A futility, perversity and jeopardy critique of risk appetite

Abstract

Purpose: Risk appetite is widely accepted as a guiding metaphor for strategic risk management, yet metaphors for complex practice are hard to critique. This critical review paper applies an analytical framework comprising three categories of flaw – futility, perversity and jeopardy – in order to critically explore the risk appetite metaphor. Taking stock of management literature emphasising the need for metaphor to give ideation to complex management challenges and activities, and recognising the need for high level metaphor within strategic risk management in particular, we propose a means to scrutinise the risk appetite metaphor and thereby illustrate its use for further management metaphors.

Design/methodology/approach: We apply a structured analytical perspective designed to scrutinise conceivably any purportedly progressive social measure. The three flaw categories are used to warn that organizational risk appetite specifications can be: (i) futile vis a vis their goals, (ii) productive of perverse outcomes with respect to these goals and (iii) so misleading about the true potential for risk management as to jeopardise superior alternative use of risk management resource. These flaw categories are used to structure a critical review of the risk appetite metaphor which moves towards identifying its most fundamental flaws.

Findings: Two closely interrelated antecedents to flaws discussed within the three flaw categories are proposed: firstly, false confidence in organisational risk assessment and, secondly, organisational blindness towards contributions of behavioural risk-taking to true organisational risk exposure. A theory of high (over-optimistic, excessive or inappropriate) risk-taking organisations explores flaws within the three flaw categories with reference to these antecedents under organisational-cultural circumstances where the risk appetite metaphor is most needed and yet most problematic.

Originality/value: The paper is highly original in its representation of risk management as an organisational practice reliant on metaphor, and in proposing a structured means to challenge it as a dominant guiding metaphor where it has gained widespread uncritical acceptance. The discussion is also innovative in its representation of high risk-taking organisations as likely to harbour strong managerial motives, aptitudes and capacities for covert and illicit forms of risk-taking which, being subversive and sometimes reactionary toward risk appetite specifications, may cause particularly serious futility, perversity and jeopardy problems. To conclude, the theory and its implications are summarised for practitioner and educational use.

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Identifiers

ORCID for Alasdair Marshall: orcid.org/0000-0002-9789-8042

ORCID for Maxwell Chipulu: orcid.org/0000-0002-0139-6188

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