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Safeguard OSH Solutions - Thomson Reuters

Safeguard OSH Solutions - Thomson Reuters


Appetite for risk

The concept of organisational risk appetite is gaining currency. MONIKA WAKEMAN and DAVID SEATH outline what it means and how it can be useful.

An understanding of risk appetite can help an organisation better position its health and safety messaging for stakeholders. It can also help inform where to focus when it comes to applying scarce organisational resources.

One of the definitions of risk appetite is that it is the amount of risk an organisation is willing to accept in the pursuit of its objectives. Each organisation pursues various objectives to add value and should broadly understand the risk it is willing to undertake in doing so. Risk appetite helps provide boundaries around the amount of risk an organisation might assume in regard to a wide range of factors, most importantly its capacity (financial, reputational, etc) to assume such risks.

In practical terms, when a board considers a strategy it would be expected, among other factors, to determine whether that strategy aligns with the organisation’s risk appetite. This will differ based on the type of risk considered, and, taking a long term view, whether the risks are rewarded or not.

Organisations in general have a very low appetite for assuming health and safety risk exposures. Neglect of H&S risk only has negative consequences in the long term. Understanding the symmetry of the risk-reward payoff under various scenarios (highly asymmetric in the case of H&S risk) is important in making informed choices and is the reason why risk appetite as a concept has gained increasing appeal in an increasingly uncertain world.

DECIDING TOLERANCES

Risk appetite is useful in two ways. Firstly in deciding whether to take on a risk in the first place for strategic or operational reasons (or avoid it if possible); and secondly, assuming the risk exposure is accepted, in deciding within what limits/tolerances.

In the case of H&S risk, we manage our exposure through managing our day-today affairs through the limits/tolerances we impose on ourselves. This aligns with the concept of “as low as reasonably practicable” in relation to H&S matters – meaning the best we can do is take all steps to reduce an omnipresent risk within our available means.

Risk appetite is a vital component of effective risk governance and management. It is a “super-calibration” mechanism for risk in an organisation, helping decide what is too much, too little or about right; and in the case of H&S risk, zero appetite for exposures that are caused by failing to take all reasonably practicable steps.

Risk tolerances and limits are the means by which risk appetite is cascaded through an organisation. In the case of H&S, these might be the day-to-day limits around particular aspects of business activity that need to be watched carefully (eg limits on the number of hours drivers can log in a single 12-hour period etc.).

WHERE TO START

To articulate its H&S risk appetite an organisation must have a clear understanding of its business model and how this inherently predisposes it to H&S risk. It requires searching conversations between its board and senior management to develop a shared understanding of the important facets of its H&S risk that need to be reflected in a risk appetite statement. This understanding then informs the parameters and measures whereby an organisation can keep its finger on the pulse.

Tolerance levels and actual exposures can also be measured against these parameters. Approached in a systematic way, the board and management can progress toward a more sophisticated understanding of an organisation’s exposures and fine-tune the articulation of their risk appetite statement and the related measurement metrics and their tolerances.

In practice this will involve identifying all relevant H&S risk exposures using multiple sources such as pre-existing risk reports, industry insights, business knowledge, leading and lagging indicators, internal staff feedback and the business’ health and safety strategy. Together these would help in the articulation of a high-level risk appetite statement that:

  • • 
    Is an expression of the organisation’s attitude and beliefs in relation to health and safety;
  • • 
    Sets out the bright-line boundaries (ie the zero tolerance components of the statement); and
  • • 
    Creates the linkages to how an organisation then lives up to this statement/s in the business day-to-day (ie to the active setting and management of tolerances).

The latter can take many forms including risk ranking (likelihood and consequence grids) and operating metrics with trigger maximum and minimum thresholds as appropriate, etc. Together these provide visibility on how the business has effectively calibrated its measures against its risk appetite.

Monika Wakeman is associate director and David Seath a partner with the Risk Advisory service of Deloitte.

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