being informed of the risk appetite, need to actively collaborate with the leaders to find out the most optimal solutions.
