The contrast between principles & rules
Arguably, it is this tension between European and US attitudes to risk management and reporting – the contrast between principles and rules – that has led to a fundamental confusion about what this kind of disclosure is meant to do. At the core of the ‘light-touch’ approach in Europe is the belief that the purpose of risk disclosure is shareholder information. Give investors the kind of disclosure they need to make informed decisions, and let them get on with it. That’s why European guidance on risk reporting focuses on the principal risks, in other words, the ones that investors need to be most aware of, either because of their likelihood or their potential impact.
In the US, the approach to risk reporting is all about protecting the company from potential future litigation. In this mindset, forward looking information could potentially be used to damage the company. If it has to be disclosed, it should only be so clad in an impenetrable armour of caution, caveat and condition.