What are the impacts of a misalignment between the risk appetite of the management and of the board of directors?

Details

Supervisors

Sarens, Gerrit

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion

Abstract

The recent financial crisis and corporate scandals have increased the need for sound corporate governance mechanisms within organizations around the world. For instance, failures are deemed to have been provoked by decision makers who may have failed in understanding how much risk they should accept in situations of uncertainties. As a consequence of this undeniable link between corporate governance and enterprise risk management, the risk appetite topic has been attached growing importance. Indeed, it appears that nowadays, it is essential for organizations to properly understand and integrate this concept into their overall strategy. Through this thesis, we aimed to define what were the impacts of a misalignment of risk appetite between the board of directors and the management. To address this problematic, we proceeded to various stages: an exploratory study, followed by a qualitative research. Indeed, we initially tried to gain a deeper understanding of corporate governance and risk management by investigating the literature about these topics. This enabled us to develop a literature review, which provided us reliable bases to design our research questions. Then, in order to provide answers to these questions, we conducted interviews to collect qualitative data from various governance actors. Finally, this thesis addressed the answers to our research questions through a discussion and analysis of the results. As a result, we could observe two main tendencies: first, impacts on one company do not necessarily apply to another, depending on the company size or sector; second, we believe that a misalignment initially induces interpersonal and relational impacts, which may in turn generate impacts on the company performance. In this manner, we understand that these impacts are to a certain extent interconnected. In addition to that, we tried to provide some practical recommendations to avoid facing a risk appetite misalignment, and thus impacts that such situation may induce. Furthermore, we provided some personal reflections regarding our topic, which came out while proceeding to this research.