Page 488 - COSO Guidance

16 | Risk Appetite — Critical to Success

Validating appetite It’s also worth looking at emerging trends and considering
There may be a sense that these discussions of business whether appetite is sufficiently accommodating to them.
modeling or other approaches will produce a complete Taking a “what if” approach to assumptions about the
view of appetite. Often, however, that view is based on what future may reveal internal biases that emerged during the
people believe the organizations should, or will, act on when development of appetite. For example:
considering risk in decision-making.
• What if key talent needed to sustain growth is not
One insightful approach to validating appetite is to apply the available or not engaged?
statements to a series of past decisions—in essence, back-
testing the statements or boundaries in place. Organizations • What if the actual rate of innovative ideas pursued
may also choose to back-test assumptions, such as those exceeds our expectations?
on how the business environment informs performance.
This approach may reveal instances where decisions were • What if new business disruptors enter the market sooner
made outside the intended guidance. There may have been than expected?
certain board or management judgments that considered
the strategic opportunities available and led to a conscious Each of these approaches may instill in management the
decision to shift operations either above or below its normal need to refine appetite to provide added insight for
appetite. In addition, those making the decisions may have decision-making.
been displaying a form of bias if there were cultural factors
that influenced those decisions.
We suggest organizations develop a
The boundaries set can also be compared to historical plan to validate risk appetite, using the
performance to understand the guidance offered in these approaches developed within
your organization.
measures. Some organizations review measures from peer
companies and industries to see if they have adopted an
appetite that varies greatly from others. Some variation in
appetite is typical as companies have different missions
and visions and may have adopted a strategy that requires
a higher or lower appetite to remain resilient to
those changes.

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