COSO’s Thought Paper on Risk Appetite

COSO has released a new thought paper, Risk Appetite – Critical to Success, that provides guidance to help executives and boards understand and articulate the organization’s risk appetite.  The document focuses on how organizations can promote risk appetite as an integral part of decision-making.

Mark Beasley, KPMG Professor and Director of the ERM Initiative at NC State, recently interviewed Frank Martens, who is one of the co-authors of this new paper. Martens shares insights about the guidance including the importance of linking risk appetite with strategies and objectives and applying appetite as part of managing an organization’s success.  He emphasizes the importance of articulating a risk appetite that is flexible enough to adapt to changing conditions, while providing relevant thresholds that guide decision-making to be within acceptable ranges expected by key stakeholders.

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 vision and integrates with strategy and objectives with the end goal of adding value,” according to Martens.

The thought paper addresses these topics:

• Putting Risk Appetite into the Context of the Business
• Linking Risk Appetite and Strategy
• Inputs to Appetite and Their Application:  An Overview
• Inputs to Risk Appetite
• Developing Risk Appetite to Support Strategy and Objectives
• Articulating and Communicating Risk Appetite to Support Decision-Making
• Using Risk Appetite to Enhance Performance
• Supporting the Use of Appetite

Martens co-authored this paper with Larry Rittenberg, EY Emeritus Professor of Accounting at the University of Wisconsin-Madison and former chair of COSO.  Frank Martens is owner of Pacific Rim Risk Management Services.

The paper can be downloaded for free at the COSO website (www.coso.org).