An organisation’s risk appetite is normally set by reference to the ambition of the directors/investors and how well they think they can manage the risks in their market and in their area of expertise. It is also set by reference to the prevailing conditions, whether they be political, economic, social, technological, legal/regulatory or environmental (a range of factors commonly summarised as PESTLE).
When western companies started getting into the Chinese market for example, they increased their risk appetite and were willing to suffer a period of losses in order to get into that huge market – KFC had a plan to set up hundreds of stores within its first five years in China – they managed only a handful, but they kept at it (it now has over 5,000 and is aiming for 20,000 in what is now KFC’s biggest market).
Glencore is the world’s biggest commodity trader. It is a large-scale miner, but also acts as an intermediary linking suppliers of raw materials, usually in developing countries, with manufacturers and consumers in the more developed parts of the world. What sets it apart is its appetite for risk. It believes it is particularly good at managing political risks in inherently volatile countries. This has made it a company to watch as far as the US Department of Justice is concerned.
Glencore’s interests in the Democratic Republic of Congo are in cobalt – the DRC has half of all known reserves, and the metal has doubled in value in the last two years. Their interests there involve them with a sanctioned individual who is close to the DRC’s president (whose term, btw, is over but he refuses to leave). So, Glencore thought they would avoid US sanctions by paying this individual in euros instead of dollars. Well, that didn’t work, and now the US Dept of Justice has slapped a subpoena on them for documents in order to investigate them for bribery and corruption.
Often the ceiling on a company’s risk appetite is set by the regulator.
Source: The Financial Times, Fortune Magazine