Appetite for risk: theoretical framework and practical application in a technology-based environment
| Date | 05 December 2024 |
| Pages | 71-103 |
| DOI | https://doi.org/10.1108/JIC-04-2024-0108 |
| Published date | 05 December 2024 |
| Subject Matter | Information & knowledge management,Knowledge management,HR & organizational behaviour,Organizational structure/dynamics,Accounting & finance,Accounting/accountancy,Behavioural accounting |
| Author | Fábio Lotti Oliva,Jefferson Luiz Bution,Flavia Gutierrez Motta,Germano Fenner,Brandon Randolph-Seng,Marco Papa,M. Muzamil Naqshbandi |
Appetite for risk: theoretical
framework and practical application
in a technology-based environment
F
abio Lotti Oliva
University of S~
ao Paulo, S~
ao Paulo, Brazil
Jefferson Luiz Bution
USP FEA, S~
ao Paulo, Brazil
Flavia Gutierrez Motta
Instituto de Pesquisas Tecnol
ogicas, S~
ao Paulo, Brazil
Germano Fenner
University of S~
ao Paulo, S~
ao Paulo, Brazil
Brandon Randolph-Seng
Texas A&M University-Commerce, Commerce, Texas, USA
Marco Papa
Universita degli Studi di Bari Aldo Moro, Bari, Italy, and
M. Muzamil Naqshbandi
School of Business and Economics, University of Brunei Darussalam, Bandar Seri
Begawan, Brunei Darussalam
Abstract
Purpose –The research objective was twofold: first, to propose a novel framework for composing an organization’s
aggregate risk appetite, and second, to demonstrate the application of this framework in a suitable organization.
Design/methodology/approach –A conceptual framework for defining an organization’s aggregate risk
appetite was developed based on relevant organizational theory and research through the lens of knowledge
management. The organizational appetite for risk framework was subsequently implemented at the S~
ao Paulo
State Technological Research Institute (IPT) using the design science research approach. Finally, the
implementation was carefully examined in order to encourage future applications and to further refine the
appetite for risk framework.
Findings –The composition and application of the proposed appetite for risk framework optimally identified the
aggregated risk appetite of the complete test organization. Moreover, organizational differences between
bottom-up tolerance and top-down appetite were revealed.
Practical implications –Our main practical contribution is a comprehensive procedure to conduct a risk
assessment and achieve an organization-wide aggregate risk appetite through the lens of knowledge management.
Originality/value –Unlike past theory and research that take a strictly top-down approach to risk appetite, our
framework integrates dispersed knowledge on risk-taking at various levels of the organization, thereby
contributing to the underexplored role of bottom management in shaping aggregate risk appetite.
Keywords Risk appetite, Knowledge management, Intellectual capital, Risk management, Strategic planning,
Environment of value
Paper type Research paper
1. Introduction
Every business organization takes certain risks to innovate, grow,and remain competitive. The
challenge, therefore, is for businesses to determine the right amount of risk to sustain
Journal of
Intellectual
Capital
71
The article is based on the study supported by: Conselho Nacional de Desenvolvimento Cient
ıfico e
Tecnol
ogico - CNPq. Faculdade de Economia, Administraç~
ao, Contabilidade e Atu
aria - FEAUSP.
Fundaç~
ao de Amparo
aPesquisa do Estado de S~
ao Paulo - FAPESP. Fundaç~
ao Instituto de Administraç~
ao -
FIA. Instituto de Pesquisas Tecnol
ogicas - IPT. Universidade de S~
ao Paulo - USP.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1469-1930.htm
Received 20 April 2024
Revised 7 July 2024
5 October 2024
Accepted 2 November 2024
Journalof Intellectual Capital
Vol.26 No. 1, 2025
pp.71-103
©Emerald Publishing Limited
1469-1930
DOI10.1108/JIC-04-2024-0108
positioning, growth, and ultimately value (Kusa et al., 2023;Hock-Doepgen et al., 2021).
According to the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), risk appetite refers to “the types and quantity of risk, at a broad level, that an
organization is willing to accept in pursuit of value” (COSO, 2020, p. 1).
However, risk-taking is an individual-level behavior, with organizational risk appetite
being an archetype that borrows “human person” traits to presume “legal person” behavior
(Nobre et al., 2018;Mandel and Parija, 2024). The shift from a personal to a collective attitude
towards risk willingness remains a challenge for management scholars and practitioners to
clearly identify (Bran and Vaidis, 2020). Not only is “appetite” a metaphor for a complex
practice, but academics and practitioners alike interchangeably use terms such as “risk
tolerance,” “risk perception,” and “risk preference” (Marshall et al., 2019;Nobre et al., 2018).
Furthermore, the implementation of risk appetite frameworks has been mostly limited to
financial services (Mandel and Parija, 2024).
In this paper, therefore, we build upon current knowledge management literature to help fill
the gap in what is known about organizational risk. Specifically, we draw from knowledge
management research that has investigated Enterprise Risk Management (ERM) (e.g. Oliva
et al., 2022;Hock-Doepgen et al., 2021) and intellectual capital (Khan and Ali, 2017).
1.1 Framework overview
The G20/OECD principles of corporate governance specify that the company’s board of
directors is responsible for directing, monitoring, and reviewing risk management policies and
procedures, as well as ensuring the integrity of financial and accounting reports and the
presence of adequate internal controls (OECD, 2023). Nevertheless, there are various levels of
risk-taking within the organization, accumulated as tacit and dispersed knowledge. The board
may have a risk-taking vision for example, but it may not be practiced and could even be
confined to a risk policy statement. Such a situation may leave executives stuck in the middle
in terms of creating a risk culture that actually incorporates both top-down and bottom-up
knowledge on risk appetite from the entire organization.
Corroborating this view, Marshall et al. (2019, p. 52) posit that, “.. . risk appetite can be
viewed as a high-level portfolio of controls linked to, and even culturally bound to, particular
strategies, which boards and shareholders can apply, and whose impositions in part constitute
reflexive cultural steering within the organization to expedite more effective risk
management.” Taking the banking sector as an example, credit risk is widely accepted. The
bank, regulator, society, and all stakeholders understand that not every loan will be honored.
However, from the perspective of a retail bank, zero tolerance for fraud or for customers being
mis-sold is proclaimed. Thus, there is a visible trade-off regarding “whose” appetite should be
considered in the environment of value (Davies and Zhivitskaya, 2014).
Beyond theoretical limitations to understanding risk perceptions in organizations,
application studies on risk appetite have been limited to traditional silos or the utilization of
risk appetite for resolving trade-offs between risk and return, such as in financial management
(e.g. monetary exposure limits) or in project management (e.g. prioritization of projects or
portfolios). As a consequence, executives have limited evidence and examples to follow when
formulating a realistic organizational risk appetite policy, making it nearly impossible to
implement within the organization.
This argument is backed by the professional certification organization PECB, which
cautions that numerous organizations view risk appetite as an engaging theoretical topic
regarding risk but fail to effectively integrate the risk plan into their routine activities or daily
decision-making practices (Hyseni, 2024;Keqa and Lannoy, 2016). Furthermore, by
analyzing the antecedents of flaws in risk appetite, Marshall et al. (2019, p. 51) support the
need for application studies by emphasizing two issues: “false confidence in organizational
risk assessment”, and “organizational blindness towards the effects of behavioral risk-taking
on genuine organizational risk exposure”. Application studies, in turn, help to narrow the gap
JIC
26,1
72
between Enterprise Risk Management theory and the actual risk tolerances of executives
(Oliva et al., 2022).
1.2 Contributions
Considering the theoretical and practical gaps in understanding organizational risk appetite,
the current research aims to propose a framework to guide the construction of a corporate-level
risk appetite. The proposed framework is based on dispersed knowledge about risk-taking
across managerial tiers and the organization’s value environment, consistent with a holistic
stakeholder approach (see Randolph-Seng et al., 2024). Furthermore, the utility of the
framework is tested on the S~
ao Paulo State Technological Research Institute (IPT), a major
knowledge-based organization in Latin America, which addresses Khaw and Teoh’s (2023)
contention that research institutes lack investigations into risk management.
In sum, our research provides three unique contributions to the theory and practice of risk
appetite. First, we provide a comprehensive organizational view by including the roles of
middle and lower management in shaping the organizational risk appetite. Second, we
consider the organization’s value environment to tailor its aggregate appetite for each type of
risk, consistent with a stakeholder-driven perspective (see Kessler et al., 2019). Third, we
apply the framework to a research institute, a sector that has been extensively studied in the
innovation risk-taking silo but overlooked in the organizational risk appetite domain (Khaw
and Teoh, 2023).
2. Literature review
2.1 Risk appetite
According to the Institute of Risk Management (IRM), “risk appetite” is a widely used phrase,
but often in different contexts and for various purposes (IRM, 2018). Nevertheless, for the
purposes of this research, risk appetite is defined as, “the types and quantity of risk, at a broad
level, that an organization is willing to accept in pursuit of value” (COSO, 2020, p. 1).
Organizations may lean towards being either more daring or conservative. Considerations
include the maximum amount of risk an entity is willingto bear, the type of risk the company is
prepared to tolerate, how much and what kind of risk the organization is willing to accept to
achieve its corporate objectives, and the manager’s ability to take on risks (Marshall et al.,
2019;Gam
on-Sanz et al., 2024).
The entrepreneurial literature extensively explores both individual and collective risk-
taking. Risk tolerance is a widely studied entrepreneurial skill, especially in hard-tech
environments, such as in our application study. According to Kusa et al. (2023, p. 37), “Risk-
taking reflects the subjective probability of systemic failure or possible loss and is also
understood as a personality trait influencing attitudes toward entrepreneurship.” Conversely,
Qian et al. (2023) found that excessive personal risk tolerance can hinder managerial ability
and lead to poor innovation performance. Thus, personal risk-taking can be detrimental if not
properly balanced.
Studying a case of new drug development in a major pharmaceutical company, Styhre
(2006, p. 310) showed how the organization’s embedded risk appetite drives individual
attitudes: “Laboratory researchers perceive top management as aware of the challenges posed
by time and financial pressures in scientific work. Instead of attempting to eliminate all risks,
these researchers emphasize the importance of acknowledging and managing the inherent
risks in scientific endeavors.”
In light of the individual and collective risk approach, Nobre et al. (2018) investigated the
literature on managerial risk-taking and identified eight concepts of risk that influence
corporate decision-making. They found two concepts inherent to companies (i.e. risk capacity
and risk need) and six concepts intrinsic to managers: risk composure, risk preference, risk
perception, risk knowledge, risk bearing, and risk tolerance.
Journal of
Intellectual
Capital
73
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