Risk Appetite: Fight or Flight?
by François Masquelier, Head of Corporate Finance and Treasury, RTL Group, and Honorary Chairman of the European Association of Corporate Treasurers
Risk appetite… this notion is something of a paradox in times of crisis. Generally speaking, no one likes risk; we all strive to limit it as much as possible. However, behind this notion is hidden the idea of determining a company’s profile. Without a precise definition of its profile, how can one adopt the appropriate strategy that would be approved by the company’s shareholders? Defining risk profile remains a delicate calibration exercise but is a prerequisite for ERM (Enterprise Risk Management). In this article, we will demystify this somewhat confusing concept.
‘Risk Appetite’ or ‘Risk Profile?
The touchy subject of ‘risk appetite’ always sparks heated debates. Risk appetite is not a single fixed concept. It can vary over time. The term itself originated in the English-speaking world, and the approach is not universally embraced. Many CFOs prefer the idea of a ‘risk profile’, which is less harsh and more ‘sellable’ internally. Having an appetite for risk is a strange concept, isn’t it? Generally speaking, no one is hungry for risk. Yet this notion, which everyone agrees is complex and even a bit mysterious, is nevertheless the cornerstone of an actual ERM (Enterprise-wide Risk Management) process*. The ERM policy must or should contain the foundations of ‘risk appetite’ in its set of defined rules. Within this concept, there is the idea of measuring the types of risk that the company is willing to keep and those that it is prepared to sell, to eliminate or to mitigate by various means, and to incorporate this into the group’s risk management strategy (see the British Standard Institute’s Code of Practice on Risk Management BS 31100 published in October 2008 – www.bsigroup.com).