Corporate Risk Appetite: A Boundary for Taking Risks or a Source of New Problems?

Many companies want to grow aggressively. The Board of Directors encourages market expansion, acquisitions, opening new branches, or digital transformation.

On the other hand, the corporate risk management function warns about potential non-performing loans (NPL), liquidity pressure, IT projects going over budget, and internal fraud risks.

In practice, conflict occurs not because of differences in objectives, but because of the absence of a clear risk appetite.

Without mutually agreed boundaries, every major decision turns into a tug-of-war between ambition and concern. Today the company dares to take risks, tomorrow it suddenly presses the brakes too hard.

Risk appetite is not just a formality document to fulfill audit or governance requirements. It is the foundation of risk strategy that determines the consistency of the company’s direction.

What Is Risk Appetite?

Risk appetite is the level of risk that a company consciously and measurably willing to accept in order to achieve its strategic objectives.

In other words, risk appetite answers the question: how far is the company prepared to bear uncertainty in pursuit of growth?

Every business strategy contains risk. For example:

• A financing company targeting 25% annual credit growth must accept the possibility of rising NPL.
• A technology startup pursuing scale-up typically accepts short-term losses, but does not tolerate customer data breaches.
• A manufacturing company may dare to expand production capacity, but will not accept compromises on workplace safety standards.

The most common mistake is drafting a risk appetite statement that is too general, such as “having a low appetite for risk.” Low appetite for what risk? In what context? Without specification, such a statement does not help decision-making.

Risk appetite must always be linked to growth strategy, capital capacity, and shareholder expectations.

The Difference Between Risk Appetite and Risk Tolerance

Risk appetite determines the company’s attitude toward risk. Meanwhile, risk tolerance determines the threshold that controls that risk in daily practice.

Simply put:

• Risk Appetite is strategic direction. Analogy: “We are willing to drive on the highway at high speed to arrive faster.”
• Risk Tolerance is the operational limit, often expressed in numbers, that must not be exceeded. Analogy: “Maximum speed 100 km/h. If exceeding 110 km/h, an alarm will sound.”

In a business context, the difference can be described as follows:

Within the risk management framework, appetite provides direction, while tolerance ensures controls remain in place. Without appetite, tolerance becomes too conservative. Without tolerance, appetite becomes too abstract.

The Role of Risk Appetite for Companies

Risk appetite is a written or unwritten “constitution” tool that aligns the top management. The tangible impacts of implementing risk appetite for the company are as follows:

1. Consistency of Decisions Across the Organization

Without risk appetite, strategic decisions become highly dependent on individual preferences, not on company policy.

As an example, one division head aggressively pushes expansion into a high-yield segment with a high-risk profile. Another division head rejects the expansion due to concerns over an increase in NPL. Both feel they are right, but there is no shared reference point.

If the risk appetite states:

“The company has a moderate appetite for credit risk and is willing to accept NPL up to 5% to support 20% annual growth,”

then the direction becomes clear. The expansion decision is no longer based on individual courage, but on a strategic mandate.

Another example during a liquidity crisis:

If the company’s appetite emphasizes that “cash flow stability and solvency are top priorities under market stress,” then all units automatically shift focus to collections, cost efficiency, and capital expenditure control. No ad-hoc reactive instructions are needed.

Risk appetite functions as a shared language that reduces subjective interpretations of risk.

2. Prevention of Impulsive Decisions

Many risky decisions are born from momentary euphoria: an acquisition opportunity, a large contract with thin margins, or an investment in trending technology. Without risk appetite, such decisions are often influenced by external pressure or fear of missing out.

For example, a manufacturing company may be tempted to acquire a technology startup to appear innovative. However, if the company’s appetite toward technology and cultural integration risk is stated as low, the questions become straightforward:

• Does management have the competence to manage a digital business?
• Is the potential integration loss aligned with the agreed risk profile?

If not aligned, the discussion can stop early before due diligence costs escalate.

In practice, companies without risk appetite often fall into two extremes: either making major decisions too quickly, or hesitating too long without clarity of direction.

Risk appetite creates a checks-and-balances mechanism based on strategic mandate, not market emotion.

3. Alignment Between Strategy and Risk Management

In many organizations, the corporate risk management function is perceived as a barrier to growth. Every business proposal is considered risky and ends up being rejected.

The root of the problem is not the risk function, but the absence of an agreement on the acceptable level of risk. If the Board has agreed on the following appetite:

• Aggressive growth in the mid-market segment
• Low appetite for legal and reputational risk
• Moderate appetite for earnings volatility within a defined range

Then the risk function no longer simply says “no.” Their task is to ensure the strategy runs within those corridors.

For example, in a regional expansion project. The risk function does not hinder expansion, but ensures that the funding structure, legal contracts, and operational mitigation are within the established tolerance limits.

In this condition, risk management transforms from a “police” role into a strategic partner that helps the business grow in a controlled manner.

4. Strengthening Governance and Accountability

A clearly documented risk appetite provides an objective basis for the Board of Commissioners to conduct oversight.

Without appetite, management performance evaluation becomes biased solely by outcomes. If profits rise, decisions are deemed correct even though risk has increased sharply. If profits fall, decisions are deemed wrong even though risk was managed with discipline.

With risk appetite, the board can ask more relevant questions:

• Is the current leverage ratio still within the agreed corridor?
• Has exposure to a single industry sector exceeded the appetite limit?
• Are IT project losses still within tolerance?

If exposure exceeds appetite, the board of directors must provide justification and a corrective plan. This is where accountability becomes real, not a formality. Risk appetite clarifies the mandate given by shareholders to management.

5. Increased Investor and Regulator Confidence

In the due diligence process, a risk appetite statement often becomes an indicator of good governance.

Professional investors do not only look at profit growth, but also how risk is managed. A company that is able to demonstrate:

• Measured appetite toward leverage
• Clear concentration risk limits
• Regular monitoring mechanisms

will be perceived as more mature than a company that relies solely on management intuition.

Regulators also view risk appetite as evidence that the company is capable of controlling its own risks, not merely complying administratively.

Companies that have a well-documented risk strategy are usually better prepared for audits, experience fewer drastic corrections, and remain more stable during market volatility.

The Risk of Having No Clear Risk Appetite:

Without risk appetite, companies operate reactively. One month management approves a thin-margin project with high political risk due to large contract value. The next month, a similar project is rejected simply because of previous loss trauma. There is no consistent standard.

Consequently, investors see high earnings volatility, commissioners are confused in evaluating performance, and audit fatigue occurs because there is no benchmark.

Stages in Developing an Effective Risk Appetite

Here is a practical approach you can use to develop the company’s risk appetite.

1. Start from the Company’s Strategic Objectives

Risk appetite cannot be formulated in a vacuum. Before discussing risk, ensure clarity of objectives: where will the company head in the next 3–5 years? Is the focus on aggressive growth, profitability, sustainability, or a combination?

In the first session, you may ask management: What differentiates us in the eyes of customers?A company that differentiates itself through innovation will have a different appetite for technology and market risk compared to a company that relies on cost efficiency.

2. Identify Key Risk Categories

Not all risks need an explicit appetite statement. Focus on categories that are material to achieving strategic objectives. Generally, these include:

• Strategic risk (expansion, acquisition, competition)
• Credit/market risk (financial exposure)
• Operational risk (supply chain, technology, HR)
• Compliance and legal risk
• Reputational risk

For each category, ask: How much uncertainty are we willing to accept? These discussions often reveal differing perceptions among directors, and that is healthy practice.

3. Define Acceptable Risk Limits

From strategic discussions, translate into measurable parameters. Use a combination of quantitative indicators and qualitative statements. Examples:

• Quantitative: “Minimum capital adequacy ratio 18%,” “Credit growth maximum 2x industry growth.”
• Qualitative: “We will not enter businesses that may damage the environment,” “Regulatory compliance is a non-negotiable prerequisite.”

Avoid creating too many indicators as this will make the risk appetite overly complex. You can use around 5–7 main appetite statements to make them easy to communicate and remember.

4. Document in a Risk Appetite Statement (RAS)

This document must be concise and readable. If a risk appetite statement spans 30 pages, it is likely no one will read it. An effective format is 3–5 pages including:

• Executive summary (one paragraph about the company’s risk philosophy)
• Appetite statements per risk category
• Key indicators and tolerances
• Responsible parties and escalation mechanisms

Use business language, not compliance jargon. Avoid sentences like “The company commits to implementing risk management in accordance with ISO 31000 framework.”

Replace it with: “We are willing to take measured credit risk to achieve growth targets, but will not sacrifice portfolio quality for the sake of chasing volume.”

5. Communicate Across the Organization

A risk appetite statement stored in the Board’s drawer is meaningless. Conduct tiered socialization to:

• Board of Directors and Commissioners: establishment and evaluation discussions
• Senior management: translating appetite into policy
• Operational level: daily decision parameters

If possible, you could even print pocket cards containing the three main risk appetite statements for store managers in a retail company. This is effective because they are the front line in decisions on discounts, returns, and customer service.

6. Conduct Periodic Review

Risk appetite is not static. At least annually, or during significant change (acquisition, economic crisis, leadership change), conduct evaluation. Is last year’s appetite still relevant to the current/new conditions?

In practice, mature companies refresh risk appetite in each strategic planning cycle, ensuring the risk framework always aligns with current business direction.

Conclusion

Risk appetite is the strategic boundary defining how far a company is willing to take risk to achieve its objectives. It differs from risk tolerance, which functions as an operational numeric limit.

In corporate risk management, risk appetite acts as a bridge between growth ambition and control discipline.

Without clear appetite, companies easily fall into inconsistent decisions: too bold when the market is optimistic, and too defensive when pressure increases.

For directors and boards, setting risk appetite is not just a governance obligation. It is a strategic decision about corporate identity: whether to grow aggressively with measured risk, or maintain stability with moderate growth.

Without a clear risk appetite, you are not truly managing risk, only reacting to circumstances. And in a competitive business environment, directionless reactions rarely yield sustainability.

FAQ: Corporate Risk Appetite