Understanding risk appetite

Transcription

1 Understanding risk appetite How much risk to take? Presented by Dr David Hillson HonFAPM, PMI Fellow The Risk Doctor Risk Doctor & Partners Copyright , Risk Doctor & Partners, Slide 1 Acknowledgement The ideas and concepts in this presentation were developed jointly with Ruth Murray-Webster See also A Short Guide to Risk Appetite David Hillson & Ruth Murray-Webster [pub. Gower, 2012, ISBN ] Copyright , Risk Doctor & Partners, Slide 2 Page 1

2 Key question: How much risk? including: How much risk do we face? How much risk can we take? How much risk should we take? How much risk do we want to take? How much risk will we take? How much risk are we taking? Which one is risk appetite? [and what are the others?!] Copyright , Risk Doctor & Partners, Slide 3 Appetite: The physical analogy Appetite = desire to satisfy a need Food, drink, sex How hungry are you? How to express the answer? What are the units of measure? Need a proxy external measure Copyright , Risk Doctor & Partners, Slide 4 Page 2

3 Appetite: Key features Desire for something (e.g. food) Meets a need (conscious or unconscious) Internal, intangible, not measurable Appetite is not an amount of food Need external proxy to express or measure Amount of food Affects external behaviour How much to eat, when, what? Influenced by many factors Physical, mental, metabolic, environmental Copyright , Risk Doctor & Partners, Slide 5 RiskAppetite: Key features Desire for risk-taking something (e.g. food) Meets a need for (conscious risk-taking or unconscious) (conscious or unconscious) Internal, intangible, not measurable Appetite Risk appetite is not is an not amount an amount of food of risk Need external proxy to express or measure Amount of food risk [= risk thresholds] Affects external behaviour How Decision-making, much to eat, risk-taking, when, what? risk responses Influenced by many factors Physical, Individuals, mental, groups, metabolic, situation, environmental context Copyright , Risk Doctor & Partners, Slide 6 Page 3

4 Why does risk appetite matter? Risk standards (1) Compliance requirement ISO31000:2009, ISO Guide 73:2009, ISO31010:2009 BS31100:2011, OGC M_o_R (2010) Corporate governance regulators UK Financial Reporting Council European Commission NACD, COSO, King III, ASX Risk professional bodies IRM, AIRMIC, IOR, ALARM, BCI, GARP, IIA Copyright , Risk Doctor & Partners, Slide 7 Why does risk appetite matter? (2) Decision support Important for decision-makers to answer question: How much risk will we take? Should inform decisions on Corporate goals Investment decisions Business strategy Portfolio construction Project execution Technical solutions Operational efficiencies etc. Copyright , Risk Doctor & Partners, Slide 8 Page 4

5 What s the answer? For all these management questions risk appetite drives the answer Need to understand & express risk appetite What it is (and isn t) Note multiple levels of application Need to be consistent & aligned Copyright , Risk Doctor & Partners, Slide 9 But what is risk appetite? Hot topic but little consensus No single accepted definition Confusion & overlap with other terms: risk attitude, risk capacity, risk culture, risk exposure, risk perception, risk preference, risk profile, risk propensity, risk threshold, risk tolerance (and others) Comparing with physical analogy, risk appetite is: internal drive to take risk in a given situation Copyright , Risk Doctor & Partners, Slide 10 Page 5

6 Ins & outs of risk appetite Risk appetite is situational, depends on objectives Affected by the people involved: individual risk preferences group risk culture Expressed via risk thresholds = amount of risk Quantified upper and lower limits of acceptable uncertainty against each objective INDIVIDUAL PREFERENCES GROUP CULTURE APPETITE THRESHOLDS SITUATION OBJECTIVES Copyright , Risk Doctor & Partners, Slide 11 Potential problem PREFERENCES CULTURE APPETITE THRESHOLDS SITUATION OBJECTIVES Apart from situation, all inputs are intangible, internal, intrinsic Where can we exert influence or control? Risk appetite just is Resulting risk thresholds may be inappropriate Taking too much or too little risk Copyright , Risk Doctor & Partners, Slide 12 Page 6

7 Step 1: Check CAPACITY PREFERENCES CULTURE APPETITE check thresholds against capacity THRESHOLDS SITUATION OBJECTIVES Risk thresholds must be within capacity to take risk OK, but what if not? Need to modify risk thresholds How? Copyright , Risk Doctor & Partners, Slide 13 Step 2: Intervene Apply some intentionality, intelligence, choice Risk attitude: chosen response to risk influenced by perception Key characteristics of risk attitude Situational Chosen variable & manageable Individuals and groups Risk attitude spectrum Copyright , Risk Doctor & Partners, Slide 14 Page 7

8 The risk attitude spectrum RESPONSE TO + AVERSE TOLERANT SEEKING + RESPONSE TO All images from FaceTrace Copyright BrainJuicer 2006 Copyright , Risk Doctor & Partners, Slide 15 Ins & outs of risk attitude Risk attitude is affected by perception Perceived level of risk in situation Range of situational influences SITUATION OBJECTIVES INHERENT EXPOSURE PERCEPTION ATTITUDE Copyright , Risk Doctor & Partners, Slide 16 Page 8

9 Ins & outs of risk attitude Affects behaviour towards risk Actions to address risk exposure Choice of risk thresholds SITUATION OBJECTIVES INHERENT EXPOSURE THRESHOLDS PERCEPTION ATTITUDE ACTIONS check residual risk exposure against risk thresholds RESIDUAL EXPOSURE Copyright , Risk Doctor & Partners, Slide 17 Putting it all together Risk appetite is internal drive to take risk in a given situation, expressed via risk thresholds Drivers of risk appetite are all internal Unmanaged risk appetite may produce inappropriate risk thresholds Risk attitude is situational, based on perception Risk attitude is a choice Risk attitude offers a control loop Choose different risk attitude to result in changed risk thresholds Copyright , Risk Doctor & Partners, Slide 18 Page 9

10 The RARA Model Two key central factors Risk appetite internal drive to take risk in a given situation Risk attitude chosen response to risk, influenced by perception Both influence risk thresholds, different roles Risk appetite is driven & determined Risk attitude allows choice & change Setting right risk thresholds requires both The RARA Model Copyright , Risk Doctor & Partners, Slide 19 The RARA Model Combining risk appetite & risk attitude PEOPLE APPETITE CAPACITY check thresholds against capacity SITUATION OBJECTIVES INHERENT EXPOSURE THRESHOLDS PERCEPTION ATTITUDE ACTIONS check residual risk exposure against risk thresholds RESIDUAL EXPOSURE Copyright , Risk Doctor & Partners, Slide 20 Page 10

11 Set INITIAL THRESHOLDS against objectives with no external reference ( gut feel ) STEP 1: UNMANAGED Consider people aspects: individual risk preferences & group risk culture Modify risk thresholds to reflect APPETITE of people STEP 2: CONSTRAINED Are risk thresholds appropriate? Y Use them STEP 3: CHECK Choose different position towards risk N Modify risk thresholds to reflect chosen ATTITUDE STEP 4: INFORMED Copyright , Risk Doctor & Partners, Slide 21 So what?! Risk appetite matters Drives our answers to How much risk? Risk appetite is expressed via risk thresholds External measurable proxy for internal tendency Unmanaged risk appetite can cause problems Influenced by internal factors Manage by choosing appropriate risk attitude Maintain control by adjusting risk attitude as required Take the right risks safely success! Copyright , Risk Doctor & Partners, Slide 22 Page 11

12 For further information contact: David Hillson Risk Doctor & Partners A Short Guide to Risk Appetite David Hillson & Ruth Murray-Webster [pub. Gower, 2012, ISBN ] Copyright , Risk Doctor & Partners, Slide 23 Page 12

13 Risk Doctor & Partners tel. +44(0) Risk Doctor & Partners provides specialist risk management consultancy and training from The Risk Doctor and selected partners, who offer a high-quality professional service to clients across the globe. We combine leading-edge thinking with expert practical application, giving access to the latest developments in risk management best practice. Risk Doctor & Partners services are available worldwide through our network of partners, who include world-class experts in various risk specialisms. Full details of the business are on our website The website also offers a wide range of technical papers for free download, and allows you to raise specific problems for rapid diagnosis. Company Services The range of professional services offered by Risk Doctor & Partners include : Coaching and mentoring, providing personal input and support to key individuals or small teams, aiming to share and transfer expertise Organisational benchmarking, using proven maturity models to understand current risk management capability in terms of risk culture, processes, experience and application, then defining realistic and achievable improvement targets and action plans to enhance capability Process review, comparing your risk management approach against best practice and recommending practical improvements to meet the specific challenges faced by your business Risk review, assessing the risk exposure of your project, programme or business, identifying and prioritising threats and opportunities, and developing effective responses to optimise performance and achievement of objectives Risk training, offering a range of learning experiences designed to raise awareness, create understanding and develop skills, targeting senior management, programme/project managers, project teams and risk practitioners About David Hillson Dr David Hillson is The Risk Doctor. He is an international risk consultant, and Director of Risk Doctor & Partners. Many executives have benefited from his insights through personal coaching, and he has helped a wide range of organisations to manage their risk successfully at both strategic and tactical levels. David has developed a number of innovations in risk management, which have been widely adopted. He is best known for championing the inclusion of opportunity in the risk process. He has also developed a scalable project risk methodology (see and a practical approach to managing risk attitudes ( David s risk work has been recognised with several awards, including Risk Personality of the Year in He received the PMI Fellow Award, the PMI PM Excellence Award and the PMI Distinguished Contribution Award from the Project Management Institute (PMI). He is also an Honorary Fellow of the Association for Project Management (APM) and a Fellow of the Institute of Risk Management (IRM). David was elected a Fellow of the Royal Society of Arts (RSA) to contribute to its Risk Commission, and he is a Chartered Fellow with the Chartered Management Institute (CMI). Risk Doctor Network Risk Doctor & Partners maintains a global network of people who want to keep in touch with latest risk management thinking and practice. Network members receive free regular briefings on current risk management issues. To join the Risk Doctor Network, to newsubscriber@risk-doctor.com and give your name, position and address. CONTACT US TODAY Risk is everywhere and presents a range of threats and opportunities which need to be managed proactively if we are to minimise problems and maximise benefits. Risk Doctor & Partners offers high-value solutions for effective risk management contact us today at info@risk-doctor.com to find out how you can benefit, or visit for full details.