Abstract
This article analyzes the preconditions and genesis of the concept of risk appetite from the first works on rational decision problem in the conditions of risk and uncertainty, researched by John von Neumann and Oscar Morgenstern in the mid of 20th century within the description of the utility function, to the modern use of Risk Appetite Statement as an innovative risk management tool of the multinational enterprises (MNE). A special focus is placed on the practical use and benefits of the Risk Appetite Statement within the process of internationalization and MNE development of the both financial and non-financial sectors of economy of the US, European Union and Ukraine. The paper argues that the Risk Appetite Statement tool not only sets limits on risks, but also provides other important advantages for MNE in forming a business development strategy and implementing key projects. Practical application of the Risk Appetite Statement in the largest state-owned enterprise of Ukraine NJSC "Naftogaz of Ukraine" is considered in detail.
Highlights
Rapid internationalization and development of multinational enterprises (MNE) over the past two decades, and the global financial crisis of 2008-2009, have highlighted the relevance and urgency of developing effective tools for identifying and assessing the risks and threats faced by MNE in the pursuit of their strategic goals, providing necessary resources to reduce them
Theoretical approaches review The first scientific research in the field of risk compensation, which is embedded in the concept of risk appetite, can be traced in the utility function formulated by John Von Neumann and Oskar Morgenstern in 1947 [Neumann, Morgenstern, 1947]
Risk Appetite Statement is an innovative risk management tool that allows to diagnose risk level across all operations of MNE, identify the most problematic areas, and map actions that will reduce the risk of activity where it exceeds the permitted levels, or maintain acceptable risk levels in those areas, where it is today
Summary
Rapid internationalization and development of multinational enterprises (MNE) over the past two decades, and the global financial crisis of 2008-2009, have highlighted the relevance and urgency of developing effective tools for identifying and assessing the risks and threats faced by MNE in the pursuit of their strategic goals, providing necessary resources to reduce them. Risk-seeking condition (high risk appetite) is marked on the chart in red and indicates that additional utility unit is provided by less income than at risk-neutral approach (blue straight line) and risk-aversion, i.e. low risk appetite (marked in green) Another important step in the development of scientific knowledge that describes individual's behavior under uncertainty is Prospect Theory, which was formulated by Daniel Kahneman and Amos Tversky in 1979 in the article “Prospect Theory: An Analysis of Decision under Risk” [Kahneman, Tversky, 1979]. This document defines risk appetite of Naftogaz Group in its main areas of operations: production, transit and distribution of natural gas, implementation of the PSO regulations, corporate governance and reform and unbundling, liquidity and currency risk management, meeting the requirements of existing and new licenses for production and distribution of natural gas, etc
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