cyril roux : risk appetite and its role in commercial organisations address by mr cyril roux, deputy governor ( financial regulation ) of the central bank of ireland, to the institute of directors ’ risk appetite forum, dublin, 22 october 2015. * * * it is my pleasure to make the opening comments at this event bringing together directors, senior executives and risk management professionals from both financial services and nonfinancial services organisations. the purpose of our forum is to facilitate discussion on the important topic of risk appetite and its role in commercial organisations, including of course financial firms. one of the key reasons behind the financial crisis was the weakness of risk culture and the failure of effective risk management in many financial firms. while a good deal of progress has been made across the financial services industry in addressing such issues, both risk culture and risk appetite remain areas where there remains much to be learned and done. with this in mind, the central bank of ireland and the institute of directors in ireland are hosting this joint event to facilitate a broad discussion and sharing of ideas from theoretical, practical and regulatory perspectives. we look forward to hearing your opinions and experiences and we hope it will be an informative and thought - provoking forum. what is risk appetite? the financial stability board ’ s ( fsb ) defines risk appetite as : “ the aggregate level and types of risk an organisation is willing to assume within its risk capacity to achieve its strategic objectives and business plan ”. in other words, the risk appetite statement is the formal articulation of an entity ’ s willingness to take on and effectively manage certain risks and avoid, or minimise, other risks in the pursuit of its strategic objectives. why establish risk appetite? exposure to risk is an inevitable part of doing business. successful businesses take on and manage calculated risks in order to achieve their goals. the challenge is to identify the risks which the firm is able to take on, that is to say the risks which the executive team has the appropriate skills, knowledge and experience to manage, up to a degree which the firm has the wherewithal to withstand. a clearly defined risk appetite provides the directors, management and staff with a framework which facilitates the identification and management of risks. strategic objectives should underpin the risk appetite statement. an effective risk appetite statement enables the assumption of risk in line with the strategic objectives of the organisation while giving the board and management confidence to avoid risks that are not in keeping with them. given the links between the strategy and risk appetite, the

. therefore, to fully implement a new strategy or to rebuild an organisation to be effective in a changing environment, it is critical to reshape culture as well. 3 / 6 bis central bankers'speeches the primary responsibility for reshaping culture rests with the executive team, under the direction of the board. it is not a human resources or organisational design exercise. it is a leadership responsibility. it requires leaders to take a long hard look at the current culture, the existing business processes, the work attitudes and behaviours they foster. without first establishing what the current culture is, the issuance of lofty mission statements or long lists of core values are merely paying ‘ lip service ’ to implementing effective cultural change. since employees tend to take their cues on what is important and how to behave from their leaders, negative activities and behaviour at the top foster negative behaviours further down the organisation. “ a good organisational culture is about more than avoiding good people doing bad things ; it is about equipping and enabling good people to do ever better things17. ” a firm in seeking to effect cultural change can take some practical steps to achieve this aim. i will suggest five as a starting point : 1. communicate and " walk the talk " - the cultural values and expectations of the firm need to be consistently communicated and modelled by the top, middle and lower management levels. 2. enhance diversity at senior levels – meaningfully addressing the acute lack of diversity at senior levels requires : more ambition, including in targets and measures ; more than lip service being paid to diversity programmes ; better building of pipelines of talent ; considering the overall construct and functioning of the executive management layer when making appointments ; and identifying and reducing barriers to change. 3. practice, process, performance – principles and values need to be reinforced through practices and processes, including training and particularly performance management. there must be clear alignment between individual roles and objectives and wider purpose, strategy and outcomes, with people held accountable for their actions. 4. ongoing assessment and checking – boards and executives need to have mechanisms and measures to understand whether the culture they espouse is consistent with the culture of the organisation, and consider how they would identify where it is not. considering how decision - making, risk identification, product development, the use of behavioural economics, the treatment of whistleblowers and everything in between works in an organisation is key to understanding the culture of the organisation. boards and executives need to consider the information they receive and