The alignment of organisation strategy and risk appetite in the financial services industry

M.Com. (Business Management)This study concerns itself with the concepts of strategy, risk management and risk appetite. Strategy and risk management playa very important role in any business, but it is very difficult to determine the interrelationship between strategy and risk. There is no scientific/academic proof and there is no model or framework on what the alignment between an organisation's strategy and risk appetite is. Therefore, the purpose of this study is to develop a risk appetite model to align an organisation's strategy and risk management, so that management will be able to improve its decision-making. The research design is based on a qualitative evaluation of the various literature concepts on strategy, risk management and risk appetite. Furthermore, personal interviews were held with senior risk, strategy and financial managers in the South African financial services industry to test the risk appetite model and determine the relevance and robustness of the risk appetite model. The main findings of this study revealed that: • to take full advantage of business opportunities, risk management and strategy cannot operate independently in any organisation; they must be integrated or at least linked with one another; • risk appetite is an important concept on its own, but is even more crucial as the link between risk management and strategy; • most financial services organisations assume that there is a link between risk management, strategy and risk appetite but that there is no formal processor framework available to link the three concepts; • effective risk management enables financial services organisations to achieve a competitive advantage, which is achieved by optimising risks and rewards; and • organisations that probably will withstand future crises are those with appropriate enterprise risk management practices in place where risk and strategy are linked with each other; and the risk appetite model can play an important role in achieving this goal. The main conclusion is that the risk appetite model is the formal framework to integrate risk management with strategy, because the model: • takes a holistic view to risk management; • allows all employees at all levels to understand risk appetite because it is quantitative and not too mathematical; • utilises risk appetite as the "gel" to link strategy and risk management; • allows for measured decision-making and proper governing; • allows organisations to be proactive in their risk management; • takes the upside and downside of risk into consideration; • gives strategic direction to the business; and • addresses all the important steps to integrate risk management, risk appetite and strategy. Lastly, for the risk appetite model to be successful it is essential to: • have buy-in from everyone in the organisation; • have the right governance in place to ensure the effective implementation and communication of the organisation's risk appetite; and • continuously monitor the organisation's risk appetite