From Elusive to Anchored
Grounding Organizational Risk Tolerance
Risk is an abstract subject appreciated only by experts, until it’s not a theory any longer. Most recognize that risk discussions are important whether discussing operations or investments, but it is where these two meet that gets tricky. Whether you’re talking about a personal investment portfolio or managing the totality of financial assets for a complex institution, evaluating tolerance shares the same characteristics.
Risk tolerance helps define one’s ability to pursue certain financial strategies. But it is helpful to break it down because risk tolerance becomes more difficult to define in a group setting, such as at a Board meeting. Consider a classic viewpoint: risk tolerance is the lesser of risk willingness and risk capacity.
In evaluating risk willingness for institutions, one may think about the following:
What are the limits of volatility for philanthropic community?
At what volatility are investments discussions escalated?
What is the level of understanding for our risk assets?
Is the risk of decisions known by all involved with the decision?
Especially in a group setting with equal vote, the lesser tends to win risk willingness. Undoubtedly individual viewpoints must come together to determine an organization’s parameter. Whereas risk willingness is difficult to pin down, risk capacity can be much more concrete. If one is still guessing, there’s no need. There are methods to alleviate the fog. Consider:
What are the strengths or minimum standards required by maintaining our credit rating?
What is the nature of our operational risks requiring a backstop of liquidity?
To what degree is our overall cash generation reliant on investment returns to stabilize spending sources?
Navigating these discussions is a full team effort among governance, executives, and advisors and it is helpful to ensure a fully integrated discussion of all financial resource decisions aligned to the needs and capacities of the organization. Organizations must “own” this discussion to properly position their critical financial strategies. Armed with that knowledge for a collective approach, each specialist team (e.g., investments) is better positioned to perform their contribution to the whole admirably. Reasoned Advisory can help you design and execute a process that takes the mystery out of organizational risk approaches to make more confident business and financial strategy decisions.