Page 491 - COSO Guidance

Risk Appetite — Critical to Success | 19

USING RISK APPETITE TO ENHANCE PERFORMANCE

Appetite can be viewed through both a risk lens and a Once strategy and objectives are set, the focus shifts to
performance lens. A performance lens asks basic questions execution. Here, other levels of management and those in
such as, “How much risk am I willing to take to achieve an day-to-day execution roles are also engaged. Boundaries
objective?” If it is too much, then a different approach is are set for acceptable variation in performance using
needed. The performance lens can help management and measures developed for monitoring performance. We depict
the board identify whether the organization is not taking this variation and monitoring as risk tolerance.
enough risk to achieve desired objectives.
Business operations may also develop specific indicators
Boards and management will need to strike a balance to alert management when the level of acceptable risks is
between risk and intended performance. For instance, exceeded. When this happens, it should trigger discussion
consider two companies faced with a changing business within the organization.
environment and the need to innovate. Company A believes
it can enhance its performance over its peers by being the The following diagram illustrates how performance links
first to successfully innovate. It may try new ideas often, appetite through tolerance, and indicators and triggers.
fail quickly, and repeat this approach to attain the “first
mover” advantage. It will require a higher appetite to be Figure 4. Appetite, tolerance,
successful as it consumes greater resources to attain and indicators and triggers
higher performance, but the potential large return is built
into this approach.

Conversely, Company B may prefer to be a later adopter, Appetite
setting a lower appetite for making decisions that consume • Applies through development of strategy and setting of objectives
resources while understanding that it will likely experience • Focuses on overall goals of the business (objective-focused)
lower performance in the market. On the other hand, • Aids in decision-making
there is a risk that Company B wants high performance, • Aids in evaluating overall entity performance
but is not willing to take the risks needed to attain desired • Ties strategy to measures
performance.

Tolerance
We suggest organizations develop • Applies in the execution of strategy
a philosophy on risk-taking and • Focuses on objectives and variation from plan (objective-focused)
performance; for example, whether you • Aids in decision-making and in evaluating performance relative
would accept higher risk for greater to objectives
performance or whether you would be • Ties objectives to measures
satisfied to accept lower performance
to limit risk.
Indicators and triggers
• Applies at any level of the business
Perspectives on performance • Considers specific risks (risk-focused)
Perspectives on attaining performance often vary within • Ties risks to measures (e.g., key indicators
an organization. For senior management, appetite focuses
on decisions that impact the strategies and objectives,
and overall performance goals. Ideally, there is a healthy
discussion and debate of how senior management and the
board envision decisions. Appetite at this level is often highly
aggregated and requires cascading levels of specificity
in the organization. Measures may also be put in place for
evaluating strategic priorities.

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