Risk appetite that never reached the contract team
Northbridge Logistics is a privately owned UK freight and distribution group with 1,200 staff and revenue of £240m. Its board-approved risk appetite statement says: 'The group has a low tolerance for financial risk and avoids speculative exposure.' Commercial teams have recently won three fixed-price, three-year haulage contracts worth £38m in total. Fuel represents about 30% of contract cost, but the group has no fuel hedging policy and no contract-approval risk assessment. In the past six months diesel prices rose 18%; forecast margins on the new contracts have fallen from 9% to 2%. The CFO describes the appetite statement as 'a document for the annual report'. Internal audit found no mechanism for escalating contract risk to the board, and the risk register has not been updated since the contracts were signed. The board has asked the chief risk officer to explain why risk appetite did not influence the decision and to propose a remedy.
1. Critically evaluate Northbridge's risk appetite statement and explain why it failed to shape the contract decisions.
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The statement fails on several tests. It is aspirational rather than operational: 'low tolerance for financial risk' gives no boundary, metric or delegated authority, so a contract team cannot test a £38m fixed-price bid against it. It conflates risk appetite with risk avoidance; a logistics group cannot avoid fuel price risk while selling fixed-price haulage, so the appetite must state how much fuel exposure is acceptable and who may approve exceptions. It is not linked to objectives or capacity: the board has not defined how much margin erosion or cash volatility it could absorb. It is not embedded in processes: no contract risk assessment, no escalation trigger and no reporting against appetite. Finally, 'avoids speculative exposure' is ambiguous-hedging fuel could be prudent risk management, not speculation. The failure is therefore a control and culture failure as much as a drafting failure: the statement had no owners, limits, monitoring or consequences, so commercial pressure filled the vacuum.
2. Recommend how the CRO should connect risk appetite to contract approval, monitoring and board reporting. Include specific limits or triggers.
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Recommended actions:
- Replace the statement with a risk appetite framework by risk category (financial, operational, safety, compliance, reputational), each with a metric, appetite threshold and escalation trigger. For example: gross margin on fixed-price contracts not below 6%; unhedged fuel exposure not above 25% of forecast annual fuel spend; any single contract above £10m requires board approval.
- Introduce a contract risk assessment at bid stage covering fuel, customer credit, penalties and volume; finance must model a ±20% fuel scenario.
- Set a delegated authority matrix: contracts above £5m, or with unhedged fuel above threshold, go to the risk committee.
- Adopt a hedging policy with permitted instruments, tenor and counterparty limits; hedging is risk mitigation, not speculation.
- Report monthly KRIs: percentage of fuel hedged, margin by contract, number of contracts outside appetite, and escalation status.
- Board reviews appetite annually and after major market shifts.
- Train commercial teams and link performance objectives to adherence.
This converts the statement into decision rules and gives the board evidence that exceptions are visible and owned.