Understanding risk appetite
ACTION: The main purpose of this master thesis is to make sense of risk appetite both in literature and in practice, and to explore how risk appetite was institutionalized in Avinor.
Risk appetite is a central concept for organizations that take a holistic approach to managing risk, often called enterprise risk management (ERM). In ERM frameworks, the risk appetite is defined as the amount of risk, on a broad level, an organization is willing to accept in the pursuit of value. Despite its pivotal role in such frameworks, there has been much discussion about what it actually is, how to understand it in practice, and how risk appetite can guide risk taking in organizations. These questions lead us on a journey to make sense of risk appetite both in literature and in practice, and to explore how risk appetite was institutionalized in Avinor.
Our study was exploratory and revealed some interesting insights into how risk appetite is understood and operationalized in a complex environment with a broad range of risks ranging from aviation and safety risk to market and financial risks. First, we found that there is consensuses in the literature that risk appetite is a top-down element that should align the organization with respect to risk taking. Nevertheless, there is considerable debate about how this alignment should be practiced and whether risk appetite can be represented by mere metrics. Second, our study of Avionor revealed that external and internal pressures stemming from the organizational context influenced the organization’s risk appetite. For example, being a state-owned company came with normative expectations of how much risk-appetite a state-owned company ought to take. Hence, mangers reasoned that a conservative risk appetite was appropriate. Third, we experienced that risk appetite is not a singular concept throughout the organization. In fact, the institutionalization of risk appetite relies on cultural elements in the organization. We reasoned that, as the subjectivity of measuring risk increases, managing risk through metrics may not be as effective as managing risk through cultural elements.
Overall, we were both very grateful for the opportunity to join the FOCUS group and for the opportunity to immerse ourselves in one of the most exciting risk management organizations in Norway; combining theory with practice really brought new colors onto the concept of risk appetite.