Corporate Risk Appetite: Ensuring Board and Senior Management Accountability for Risk

Abstract

This paper examines various concepts related to the topic of corporate risk appetite. It emphasises the need for consistency of definitions and coherence of terminology. Corporate risk appetite articulation is discussed as a corollary to strategy formulation and as an aid to corporate governance. The paper highlights the challenges that financial firms’ boards have faced in expressing their risk appetite and in setting the approach to risk at board-level. The paper further stresses the need to assess risk holistically in risk appetite discussions. It introduces the Govindarajan-Andenaes model as a process template for systematically identifying and deploying risk appetite. The objective is to allow the risk appetite statement to be a practical tool that aids transparency in both risk-taking by firms and in the evaluation of their risk-based performance on an ongoing basis.