Executive Summary - The Institute of Risk Management

IntroductionThe UK Corporate Governance Codestates that “the board is responsiblefor determining the nature andextent of the significant risks itis willing to take in achieving itsstrategic objectives.”The intent of this document is to providehigh level guidance to directors and seniorexecutives on how to address this partof the Code, which essentially requiresconsideration of the subjects of ‘riskappetite’ and ‘risk tolerance’.This summary will tell you:• what you need to know• what you need to do, and• where can you turn for moredetailed guidanceIt became apparent during thedevelopment of our paper that there isconsiderable interest in this topic inthe public sector as well as the privatesector, and also beyond the UK. So, whilesome specifics might differ, we feel thatthe underlying principles hold true forall sectors and all geographical locations.We have prepared this guidance underthe overall direction of a working groupof the Institute of Risk Management. Ourwork has produced this executive summary,which is designed to provide an overviewof the subject for general use, particularlyby board members, and a more detailedversion which is primarily designed to assistthose whose task it is to advise boards onthese matters. The detailed version of ourguidance is available for free downloadfrom IRM’s website * .Following the financial collapse,precipitated by banks which we allassumed were outstanding at managingrisk, which was after all their raisond’être, first the Walker Report, and thenthe review of Corporate Governance bythe FRC highlighted the need for boardsto re-evaluate just how good they areat managing risk. As a consequence RiskAppetite and Risk Tolerance are nowon the agenda for all listed companies.Importantly, our work has shown thatthis interest extends outside the listedsector to organisations in all walks of life.But managing risk appetite represents amassive challenge: risk professionals havebeen divided as to how to determine riskappetite and there is precious little in termsof useful guidance.4* Risk Appetite and Tolerance – Guidance Paper availablefrom www.theirm.org/publications/risk_appetite.html