Page 479 - COSO Guidance

Risk Appetite — Critical to Success | 7

Objective-focused approaches costs, patient’s seen, etc. Risk-focused statements often
Objective-focused approaches are closely tied to strategy complement the broader objectives-focused approach by
direction and how an organization intends to create value. articulating, more precisely, the expected outcome. The
They focus on entity-level goals and priorities. following are some examples:
The following are some examples of objective-focused • Automotive company—Maintain number of new vehicles
statements: requiring warranty repairs within a range of 1% to 2%
(risk: warranty costs).
• Energy company—We will pursue innovation to improve
customer service levels and efficiency in operations • Community bank—Maintain exposure to geographic
unless such innovation potentially elevates safety concentrations in any one region to 20% of the overall
concerns or creates significant disruption to business portfolio (risk: credit losses).
operations (objective: to innovate to create value).
• Hotel management company—Maintain staff turnover
• Industrial products company—We will seek ways to levels at less than 60% on an annualized basis
offer a diverse suite of products that offer equipment of (risk: losing staff).
superior quality and reliability. We understand that such
goals may come with a cost. We will prudently accept
risks that increase our costs when doing so is needed We suggest organizations adopt an
objective-focused approach, which
to maintain quality (objective: to produce superior and cascades into risk considerations,
reliable products). unless there are specific regulatory
or other business reasons limiting
In developing an objective view, organizations need this choice.
to understand the overall risk profile relative to those
objectives and, ultimately, the overall strategy.

Risk-focused approaches Linking the approaches
In contrast, most often risk-focused approaches can be An organization may choose to adopt an objective-focused
tied to the risk or categories of risk noted in a typical risk approach and cascade those objective-based appetite
register—risks of losing staff, loan concentrations, warranty statements into risk-focused statements, as the figure below
illustrates.
Figure 2. Linking the Approaches

Objective-focused Risk-focused

Product Development
Organic Natural Food Company Maintain 6 to 10 products in development at all times.
We understand that innovation Risk: Insufficient products under development to
requires a more moderate risk meet customer needs.
appeite and will manage the
risk of failing to develop new
tastes our customers desire with Consumer Acceptance
the opportunity to enhance our Maintain customer satisfaction rate within a range
product line. We will not make of 4.6 to 4.9 out of 5.
decisions that compromise our
brand by using products that are Risk: Customers become unsatisfied with snacks
not certified organic. We accept developed by the company.
that this decision may increase
our costs.

Objective Production Capacity
Develop new, innovative products Limit investment in new equipment required to bring
that interest and excite consumers. innovativive ideas into production to no more than
50% of our overall capital budget.
Risk: Innovation is not financially viable.

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