Out of the Shadows: Requiring Strategic Management Disclosure

Under federal securities laws and regulations, public companies must disclose to investors a considerable amount of information about their risk management processes to limit losses. In contrast, these companies need not disclose virtually anything about their strategic management processes to gen- erate gains. This mismatch in disclosure gives investors a distorted sense of firm processes to create value, undermining the federal securities laws' central purpose of creating informed investors. It also signals that risk management processes, which are cast in disclosure sunlight, are more important to firm success than strategic management processes, which remain in the shadows.

To address these concerns, I propose that public firms be required to disclose those qualities of their strategic management processes that are equiv- alent to what those firms disclose about their risk management processes. I also propose that firms disclose how those two processes work together to create value. This new disclosure would encourage firms to design and implement their risk and strategic management processes in an integrated, holistic fashion, consistent with Enterprise Risk Management. It would also reinforce the reality that the path to long-term success for a firm lies not merely with managing its risks, but also with formulating and implementing an effective strategy for growth-a process that unfortunately may suffer from neglect amidst the box- checking exercise that flows from compliance with scores of risk-based regula- tions.