This seems like a security shit show.

Can we disable it by group policy across entire domains?

Surely no business would ever allow Microsoft to 'reformat, display, and distribute' confidential company documents?

Or am I missing something.

Well, if there's some sort of cloud feature allowing you to share documents you write with others, it would make sense you would have to allow Microsoft to "reformat, display, and distribute" for the purpose of providing you that service.

However, the terms of service says "To the extent necessary to provide the Services to you and others, [...] and to improve Microsoft products and services". So they're saying they can use your content not just to provide you service, but to provide other people service and to improve all Microsoft products.