Case: Assessing Risk Appetite for a Utility Company

The following questionnaire must be completed by Management and the Board of Directors. Weighted responses from Management (40% weight) and Board of Directors (60% weight) are then collated to finalize the current and target Risk Appetite (within the five-year horizon) profile for a company.

Risk parameters	Low (1)	Medium (2)	High (3)
Expectations
Preference for return cash flows	Below average, regular and stable	Average, Sometimes irregular	Above average Delayed, Irregular
Time Horizon of payback	Short term (6-18 months)	Medium term (18 – 36 months)	Long-term (36 months+)
Willingness to lead the Telecom industry in products and solutions	Followers of trends, slow to react	Reactive. Selective and tread carefully	Proactive, selectively lead trends
Return expectations (RoIC)	Industry average (8-11%)	Slightly above average (11%-15%)	Significantly above average (15%+)
Tolerance
Temporary capital loss tolerance	0-15%	15-30%	>30%
Permanent capital loss tolerance	0-5%	5-20%	>20%
Public Listing status	Within +/- 2 years of listing	Late stage Private, or Listed for 2-5 years	Growth stage Private, or Listed for >5 years
Investment Maturity & capabilities
Organic investment governance (incl. capital budgeting)	Novice (0-2 years)	Intermediate (2-5 years)	Experienced (>5 years)
Inorganic investment governance	Novice (0-2 years)	Intermediate (2-5 years)	Experienced (>5 years)
Nature of investments managed	Core and Near-Core	Core+, Traditional beyond core	All investments
Value realization experience & capabilities	Limited (<2 years)	Reasonable (2-5 years)	Good (>5 years)

Illustrative application of Risk appetite to Investment Pool

For instance, let us say that the capital allocated to the external investment pool is SAR 500 Mn (say). Expected RoIC from this Capital pool is 11% (say). Here are three choices we have for allocation of SR 500 M over the next 5 years –

External Investment Pool	5Y Avg. RoIC BM	Scenario #1	Scenario #2	Scenario #3
Amount Allocated	Annual Return	Amount Allocated	Annual Return	Amount Allocated	Annual Return
Core/Core+	7%	SR 100 M	SR 7 M	-	-	SR 50 M	SR 3.5 M
Related non-core	10%	SR 400 M	SR 40 M	SR 500 M	SR 50 M	SR 300 M	SR 30.0 M
International	13%	-	-	-	-	SR 75 M	SR 9.8 M
Emerging areas/ Opportunistic	16%	-	-	-	-	SR 75 M	SR 12.0 M
Overall Actual		SR 500 M	SR 47 M	SR 500 M	SR 50 M	SR 500 M	SR 55.3 M
Overall Expected		SR 500 M	SR 55 M	SR 500 M	SR 55 M	SR 500 M	SR 55.0 M
Goal Achieved			NO		NO		YES

In Summary: Clearly, we had to step into riskier areas because we expected higher RoICs. Hence, Risk appetite assessment and migration is required to align with return expectations at overall company level.

In the next article, we will look at the second lever – Investment Policy Statement for a non-investment business.