Professional Documents
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COSO - Apetite de Risco
COSO - Apetite de Risco
RISK APPETITE–
CRITICAL TO
SUCCESS
US I NG RI S K APPE T IT E TO T HRIVE
I N A C HAN GING WORLD
By
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to
specific situations should be determined through consultation with your professional adviser, and this paper should not be considered substitute
for the services of such advisors, nor should it be used as a basis for any decision or action that may affect your organization.
Authors
Acknowledgements
We would like to recognize the COSO Board: Paul J. Sobel (Chair), Richard F. Chambers (IIA), Bob Dohrer (AICPA),
Daniel C. Murdock (FEI), Douglas F. Prawitt (AAA), Jeffery C. Thompson (IMA) for their support of our work.
Preface
This project was commissioned by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), which is dedicated to providing thought leadership through the development of comprehensive
frameworks and guidance on enterprise risk management, internal control, and fraud deterrence designed to
improve organizational performance and governance and to reduce the extent of fraud in organizations.
COSO is a private-sector initiative jointly sponsored and funded by the following organizations:
RISK APPETITE–
CRITICAL TO
SUCCESS
US I NG RI S K APPE T IT E TO T HRIVE
I N A C HAN GING WORLD
Research Commissioned by
May 2020
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Risk Appetite — Critical to Success | iii
This document focuses on developing strategies and We believe that risk appetite is a critical link between
objectives and managing your organization for success, forming strategy and realizing performance. Our goal,
given the amount of risk you are willing to, and need to, consequently, is to help boards, executives, and managers
take for success. What is important here is to recognize improve their strategy setting and performance by showing
that the choice of strategies and objectives requires an them how they can more effectively apply risk appetite.
understanding of appetite for risk.
We’re confident that your appetite for risk will change
This is becoming more difficult as business landscapes over time as your strategies evolve. We encourage you to
are changing, and we see further challenges ahead. exercise your governance responsibilities and explore how
There are more voices impacting organizations in new your executive team is applying appetite to successfully
ways. Regulators are broadening their reach into data create and protect the value of your enterprise and
privacy and security, stakeholders are expecting companies enhance relationships with your stakeholders.
to share strong social purpose, and employees are shifting
the way they work. The risks associated with the changing
landscape differ based on strategic directions, and these
messages must be understood.
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iv | Risk Appetite — Critical to Success
COSO images are from COSO Enterprise Risk Management – Integrating with Strategy and Performance.
©2017, The Association of International Certified Professional Accountants on behalf of Committee of Sponsoring
Organizations of the Treadway Commission (COSO). COSO is a trademark of The Committee of Sponsoring Organizations
of the Treadway Commission.
All Rights Reserved. No part of this publication may be reproduced, redistributed, transmitted or displayed in any form or
by any means without written permission. For information regarding licensing and reprint permissions please contact the
American Institute of Certified Public Accountants, which handles licensing and permissions for COSO copyrighted materials.
Direct all inquiries to [email protected] or AICPA, Attn: Manager, Licensing & Rights, 220 Leigh Farm
Road, Durham, NC 27707 USA. Telephone inquiries may be directed to 888-777-7077.
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Risk Appetite — Critical to Success | v
Contents Page
Introduction 1
Final Thoughts 25
Appendix A:
Appetite and Enterprise Risk Management—Integrating
with Strategy and Performance 26
Appendix B:
Summary of Key Tasks 28
About COSO 30
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INTRODUCTION
At its core, risk appetite is critical to organizational success.
Articulating risk appetite for your organization will provide
Six Things to Remember
board members and senior management with important
insight. We hope to improve that understanding and promote
about Risk Appetitee
risk appetite as an integral part of decision-making. 1
RISK APPETITE IS NOT A SEPARATE FRAMEWORK
The COSO Enterprise Risk Management—Integrating with
It is integral to managing risk and integral to how
Strategy and Performance1 defines risk appetite as: organizations communicate and act. Managing risk
within appetite should not be treated as a
The types and amount of risk, on a broad level, an stand-alone activity, but as part of a portfolio
organization is willing to accept in pursuit of value. of risks to be articulated and addressed
through the organization.
Inherent in this definition are several key points. Risk
appetite: 2
RISK APPETITE AND RISK TOLERANCE DIFFER
• Is intentionally broad to apply across an organization, Various documents use the terms “risk appetite”
recognizing that it may differ within various parts of and “risk tolerance” in different ways, even
the organization while remaining relevant in changing interchangeably. This adds to the confusion in
business conditions. understanding their meaning. Though related,
they are different ideas.
• Focuses on risk that needs to be taken to pursue
strategies that enhance long-term success. 3
RISK APPETITE APPLIES TO MORE THAN
• Recognizes that risk is more than individual decisions. THE FINANCIAL SERVICES INDUSTRY
It is embodied in many financial service
• Links to value—it is tied to the choices the organization regulations, but can help all organizations to
makes on how it creates and preserves value. better understand and manage performance.
4
This thought paper is intended to help directors and
executives answer the following question: RISK APPETITE IS AT THE HEART
OF DECISION-MAKING
It is germane to decision-making. It is equally
How will a better understanding and communication of risk
important in determining that a decision
appetite help our organization succeed?
is necessary.
5
RISK APPETITE IS MUCH MORE THAN A METRIC
Often, it is treated as part of an approach where
each metric is assigned a target appetite. Although
such an approach is important, a better application
of risk appetite can lead an organization
to proactive, forward-looking opportunities
that tie appetite and strategy together
for future action.
6
RISK APPETITE HELPS INCREASE TRANSPARENCY
A well-formed and communicated risk appetite
provides awareness of the risks the organization
wishes to assume as well as those
it wishes to limit.
.........
1
Enterprise Risk Management-Integrating with Strategy and Performance, referred to in this paper as the Framework
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This paper is structured into the following sections: 5 Developing Risk Appetite to Support Strategy
and Objectives—Considers how an organization
1 Putting Risk Appetite into Context of the Business— develops risk appetite in the context of overall strategy,
Focuses on how organizations take on risk to innovate and how it incorporates risk appetite into objective-
and grow, and shows that appetite must be flexible setting. This section explores how organizations may
enough to adapt to changing conditions, helping use different approaches to build consensus and
an organization to remain relevant in an evolving encourage more consistent decision-making.
landscape.
6 Articulating and Communicating Risk Appetite
2 Linking Risk Appetite and Strategy—Emphasizes the to Support Decision-making—Considers how an
importance of understanding strategy and objectives organization can clearly and consistently articulate risk
and that taking risks requires a sense of the type and appetite to enhance decision-making, especially when
amount of risk acceptable and necessary in pursuing boards and management may not agree. Being able to
strategies and objectives. It explores a key difference clearly communicate appetite improves when there is
in adopting an objective-focused and a risk-focused a commonly applied structure, one that considers the
approach. choice of language, the intended level of precision, and
a focus on strategy and objectives rather than risks.
3 Overview of Inputs to and Application of Risk
Appetite— 7 Using Risk Appetite to Enhance Performance—
Provides an overview of how risk appetite is applied Considers how risk appetite is used to develop
in the context of strategy and objectives, developed tolerance, measures, and indicators, and to monitor
to support decision-making, and used to enhance performance in day-to-day practices.
performance. Each of these points is developed in the
following sections. 8 Supporting the Use of Appetite—Offers our views on
what organizations need to do to sustain risk appetite
4 Inputs to Risk Appetite—Considers the inputs that affect as part of an effective approach for enterprise risk
how risk appetite is applied. Among the more important management.
are the organization’s mission and vision, board and
management perspectives on appetite, the current 9 Final Thoughts—Wraps up our views that successful
strategy to pursue value, risk profile, and culture. organizations take risk to succeed.
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The Case for Risk Appetite How could a more comprehensive view of
In 2019, one of the largest medical equipment companies objectives and risk help?
failed to identify a major flaw in the software included in an There are many ways to look at the objectives and
updated product used to supplement a doctor’s analysis. associated risk the medical equipment company faced.
The equipment was designed to look like existing products, For example, there was the risk of financial penalties if the
and the software update was intended to allow users to medical equipment was not delivered on time, creating
acclimate quickly to the updated product. Unfortunately, uncertainty over the ability to meet financial performance
the updated software failed on a low percentage of cases, objectives. There was a tension between lowering the risk
with the possibility of causing harm—even loss of life. to product accuracy and improving financial rewards to
deliver on time and cement the future with a reputation for
Clinical testers assessing the updated product did not innovation and quality. At the same time, capabilities for
extensively test the software, even though a few failures innovation were waning. Further, stakeholders, engineers,
were noted while the product was in development. A fast doctors and patients may have a different view of what
rollout of the product was important to management and constitutes an acceptable risk.
the board to beat competitors to market with this
updated product. Would a better articulated risk appetite have helped this
medical company? The answer is an unequivocal yes.
What went wrong?
One might say that the company didn’t understand the type What can we learn from this?
of risks, or that the risk of failure was very low, or that time There are several important lessons to learn from our
in developing and using appetite in this context would not be medical equipment company.
beneficial. Others might say that having the board address
appetite would be too far removed from actual risks, and 1 It is easy to second guess a risk that occurred, even
that such discussions would be more “lipstick” one viewed as having a low likelihood. Sometimes risks
than “substance.” viewed as having a low likelihood do occur, but that may
not mean that the appetite was wrong or that decisions
Like many organizations do, this one missed the opportunity were flawed. What was important was that management
to discuss what and how much risk should not only needed to be diligent in assessing its ability to bring this
be accepted, but taken on, in pursuing its objective of updated product to market, with few consequences to
successfully bringing this updated product to market. the company’s reputation and brand.
In addition, there was a question about understanding how 2 A well-constructed narrative providing guidance for
the company’s risk appetite was changing. For example, the decision-making would have helped in this situation. It
company had been underperforming on the stock market. It would have provided clarity to those making decisions
had moved its headquarters to a new region of the country and confidence to those responsible for overseeing that
to an area with a strong financial center while leaving decisions reflect the board and management collective
its product development group in a part of the country views on risk. It would also provide transparency to
with strong engineering resources. The board decided to others wanting to better understand risks viewed as
enhance share value by a massive share buy-back program. within appetite.
This led to higher earnings per share, but it also moved the
company away from its engineering and innovation heritage. 3 Having a clear risk appetite would have provided a
Bottom line: the company’s risk appetite was changing, better understanding of whether the risks in bringing
in fact increasing, as the company sought to improve this product to market were within management’s
shareholder returns. comfort level, or whether, collectively, they exceed the
acceptable amount of risk.
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.........
2
Appendix A provides an expanded description of Enterprise Risk Management—Integrating with Strategy and Performance
and how appetite is depicted in the Framework.
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ng Implic
gn i atio
t al i ns
no f
ro
y
te g
m
the
tra
STRATEGY,
ib i li t y of s
st
rategy chosen
MISSION, VISION & BUSINESS ENHANCED
CORE VALUES OBJECTIVES & PERFORMANCE
Poss
PERFORMANCE
R
ce
is
kt an
os
tr ate f or m
gy & p er
The Framework sets out three important views on the • Risks to strategy and performance—There is always risk
relationship of enterprise risk management and strategy. in carrying out a strategy. The focus is on understanding
Each view is relevant to the discussion on risk appetite. the strategy set out and what the risks are to its relevance
and viability. Sometimes the amount of risks become
• Possibility of misaligned strategy and business important enough that an organization may wish to revisit
objectives—Both mission and vision provide a high-level its strategy and consider revising strategy to one with a
view of the acceptable types and amount of risk for the more suitable risk profile. New types of risks may also
entity. They help the organization to establish boundaries emerge as the organization executes its strategy. The risk
and focus on how decisions may affect strategy. An to carrying out strategy is best viewed through the lens
organization that understands its mission and vision can of objectives.
set strategies that will yield the desired portfolio view
of risk.
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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
We suggest organizations adopt an
risks that increase our costs when doing so is needed
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.
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.
Production Capacity
Objective
Limit investment in new equipment required to bring
Develop new, innovative products
innovativive ideas into production to no more than
that interest and excite consumers.
50% of our overall capital budget.
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I NP
UTS
TO
Reviews A
misssion
PP
Monitors performance
ET
and vision
and revises appetite
ITE
or strategy, as needed Considers board
and management
perspectives
on appetite
Changing context of
the business, culture
Incorporates current
strategic direction,
APPETITE risk profile,
and culture
Sets tolerance,
measures, indicators
and triggers
Identifies and evaluates
alternate strategies
Establishes
APP
Chooses
business objectives preferred strategy
LIC
ON to enhance value
AT
I
OF
APP
ETIT
E
To apply appetite as depicted above, an organization 3 Articulating and communicating appetite to support
must adopt a structure for developing, articulating, and decision-making—Considers how an organization can
communicating appetite. We set out four broad phases: develop a clear, consistent articulation of appetite that
enhances the ability to make decisions, especially when
1 Inputs to appetite—Considers those inputs that shape boards and management may have differing views.
how appetite is applied.
4 Using appetite to enhance performance—Considers
2 Developing appetite to support strategy and how appetite is used in developing tolerance, measures,
objectives—Considers how an organization develops indicators, and triggers, and in monitoring performance
appetite in the context of its overall strategy and and using these in day-to-day practices.
incorporates appetite into the setting of objectives.
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• Company B mission statement: Our goal is to deliver the The current strategic direction of the company offers
most innovative consumer products, with the best service valuable insight into risk and potential performance.
and value, within the communities we serve. We will That’s because strategy development contains a series of
expand only if we have a competitive advantage and the assumptions—what an organization holds to be true when
ability to be a leading provider in new communities. strategy is set. For example, an organization that has based
its strategy on the assumption that its industry will undergo
Both companies focus on products and services relevant to significant disruption from digital transformation may see the
generating value for their stakeholders. Company B provides need for a higher appetite to be innovative and thrive in such
added context by focusing on innovative products of higher an environment.
level and value. The emphasis on innovation, best value, etc.
signals that the company is willing to take on additional risk Further, many successful organizations focus on
to be aligned with the company’s strategy. differentiating capabilities that underpin strategy. For one
company, this may be customer service; for another, it
Making decisions about selecting strategy and developing may be technical skill and know-how that drive innovative
appetite is not a linear process with one decision always thinking. Knowing these capabilities is important. The
preceding the other. Nor is there a “right” appetite that organization that recognizes that such capabilities
applies to all organizations. Yet, there is an appetite suitable drive value would likely have a lower appetite for those
for each organization—one that reflects the unique mission, capabilities to erode.
vision, and core values.
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Board and management perspectives Ideally, the board and management will choose to use an
on appetite approach that incorporates appetite into decision-making
Boards and management have choices on how appetite with more detailed indicators that help monitor
will be applied within the organization. The organization will accepted risks.
need clear direction from the board and management on the
following:
We suggest organizations determine
• Whether the organization will adopt an approach that whether the organization will apply a
views appetite through an objective-focused lens or monitoring approach or one that integrates
a risk lens, or an approach that integrates these two decision-making and monitoring practices.3
approaches.
.........
3
Key tasks are summarized in Appendix B.
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Although such statements help an organization know what it a marketing incentive aimed at attracting new customers
should not do, they do not encourage decisions that reflect a through deep discounts creates a natural tension between
level of risk needed for the desired level of performance. these two aims.
Boards and management should reinforce that appetite is
not about making all decision-makers risk-averse, but about Natural tensions are healthy as they stimulate more robust
encouraging decisions that recognize that every successful business conversations. Analyzing statements and tensions
organization takes risks. This may be done by linking risk is a key component to reaching a meaningful articulation of
considerations with strategy setting or by incorporating both appetite for an organization.
lower and upper boundaries of risk into appetite statements.
EXAMPLE 2
EXAMPLE 1 Natural tension within a community bank
Minimal levels of risk needed by a A community bank has a goal to support the
professional services firm community in which it operates. It also has
a responsibility to its shareholders to remain
A regional professional services firm financially prudent in its decisions. With that in
believes that to successfully compete in its mind, among its appetite statements, it includes
market, it needs to grow at an annual rate the following:
of 10.5%. Historical annual growth within its
region has averaged 7% and is expected to • We encourage our staff to offer financial
continue at that rate for the next year. The products to our customers that serve their
company’s strategy is to focus on a core needs, but not where the credit risk exceeds
set of services within its region. A careful prudent levels.
review of the marketing plan and workforce • We seek to support our local community in
expansion plans estimated that these are becoming a vibrant and diverse place to live
expected to add 1% to 2% of growth over within a profitable business context.
industry norms, largely by taking market
from its competitors. This strategy is unlikely The bank has been asked to fund a loan to the
to attain the growth the partnership sees local food bank to help it upgrade its premises
as necessary to compete. The partners will to better serve the community. In considering
need to consider whether a strategy with a this request, management looked at the ability
higher risk profile—perhaps introducing new of the food bank to service the loan, specifically
services or expanding into new regions—is because it is highly dependent on donations,
needed to achieve a 10.5% growth rate. which can vary as social values and behaviors
change. Further, they questioned what secondary
source of security would exist if the food bank’s
revenue stream was not sufficient. Would the
community bank be prepared to foreclose on a
loan that caused people to go hungry? Yet, the
We suggest organizations
community bank was clearly prepared to take
determine whether to include both
risk to support the local community. Does the risk
lower and upper boundaries.
of financial loss from a poorly performing loan
outweigh the risk that comes from not supporting
the local community and developing a strong
business context in that sector? The natural
Natural tensions tension within these appetite statements helps
Natural tension refers to those situations where one appetite stimulate a deeper business conversation.
statement appears to support a decision while conflicting
with another statement. For instance, suppose a company
is willing to accept more risk to grow its customer base, but
wants to keep the same gross margin while maintaining the
current amount of risk to its profit margin. In this scenario, We suggest organizations consider
the extent to which natural tension
will be designed into risk appetite.
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Stakeholder views
Boards and management often consider appetite in relation EXAMPLE 3
to only a few stakeholders—typically shareholders and Competing stakeholder views
regulators. That view is limited.
A consumer product company is considering
Stakeholders come in various guises, but all have a vested a change to its packaging to reduce shipping
costs. The company currently ships its product in
interest in the entity. Some, such as a majority shareholder
cardboard boxes. Management is considering the
or regulator, may be able to exert their view of the entity.
following three options:
Others, such as minority shareholders and customers,
may exert indirect pressure by shifting their investments 1. Switch to a cheaper disposable plastic
and loyalties to other entities. Yet other stakeholders, such packaging, which is both lighter and smaller.
as communities and interest groups, exert pressure by 2. Switch to packaging with a higher post-
influencing those that affect the entity. consumer recycled content, recognizing that
the package is both heavier and larger.
Stakeholder activism can become more vocal when
3. Retain the current packing.
stakeholders view actions as outside their boundaries
of acceptable risk, at times going so far as impacting the There is a natural tension in place but, unlike
reputation, brand, and trust in the organization. the example of the community bank, here the
company must consider different stakeholders.
The shareholders may prefer the most cost-
effective option, as there is a lower risk to
financial performance, but the broader public
may prefer the second option as it helps to
reduce the environmental footprint of the
company and considers environmental, social,
and governance matters. Management will need
to weigh these opposing views in making its
choice. Perhaps, more importantly, the detailed
discussion can lead to innovative solutions.
For example, many organizations opt for new
alternatives as they do not like the risk in any
of the three options, they are too expensive,
and stakeholders want the organization to help
save the planet, and the risk of not being an
environmental partner is considered to be high.
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This approach encourages management and the board It is, however, usually a mistake to focus only on senior
to clearly prioritize objectives and associated appetite. In levels of management and overlook those engaged in day-
addition, various scenarios can be discussed to explore how to-day activities.
the appetite would influence decision-making throughout
the organization.
We suggest organizations include in
The possible disadvantage of this approach, however, is that the development of appetite both
senior levels of management and those
it may capture only some views from across the entity as
engaged in day-to-day activities.
there are often resource constraints limiting the number of
people who directly engage. It may also be challenging to
manage bias, which requires an adept facilitator.
Developing performance contexts
Some organizations use quantitative measures to express
We suggest organizations keep the appetite. They may arrive at these measures through
organization’s strategic plan, including business modeling. With the increasing availability of data
mission and vision, at the forefront and data analytic tools, organizations may develop data-
of facilitated discussions on appetite. rich contexts that provide insight into the impact of various
Avoid biasing discussions toward only strategic and operational decisions on entity performance.
one or two lines of the business.
For instance, an organization may focus on its production
cycle. The focus might identify the current production path
Discussions related to strategy and objectives and key quality assurance points and consider the effect of
Appetite often becomes more evident when management product rework on time and cost. At an operational level,
considers major issues facing the organization, such as management may use the context to assess decisions
innovation, new product lines, acquisitions, or joint ventures. on improving production time through innovation or by
Organizations with a lower appetite will usually react eliminating quality assurance points. At a more strategic
differently to innovation, acquisition, expansion, competition, level, the context might be used to assess how introducing
and market volatility than those with a higher appetite. a new product line would affect overall production time and
Reviewing and assessing these reactions can provide cost. Understanding appetite helps when considering how
insight into the organization’s current appetite. Integrating these decisions may be viewed in terms of the overall risk
considerations of appetite with strategic planning will likely relating to timely product production and quality.
provide the most timely understanding of the type and
amount of risk sought by the board and management. The proliferation of data and evolution of technology has
allowed for greater use of modeling and analytics at a
Appetite statements can also help to form the boundaries more reasonable cost. However, there are usually business
that keep the organization focused on strategy and goals—and risks—that are difficult to quantify with
discouraging sometimes subtle but important decisions precision. For that reason, modeling is typically just one part
that pull the organization off course. Having clarity on of the process of developing appetite.
appetite assists the board in having healthy discussions
that challenge management’s depiction of appetite. In
turn, management gains a sense of the board’s appetite We suggest organizations debate and
for specific strategies that can be incorporated into a risk discuss with management and the
board the levels of risk that seem too
management process. These boundaries can also help hold
high or low.
management back from chasing fads.
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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
approaches developed within
performance to understand the guidance offered in these
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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To be effective, appetite must be: We are not comfortable accepting more than a 10%
probability that we will incur losses of more than
• Operationalized through appropriate tolerances, and $1 million in pursuit of a specific objective.
where necessary, codified through policy
Deciding which type of appetite statements are best is
• Stated in a way that assists management in decision- up to management. Stakeholders, however, prefer risk
making statements that are not generic, but rather refer to how
management and the board run the organization. Often,
• Precise enough to be useful in making decisions and in as organizations become more experienced and their risk
monitoring by management and others responsible for management capabilities mature, their appetite statements
managing risk become more precise.
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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.
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Strategy
To build brand loyalty by producing food that is delicious and exciting, that people want to Links appetite to
eat because it tastes good and because it is good for them strategic direction
Related Appetite
We understand that innovation requires a more moderate risk profile and will manage
the risk of failing to develop new tastes our customers desire with the opportunity to Sets out possible tensions
enhance our product line. We will not make decisions that compromise our brand by
using products that are not certified organific. We accept that this may increase our cost
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Risk Appetite — Critical to Success | 25
FINAL THOUGHTS
Organizations take risk to succeed. But risk can’t go
unchecked. Setting and understanding risk appetite is
an important element of corporate governance, strategic
planning, and decision-making. Determining appetite through
a performance lens requires deep discussions that affect
management and boards and, to be effective, permeate
an organization’s culture. In this way, appetite reflects the
mission and integrates with objectives with the end goal of
adding value. Monitoring complements the decision-making
lens of appetite and encourages all parts of the organization
to be on the same wavelength.
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26 | Risk Appetite — Critical to Success
nfographic with
Infographic with Principles
Principles
MISSION, VISION STRATEGY BUSINESS IMPLEMENTATION ENHANCED
& CORE VALUES DEVELOPMENT OBJECTIVE & PERFORMANCE VALUE
FORMULATION
ENTERPRISE RISK MANAGEMENT
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Risk Appetite — Critical to Success | 27
Risk
between those risks in developing its risk profile.
Risk #3
The figure on the right was developed from the Framework 4
Risk #2
and depicts the following:
Risk #1
• An amount of risk considered acceptable (red line ). Performance
Risk curve Risk appetite Target
• The risk curve, which, in this instance, increases as
performance levels increase (blue line ).
.........
4
This graphic combines Figure 7.5 and Figure D.7.
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28 | Risk Appetite — Critical to Success
Inputs Determine whether the organization will apply Analyze stakeholders’ views that
to a monitoring approach or one that integrates may affect the organization’s view
Appetite decision-making and monitoring practices. of risk appetite.
Determine whether to include both lower and Consider the organization’s unique business
upper boundaries. context when setting risk appetite.
Consider the extent to which natural tension will Capture key inputs and consider how to
be designed into risk appetite. incorporate them into risk appetite
(e.g., mission and vision, current strategic
direction, risk profile, and culture).
Developing Appetite Develop an approach that includes facilitated Include in the development of appetite both
to Support Strategy discussions related to mission and vision, senior levels of management and those engaged
and Objectives discussions related to strategies and objectives, in day-to-day activities.
analysis of performance, or other approaches
preferred by the organization. Debate and discuss with management and
the board the levels of risk that seem too high
Keep the organization’s strategic plan, including or low.
mission and vision, at the forefront of facilitated
discussions on appetite. Avoid biasing Develop a plan to validate risk appetite,
discussions toward only one or two lines of using the approaches developed within your
the business. organization.
Articulating Appetite Adopt language that resonates with both the Use language that mimics that used for strategy
to Support stakeholder group and at varying levels within and objectives.
Decision-making the organization.
Develop and communicate a common approach
Review the current level of precision in their for grouping appetite into categories that align
appetite statement and ask if it has evolved with strategy, objectives, or risks.
as overall risk management capabilities have
matured.
Using Appetite Develop a philosophy on risk-taking and Integrate risk appetite and tolerance into the
to Enhance performance; for example, whether you would review and revision practices used to evaluate
Performance accept higher risk for greater performance or performance.
whether you would be satisfied to accept lower
performance to limit risk. Draw on continual improvement practices.
As part of internal reporting practices,
Develop a view on how risk appetite will report variation from desired risk appetite to
cascade into the organization through the use management and the board.
of tolerance, indicators and triggers (e.g., at
the board and senior management level, day- Set a specific time period for revisiting these
to-day-operations, compliance, and monitoring). stages to ensure that risk appetite remains
current.
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Risk Appetite — Critical to Success | 29
Dr. Larry Rittenberg is the Ernst & Young Emeritus Professor of Accounting at the
University of Wisconsin–Madison School of Business. He is one of only eight academics
on the list of the United States’ 100 most influential people in finance. Dr. Rittenberg
was on the COSO steering committee that oversaw the development of Enterprise Risk
Management—Integrated Framework and later served as chair of COSO. As chair,
he led the effort to provide guidance for small and midsize companies on developing
effective internal controls, and later he led COSO in developing guidance on monitoring
of internal controls.
On the University of Wisconsin faculty since 1976, Dr. Rittenberg has taught audit and
assurance, risk management, and corporate governance. His research deals with the
effectiveness of audit committees, corporate governance, and assurance services. He
has received the Bradford Cadmus Memorial Award, The Institute of Internal Auditors’
highest award, for his contributions to the internal auditing profession, and he was one
of 16 inducted into the IIA Distinguished Practitioners.
Note to Readers
The information contained herein is of a general nature and based on authorities that
are subject to change. Applicability of the information to specific situations should be
determined through consultation with your professional adviser. This thought paper
represents the views of the authors only and does not necessarily represent the views or
professional advice of the University of Wisconsin, Pacific Rim Risk Management Services,
or COSO.
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30 | Risk Appetite — Critical to Success
ABOUT COSO
Originally formed in 1985, COSO is a joint initiative of five private sector organizations and is dedicated to providing thought
leadership through the development of frameworks and guidance on enterprise risk management (ERM), internal control,
and fraud deterrence. COSO’s supporting organizations are the American Accounting Association (AAA), the American
Institute of Certified Public Accountants (AICPA), Financial Executives International (FEI), the Institute of Management
Accountants (IMA), and The Institute of Internal Auditors (IIA).
This publication contains general information only and none of COSO, any of its constituent organizations or any of the
authors of this publication is, by means of this publication, rendering accounting, business, financial, investment, legal, tax or
other professional advice or services. Information contained herein is not a substitute for such professional advice or services,
nor should it be used as a basis for any decision or action that may affect your business. Views, opinions or interpretations
expressed herein may differ from those of relevant regulators, self-regulatory organizations or other authorities and may
reflect laws, regulations or practices that are subject to change over time.
Evaluation of the information contained herein is the sole responsibility of the user. Before making any decision or taking any
action that may affect your business with respect to the matters described herein, you should consult with relevant qualified
professional advisors. COSO, its constituent organizations and the authors expressly disclaim any liability for any error,
omission or inaccuracy contained herein or any loss sustained by any person who relies on this publication.
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Thought Leadership in ERM
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Thought Leadership in ERM
RISK APPETITE–
CRITICAL TO
SUCCESS
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