Risk appetite is the mutual understanding between management and the board of directors regarding the drivers of, and parameters around, opportunity-seeking behavior. It is a high-level view of how much performance variability the entity is willing to accept.
Risk oversight begins with understanding the risk appetite; successful organizations must take risk to create value. The question is, how much risk should they take? This issue of Board Perspectives: Risk Oversight defines risk appetite and reviews ways in which the board and management should discuss it on an ongoing basis.