I recently ran across a story about a group of Maine farmers who, after being dropped by their national milk company, founded Maine’s Own Organic Milk Company (MOO) in an effort to save their farms. The documentary film Betting the Farm, which chronicles their tale, has become a film festival favorite.

Innovation is essential to achieving long-term value creation, and innovation involves taking risks. However, while for many entrepreneurs “betting the farm” or risking all is a necessity, more established companies need to take a more considered approach to risk in order to ensure their continued prosperity and survival.   

But how much risk is the right amount to take? Are we taking too much risk? Are we taking too little risk and leaving potential opportunities on the table?  How do we communicate clearly the amount of risk we are willing to take, and how do we monitor the amount of risk being taken? The Risk Appetite & Tolerance Guidance Paper developed by The Institute of Risk Management currently featured in the Risk and Innovation Spotlight homes in on these questions.

Key concepts addressed in the guidance include:

  • The difference between risk appetite and risk tolerance: Risk appetite is about the pursuit of risk – what the organization does want to do – risk tolerance is about the “lines in the sand” beyond which the organization does not want to go;
  • The importance of risk capability, which is a function of risk capacity and organizational maturity or the ability to manage risk in the organization; and
  • The risk management culture, including the organization’s propensity to take risks and the propensity to exercise control.  

These questions and concepts are fundamental for businesses seeking to maximize their returns. They are also more important for management accountants seeking to add value to their company than the creation of a risk register that oftentimes, once created, gets put on the shelf until the next update.