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My apologies to those of you who thought I would expound on the corporate governance implications of Madonna’s early oeuvre; but I want to write about materiality, and I’m a sucker for a catchy title.

Those of us who spend our waking (and many sleeping) hours thinking about disclosure know that materiality is the linchpin of disclosure; if something is material, you at least have to consider disclosing it – though of course, probability and other factors can impact that decision.  We also know that there are any number of judicial interpretations of what is and is not material.  However, it seems to me that we are approaching a tipping point in how materiality may impact disclosures.

Take, for example, the position of SEC Commissioner Elad Roisman, who has stated, in effect, that there is no need for SEC rules explicitly requiring disclosures concerning climate change and other ESG matters, because existing rules already require disclosure of anything that is material to a company.  (For example, see his keynote address to the 2020 National Conference of the Society for Corporate Governance.)  I have been a member of the Society for many years, and I have heard many of my fellow members express similar views.  However, if that is the case, taking that view to its logical extreme, why have any specific disclosure requirements at all?  Why not just say “tell us what’s material”?

On the other hand, the SEC and, to a greater extent, Congress, have often engaged in rulemaking requiring disclosure of things that aren’t – or at least don’t seem to be – material.  My favorite example is the Congressional disclosure mandate concerning conflict minerals; the issue of conflict minerals is surely material in some respects, but I submit that it’s not material to investors generally.

This materiality stew may have become further complicated by the remarks of SEC Chairman-designate Gary Gensler in his testimony before the Senate Banking, Housing, and Urban Affairs Committee, when he referred to economic materiality and political materiality.  He indicated that his standard would be the former, but there are concerns that he won’t rule out the latter.

And then you have the investor community and a relatively new breed of standard-setters, such as the Sustainability Accounting Standards Board, who in at least some cases seem to be saying that something is material if a “reasonable investor” finds it material.  So far so good, but they also seem to be saying that if you disagree with their view that something is material, you are by definition not a reasonable investor.

To quote Kurt Vonnegut, “and so it goes.”

I have stated what I think is a problem, and I’m the first to admit that I don’t have a solution.  I think that principles-based disclosure is one way of approaching it, but while I like the concept, it poses problems of its own.  First among these is that we have lived under a rules-based disclosure regime for almost 90 years, and it has enabled us to easily answer our clients when they say “show me the rules that say we have to disclose this.”  That’s not so easy in a principles-based environment.    Another problem is that a principles-based approach can be used by my fellow Society members (“we don’t need a rule because we already have to disclose it if it’s material”), by Congress (“we hereby declare this to be material”), and by the standard-setters (“it’s material because we say it’s material, and we are reasonable investors”).

In other words, I think we need a serious debate on what is and is not material and what needs and doesn’t need to be disclosed – including whether materiality is the right standard for making those determinations.