Even if you’re a large V1 organisation you still can’t do everything, or maybe shouldn’t. Organisation’s have limits on both resources and expertise, and so you have to make trade-offs and strategic choices. Understanding your risk appetite is central to this discussion.

Reviewing your risk appetite isn’t usually about changing strategy, but about the type and level of risk you are prepared to accept in pursuit of your goals.

The type of risk you are prepared to take is determined by your purpose, objectives and activities – what are you in business to do? What markets or client groups do you work with? What are you known for? What is your brand?

The level of risk, across a broad range of activity that your board is prepared to take is what a risk appetite workshop can explore. Factors influencing this might include the sector and regulatory expectations, charitable status, culture and values, past experience, financial position or prevailing government policy.

The difference between personal and collective risk appetite is an interesting topic. Clearly the board needs to reach a collective view otherwise you just keep coming back to sticking points – have you ever felt like you’ve had the same conversation at board over a long period of time? But everyone has a personal risk appetite (opinion) and it’s important for the debate to include diverse views and perspectives. However at the end of a debate a consensus is ideally reached and decisions made. If you felt constantly very uncomfortable with decisions made, it might lead you to consider your position given your values were so misaligned with the organisation.

It’s important to consider how you embed risk appetite once it has been agreed. Words like risk averse, cautious, balanced, open or ambitious can help focus the conversation in the appropriate space but are not the end point. Analysis of views in advance of a workshop can include a wide range of areas.

In this example we’ve asked the board's appetite towards development of:

a. Outright sale

b. Shared ownership

d. Market rent

e. Affordable rent

f. Social rent

g. Extra care (building not services)

h. High-rise buildings

i. Modern methods of construction (e.g. modular)

k. Mixed tenure programmes that pepper pot rather than group affordable housing

l. Increasing floor space and green areas above current standards (trade off with number of homes developed?)

This is then captured in a narrative statement for each area drawing on the discussion. E.g:
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Overall the board has an open attitude towards development. This is broken down as:

It is open towards developing social, affordable, and market rent products. Appetite for outright sale and shared ownership however is more balanced. This is reflected in the golden rule of ensuring outright sales income is a maximum of 10% of overall turnover.

The board also has an open appetite towards modern methods of construction, and mixed tenure programmes that pepper pot rather than group affordable housing if the nature of the area and scheme allows this. There is a more balanced appetite towards building for extra care, high rise and specialist disability schemes.

Developing as part of a joint venture is not actively pursued but a balanced view will be taken on opportunities arising.

Development risk appetite is captured in: development strategy, golden rules, board reporting on development and sales reporting.

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The benefits of considering risk appetite includes:

• A framework for guiding business decisions.
• Helps monitor and adjust position against an expressed appetite.
• Good foundation for communication to external stakeholders on activities and level of risk assumed in the business.
• Helps prioritise resource (where to deploy money, people, control etc.).
• Helps set controls at an appropriate level (e.g. in relation to appetite for loss / adverse outcomes).
• Provides a steer for staff on likely board approval.

Risk appetite is aligned to strategy and is forward looking. It must be set from the top with the board and management accountable for decision making, and it is important that it is operationalised through establishing internal risk limits and actions. A clear risk appetite means you minimise unresolved discussions and collectively agree what to do more or less of. Other activities may be best delivered in partnership bringing other expertise, and sometimes you will want keep doing an important activity within limits. Risk appetite is one of the most fundamental and interesting board debates.

Kelsey Walker is a Director at Savills Affordable Consultancy and will be joined by Jacqui Bateson, Board Member, Broadacres and Sally Veitch, Chair, Settle Group on the session ‘How is the risk appetite reflected in your governance?’ at Housing Governance conference – Thursday 23 June 2022 at 3:30pm.