I don’t know if any of you are like me, but living in a house with children seems to dictate the type of entertainment that I get to enjoy. For any of you that have not seen the Croods, an animated film set in the pre-historic era, it follows the supposed lone surviving cave-family, the challenges they face and ultimate opportunities that come about from a previously unknown genius that eventually leads the family in its search for a new home. The movie contained a few key lines that took me back to some board rooms and credit unions that I had visited over the past few years. The teenage cave-daughter, describes her family’s survival at one point by stating, “My family has always survived by living by my dad’s one rule: never leave the cave. We never had the chance to explore the outside world, but what we didn’t know is that our world was about to change.”
Following the advice of their dad that ‘new was always bad’, and to ‘never not be afraid’, the family survived by hunkering in its cave as the community outside was changing and things were underway that would affect their ability to survive. Without the renegade daughter failing to heed the advice of her dad, the family would have surely perished.
At one pivotal point in the family’s journey, the daughter tells her dad that he has to stop worrying so much. While he exclaims that it is his job to worry, she exclaims that the rules don’t work out here. In a typical dad/daughter exchange, dad comes back with a “well, they (the rules) have kept us alive.” The line that most stood out to me and caused me to really consider the discussions that I had participated in over the past few years was the daughter’s response: “That wasn’t living! That was just …. ‘not dying!’ There’s a difference.”
I wonder how many credit unions have settled with purely ‘not dying’. I have spent the majority of my time over the past few years assisting credit unions with implementing or running enterprise risk management programs and wrestling through annual strategic planning processes. In many cases, discussions are focused on day-to-day affairs and considerations of the organization’s biggest risks and what can be done to mitigate them. This is an absolute necessity and should be core to each and every financial institution’s management toolbox. However, the discussion must evolve beyond the world we live in today as we take a hard look at what is going on in the outside world and be willing to explore the unknown that will inevitably push us outside our comfort zone.
One such exercise consists of engaging your board and senior management in a discussion around the organization’s risk appetite. Risk appetite helps describe the organization’s willingness to assume risk in its pursuit of value. It is part of the tool set we use to shape organizational performance and manage our approach to achieving organizational goals and strategies. It has the opportunity to help the credit union not only manage risk, but enhance its overall performance.
Much as we as individuals maintain a risk appetite, an organization also has an appetite for risk, although it usually goes unwritten and unspoken. Decision makers across the organization are left to their own interpretation of the organization’s appetite for risk as they attempt to ferret out which opportunities to pursue, which obstacles to avoid and the speed at which they should operate.
A clearly defined and articulated risk appetite statement from the board and/or senior management provides a basis for which the risk culture of the organization can be more fully understood. It provides a general sense of direction to personnel across the organization, using broad statements to describe what the organization will and won’t do and how the organization will respond to certain challenges. Well thought out and clearly written risk appetite statements give a green light to management to step out of the cave, closely examine the environment and make proactive decisions that will push the organization forward.
We have found the use of qualitative appetite statements beneficial as you begin the risk appetite process. Facilitated dialogue with directors and senior managers around several key components and stakeholder needs allows the credit union’s leadership to debate differences in the amount of risk that the credit union is willing to assume in various areas. Collectively, the discussions can be summarized and drafted into risk appetite statements for ultimate approval and communication. Over time, the risk appetite statements should be used as a litmus test, as new initiatives, opportunities or issues are weighed against the statements.
While the risk appetite statements do not dictate what the credit union can and cannot do, those initiatives that cause the credit union to act outside its stated risk appetite should be carefully vetted with the decision to move forward outside the stated appetite thoroughly documented. This helps ensure consistency in thought and action across all organizational decision makers, and empowers personnel to push the limit and take those risks deemed appropriate by senior management and the board.
As the Croods ultimately prove, ‘not dying’ is only sustainable for so long. Credit unions must continue to push the envelope, not in a reckless manner, but intentionally setting their sights on what’s next and how to ensure they are positioned to offer value to their members beyond what is expected. The fact of the matter is that if we don’t do it, someone else gladly will. The final piece of advice offered to the Croods came from the unlikely teenage boy that stole the daughter’s heart and led the family to its new home. Prior to him becoming orphaned, he described the last advice received from his parents: “Don’t hide. Live. Follow the sun; you’ll make it to tomorrow!”