Executive Summary - The Institute of Risk Management

Risk appetiteand performanceOur view is that both risk appetite andrisk tolerance are inextricably linked toperformance over time. We believe thatwhile risk appetite is about the pursuitof risk, risk tolerance is about what youcan allow the organisation to deal with.Organisations have to take some risksand they have to avoid others. The bigquestion that all organisations have toask themselves is: just what does successfulperformance look like? This question mightbe easier to answer for a listed companythan for a government department,but can usefully be asked by boardsin all sectors.The illustrations on these pages showthe relationship between risk appetite,tolerance and performance. Diagram 1shows the expected direction ofperformance over the coming period.Diagram 2 illustrates the range ofperformance depending on whetherrisks (or opportunities) materialise. Theremaining diagrams demonstrate thedifference between:• all the risks that the organisation mightface (the “risk universe”- Diagram 3)• those that, if push comes to shove,they might just be able to put up with(the “risk tolerance” - Diagram 4) and• those risks that they actively wishto engage with (the “risk appetite” -Diagram 5).PerformancePerformanceCurrent directionof travel for performancet0 Time t 1Diagram 1Where you mightget to if some“good” things happent0 Time t 1Where you mightget to if some“bad” things happenDiagram 210