Understanding Risk Appetite

96 Pages·2016·1.83 MB·English

RAPPORT
09/16 REPORT
The purpose of this thesis is to understand the concept of risk appetite in terms of
what it is, what institutional pressures influence it, and how it is institutionalized in an
Understanding Risk Appetite
organization. We try to understand what risk appetite is by examining the most
influential enterprise risk management frameworks, reports from practitioners,
and scholarly research on the topic. Through a case study of a large and complex What is it, what pressures shape it
Norwegian organization, we seek to explain what influences and institutionalizes risk
appetite. First, we find that there is a consensus in the literature that risk appetite is and how is it institutionalized
a top-down element of enterprise risk management, but that there is disagreement as
to how quantitatively it is understood and practiced. Second, we find that one cannot
decouple risk appetite from its organizational context, as both external and internal
institutional pressures influence risk appetite in the organization. Third, we find that
risk appetite is not a singular concept in the organization. Risk appetites varies across
Håvard Baunan
risk categories, and the institutionalization of risk appetite relies on cultural elements
in the organization. Our thesis adds to the understanding of the risk appetite concept,
Joel Berge
and adds to the scholarly argument that the evolution of risk appetite should go in the
direction of addressing human and social behavior. Further, we contribute with a
model to analyze institutionalization of risk appetite in organizations.

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SNF Report No. 09/16

Understanding Risk Appetite
What is it, what pressures shape it and how is it institutionalized
by
Håvard Baunan
Joel Berge

SNF Project No. 4350
ACTION

The project is financed by Statoil ASA

Centre for Applied Research at NHH
Bergen, October 2016
© This copy has been drawn up by agreement
with KOPINOR, Stenergate 1, NO-0050
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result in liability to compensation.
ISBN 978-82-491-0937-1 Printed version
ISBN 978-82-491-0938-8 Online version
ISSN 0803-4036
Acknowledgements
We want to thank everyone at Avinor that helped us with our research. We especially want to
thank Ingvild Høydalsvik Røsæg at Avinor for being very helpful to us throughout the writing
of this thesis. We would also like to thank the Centre for Applied Research at NHH (SNF) for
allowing us to be a part of the Future-Oriented Corporate Solutions (FOCUS) program. We are
very grateful for the scholarship we received from SNF that enabled us to travel for our
research. We would also like to thank Katarina Kaarbøe for great input. Finally, we want to
thank our supervisor Anita Meidell for supporting us through this thesis. You have been a great
sparring partner, and we have received valuable tips and thoughtful comments throughout this
semester.

Bergen, June 17, 2016

Håvard Hageberg Baunan Joel Berge

Table of Contents

Acknowledgements
Table of Contents
List of figures
List of tables
1 Introduction ................................................................................................................................................. 1
Background and motivation ......................................................................................................................... 1
Research question ......................................................................................................................................... 3
Methodology ................................................................................................................................................ 3
Relevance ..................................................................................................................................................... 4
Structure ....................................................................................................................................................... 4
2 Risk appetite................................................................................................................................................. 5
Risk appetite in the risk management frameworks ....................................................................................... 5
Professional organizations ............................................................................................................................ 9
Practitioners ................................................................................................................................................ 10
Academic scholars ...................................................................................................................................... 11
Discussion .................................................................................................................................................. 13
3 Theoretical frameworks ............................................................................................................................ 17
Neo-institutional theory .............................................................................................................................. 17
Risk perception ........................................................................................................................................... 22
Risk management framework ..................................................................................................................... 25
Assumptions ............................................................................................................................................... 26
4 Research methodology .............................................................................................................................. 28
Research philosophy ................................................................................................................................... 28
Research design .......................................................................................................................................... 29
Data collection ............................................................................................................................................ 33
Data analysis .............................................................................................................................................. 36
Evaluation of chosen methodology ............................................................................................................ 38
Ethical considerations ................................................................................................................................. 39
5 Empirical findings ..................................................................................................................................... 41
Context ....................................................................................................................................................... 41
Design......................................................................................................................................................... 45
Use .............................................................................................................................................................. 49
6 Discussion ................................................................................................................................................... 58
Institutional pressures ................................................................................................................................. 58
Institutionalization of risk appetite ............................................................................................................. 62
7 Conclusion .................................................................................................................................................. 74
Further research .......................................................................................................................................... 75
8 References .................................................................................................................................................. 76
9 Appendix .................................................................................................................................................... 82
List of formal interviews ............................................................................................................................ 82
Documentary material ................................................................................................................................ 82
Interview guide ........................................................................................................................................... 83
List of figures

Figure 1 Risk appetite and risk tolerance .............................................................................................................. 10
Figure 2 The dimensions of risk ............................................................................................................................ 24
Figure 3 Realism-constructivism continuum of risk ............................................................................................. 25
Figure 4 Analytical model ..................................................................................................................................... 27
Figure 5 Avinor's risk organization ....................................................................................................................... 33
Figure 6 Data collection phase .............................................................................................................................. 37
Figure 7 Risk appetite in the design ...................................................................................................................... 65
Figure 8 Risk appetite in use ................................................................................................................................. 70

List of tables

Table 1 Risk appetite overview ............................................................................................................................. 16
Table 2 Institutional pillars and pressures ............................................................................................................. 21
Table 3 Respondents in Avinor ............................................................................................................................. 35
Table 4 Institutional pressures that influences risk appetite .................................................................................. 62
Table 5 List of formal interviews .......................................................................................................................... 82
Table 6 Documentary material .............................................................................................................................. 82
“Not everything that can be counted counts, and not everything that counts can be counted”
- Albert Einstein