What role does the board play in defining risk appetite in an organization?

The board plays a critical role in determining acceptable risk levels, which is a fundamental aspect of an organization’s overall governance and strategic direction. By establishing the organization’s risk appetite, the board defines the amount and type of risk that the organization is willing to take in pursuit of its objectives. This decision-making process involves weighing the potential benefits of various risks against their potential downsides, ensuring that the organization’s strategy aligns with its overall mission and capabilities.

In this capacity, the board also sets the tone for risk management across the organization, influencing the culture and approach toward risk at all levels. While operational limits, employee performance, and internal policy drafting are essential components of operational management, they typically fall under the purview of executive management rather than the board itself. The board's critical focus is on high-level strategic decisions regarding risk appetite rather than tactical or administrative aspects.