Role of the Board and Executive Management:
* The board of directors and executive management are responsible for setting the overall strategic direction of the organization, including its risk tolerance.
* They have the authority and oversight necessary to define the levels of risk that the organization is willing to accept in pursuit of its objectives.
Defining Risk Tolerance:
* Risk tolerance refers to the acceptable level of variation in performance relative to the achievement of objectives. It is essentially the degree of risk the organization is willing to endure.
* The board and executive management establish risk tolerance based on the organization's strategic goals, capacity to absorb losses, and regulatory requirements.
Importance of Senior Leadership:
* Senior leadership's involvement ensures that risk tolerance is aligned with the organization's overall strategy and risk appetite.
* It provides a top-down approach to risk management, ensuring consistency and alignment across the organization.
Comparing Other Stakeholders:
* IT Compliance and IT Audit: These functions are responsible for monitoring and ensuring adherence to policies but do not set risk tolerance.
* Regulators and Shareholders: They influence risk management practices through external pressures but do not define risk tolerance directly.
* Enterprise Risk Management (ERM): ERM frameworks support the implementation of risk
* management but the actual definition of risk tolerance comes from the board and executive management.
References:
* The CRISC Review Manual discusses how senior management, including the board, is responsible for defining risk tolerance and ensuring it aligns with the organization's risk appetite (CRISC Review Manual, Chapter 1: Governance, Section 1.10 Risk Appetite, Tolerance, and Capacity) .