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Given the firm's objective with respect to shareholders and other stakeholders, it is naturally desirable that a risk management strategy is consistent with the objective. A firm's objective has several dimensions. It can be defined in terms of a target variable such as profit, economic value, shareholders' wealth, or book value. In addition, the time horizon must be made explicit. Risk attitude with respect to the target variable is a third dimension. Determination of a risk management strategy requires also that management takes a position with respect to financial market efficiency, the existence of risk premiums, purchasing power parity, and costs of adjusting operations. These costs determine the role of financial risk management relative to the adjustment of operations and pricing. Flexibility of operations is a real option. Four types of strategies for financial risk management are discussed in this chapter based on the management's risk attitude and perception of profit opportunities in financial markets; laissez-faire (do nothing), aggressive, minimize variance, and selective hedging. These strategies can be chosen for any target variable and time horizon. Choosing a strategy is, to a large extent, an information problem. Information requirements for selective hedging, in particular, can become so overwhelming that the range of feasible strategies does not encompass it. In this situation management is faced with the need to determine what risk management objectives can be achieved with the available information.

In this chapter, I argue that financial risk poses unique challenges that justify a differential application of corporate law oversight standards. The steps in my argument are as follows. First, I show how modern firms with significant exposure to financial risk are different in fundamental ways that matter crucially to the application of oversight standards. Second, I argue that, notwithstanding these differences, the major Delaware oversight cases were correctly decided, though the result might have been the opposite if complaints had been framed differently, with relevant and important facts. Third, I argue that the federal case involving the JPMorgan “London Whale” episode was wrongly decided. I am not arguing for any change in the oversight standards themselves. Instead, my argument is that Delaware law already provides ample support and justification for holding directors to a higher standard with respect to the oversight of financial risk. The complexities of financial risk pose unique challenges that the Delaware courts should take into account when assessing director oversight failures. Such an approach would not subject directors to unwarranted exposure for oversight failures, or have negative implications for business, and it would not change Delaware’s approach to cases that do not involve financial risk.