Wheelhouse Risk Cycle: Diagnose AI Risks as SEC Filings Indicate Rising Concerns
As AI continues to dominate discussions in tech earnings calls, the enthusiasm surrounding its potential is palpable. Companies have been quick to assure investors of their AI-driven futures. However, this optimism is increasingly tempered by a growing recognition of the risks AI poses, revealing a crucial stage in the Wheelhouse Risk Cycle. Are we truly entering the AI “pit of empty promises”, or can these risks be managed strategically?
Emerging AI-Related Risks in Tech Companies
Recent disclosures by major tech firms paint a picture of dual narratives. Meta Platforms Inc. has flagged the potential for AI to spread misinformation during elections, posing significant reputational risks. Microsoft Corp. has highlighted potential legal challenges arising from copyright claims related to AI-generated content and security risks from sophisticated adversaries. Oracle Corp. has acknowledged that its AI offerings might not perform as well as those of competitors.
These concerns are not isolated. At least a dozen major tech companies have updated their risk factors in financial filings with the U.S. Securities and Exchange Commission (SEC) to include AI-related threats. These disclosures, aimed at protecting companies from potential shareholder lawsuits, underscore the significant uncertainties surrounding AI implementation.
Figure 1 - Source: Wheelhouse Advisors
The Dual Challenges of AI: From Pinnacle of Peril to Pit of Empty Promises
The AI journey within the Wheelhouse Risk Cycle has reached a critical juncture. Initially hailed as a transformative force, AI is now seen progressing from the “pinnacle of perils”—a phase where the potential for groundbreaking advancements was coupled with significant risks—to the “pit of empty promises,” where the limitations and real-world challenges of AI are becoming increasingly apparent.
The surge in risk factor disclosures is a key indicator of this transition. Companies have moved beyond merely recognizing the peril associated with AI to actively observing and documenting risks that are likely to materialize. Google’s parent company, Alphabet Inc., has warned that its AI tools could negatively impact human rights, privacy, and employment, potentially leading to lawsuits or financial losses. Adobe Inc. has raised concerns that AI might disrupt the workforce and reduce demand for its flagship software, despite promoting the continued relevance of its creative tools.
Legal and Regulatory Implications
The increase in AI-related risk disclosures highlights the critical importance of corporate governance and compliance. Adam Pritchard, a professor of corporate and securities law at the University of Michigan Law School, notes that companies often mirror each other’s risk disclosures to avoid becoming litigation targets. This “herding” behavior is a strategic response to the evolving legal landscape surrounding AI.
Palo Alto Networks Inc., Dell Technologies Inc., and Uber Technologies Inc. are among the companies that have introduced new AI-focused risk factors this year. These additions boil down to a simple message: if AI initiatives fail, companies have forewarned investors.
Strategic Imperatives for Managing AI Risks
The burgeoning evidence of AI entering a critical phase of uncertainty underscores the necessity for robust IRM strategies. As businesses continue to explore AI’s potential, they must equally prepare for the associated risks. The Wheelhouse Risk Cycle, part of Wheelhouse Advisors’ IRM Navigator™ framework, is designed to provide continuous monitoring, reassessment, and mitigation of risks as technologies evolve. This cycle helps organizations anticipate and adapt to changing risk landscapes, ensuring resilience and sustainable growth.
Need for Improvement in Disclosure Controls
A key finding from the analysis of AI-related disclosures in the S&P 500 companies is the need for improved disclosure controls. Companies must enhance their internal processes to ensure that AI-related risks are accurately and comprehensively reported. This improvement is critical for fostering transparency and maintaining investor confidence.
Risk management professionals must act now to balance AI optimism with realism. This involves rigorous scenario planning, ethical considerations, and a proactive approach to regulatory compliance. By engaging with integrated risk management frameworks, such as the Wheelhouse Risk Cycle, companies can address potential pitfalls and transform them into sustainable growth opportunities.
Are We Entering the AI Pit of Empty Promises?
The experiences of tech giants provide valuable lessons for managing these challenges. While AI presents unprecedented opportunities, it also brings significant risks that must be managed within the IRM Navigator™ framework. The notion of AI as a “pit of empty promises” can be mitigated through integrated risk management and strategic foresight. By addressing potential pitfalls head-on, companies can harness AI’s transformative potential while safeguarding against its inherent risks, ensuring a future of sustainable growth and innovation.
Clear Indicators of Progression: From Pit of Empty Promises to Incline of Integration
Figure 2 - Source: Corporate Counsel
A clear indicator of progression from the “pit of empty promises” to the “incline of integration” will be the inclusion of AI risk factors as part of the Business or Management Discussion and Analysis (MD&A) sections. This shift will signify that AI risks are being managed and integrated into the broader business strategy, reflecting a matured understanding and handling of AI within corporate risk structures.
Several companies in the S&P 500 mentioned AI in the Business or MD&A sections of their most recent 10-K, tying AI to their main products and services or to key business updates. According to Corporate Counsel, while less common than an AI-related risk factor, 40% of the S&P 500 had an AI-related disclosure in the Business or MD&A sections of their most recent 10-K, an increase from 30% in the previous period. This trend is illustrated in Figure 2.
AI-related disclosures in these sections varied significantly by industry. For instance, 95% of companies in the information technology sector included AI disclosures in the Business or MD&A sections, compared to 58% in the financial sector and 36% in healthcare. Additionally, 33% of industrials, 27% of pharmaceuticals, 22% of energy, and 20% of consumer discretionary companies made similar disclosures. Meanwhile, sectors like utilities (22%), consumer staples (12%), and real estate (7%) showed lower prevalence.
Another key indicator will be more companies including board oversight of AI disclosures in their proxy statements. Currently, 39% of S&P 500 companies mention AI in their proxy statements, but only 9% disclose the role of the board in overseeing AI-related risks.
Call to Action: Embrace Integrated Risk Management
Risk management professionals must act now to ensure AI’s promises do not devolve into perilous pitfalls. Embrace integrated risk management frameworks, starting with the Wheelhouse Risk Cycle to diagnose where organizations stand in the AI development cycle. Then, turn to the IRM Navigator™ framework to guide them through the cycle with less risk and more success. By implementing rigorous scenario planning, prioritizing ethical considerations, and maintaining a proactive stance on regulatory compliance, businesses can effectively harness AI’s transformative potential while safeguarding against its inherent risks, securing a future of sustainable growth and innovation.
References:
Observer. Major Tech Companies Are Quietly Warning of A.I. Risks in SEC Filings
Corporate Counsel. AI-Related Disclosures in SEC Filings: Trends from the S&P 500 (Part 1), AI-Related Disclosures in SEC Filings: Trends from the S&P 500 (Part 2), AI-Related Disclosures in SEC Filings: Trends from the S&P 500 (Part 3)
Bloomberg. University of Michigan Law School Interview. Adam Pritchard on AI Risk Disclosures
Wheelhouse Advisors. IRM Navigator™
