SEC Commissioner Hester Peirce recently delivered a speech titled The Art and Science of Materiality.

She illustrated the broad concept in the following remarkable fashion:

• humor me by considering this question: How would you describe the Mona Lisa to a person who has never seen it before? A half-length portrait of a woman? Wouldn’t you need to add that her smile is slight and her eyes seem to follow you wherever you go? But is that description sufficient to convey what the Mona Lisa is? Probably not. What else do you need to say? You might want to reveal that the artist was Leonardo da Vinci. Perhaps you would explain that the subject’s gaze is off-center and that she stands in a three-quarter profile with her right hand resting on top of her left. You also may need to note her resemblance to contemporary depictions of the Virgin Mary. What about the background—a debatably imaginary landscape that was anomalous for portraits at the time? And perhaps you would mention the modest dimensions of the portrait, a fact that has jarred many Louvre visitors over the years? You also might want to reveal that the subject of the painting may be Lisa del Giocondo, a Florentine woman of the late 15^th and early 16^th centuries. I could keep going, but you get the point. Describing a work of art requires choosing which among a large body of facts to convey. Knowing when you have described something adequately is difficult. And even if you believe you have described something adequately, your audience might disagree.
• At the SEC we deal with public companies, not paintings, and financial statements, not brushstrokes. Nevertheless, we encounter the same problem. We tell public companies to describe themselves. One could say a lot of things about a company to describe it, but what type of description accurately captures a public company’s essence? More precisely, what should the Commission, as a regulator, mandate that companies disclose about themselves?
• In assigning you the task of describing the Mona Lisa, I left out an important guidepost: I did not tell you who your audience would be. I mentioned only that the person to whom you were describing the painting had never seen it. You probably assumed that you were being asked to convey the painting’s essence to an average person with an ordinary interest in art. Your description might have changed if you were speaking instead to an art historian working on a book about cultural context or craquelure, an archivist for whom special elements in need of preservation would have been most interesting, a reader of the Da Vinci Code curious about what the painting purportedly hides rather than what is in view, or a climate protestor who needs information about how to best aim her pumpkin soup at the painting. If you are going to succeed at the mission of describing the Mona Lisa, you need to know to whom you will be describing the painting.
• Similarly, if public companies are making disclosures, they need to know who the intended audience is. And the SEC, as crafter of disclosure mandates needs to know too. Only then will the disclosures meet that audience’s need. Congress did a better job than I did when I assigned you the Mona Lisa task; Congress told us to whom securities disclosures should be aimed: investors.

The point of this remarkable soliloquy is that “regulators should not substitute their judgment for companies making materiality judgments in good faith (and) cannot short-circuit that company-specific judgment with one-size-fits-all prescriptive rules on all manner of topics.” But one might admire Peirce’s (albeit show-offy) eloquence while still judging the comparison to be complete nonsense. It’s hard to think of many situations in which one would need to describe the Mona Lisa, rather than simply letting someone see a reproduction for themselves, and for the situations one can think of (a conversation with an unsighted person, or one between two marooned castaways) it basically wouldn’t matter if the image evoked in the recipient’s head deviated drastically from the reality. None of this applies to corporate disclosure: investors and other stakeholders generally have no access to any information about the company beyond what it gives them, and if the impression provided by that information is inaccurate or misleading, the repercussions may be severe.

Peirce throws out the usual (one might say) varieties of pumpkin soup: “Disclosure demanded by a subset of investors hits the pocketbooks of all investors in the company. Costs include not only the time of the lawyers and accountants to prepare the disclosures, but also the time and attention of company personnel devoted to tracking, verifying, and reporting information, and the potential litigation and competitive costs of making the disclosure. Forced disclosures can substantively change how corporations behave. They also can empower people who seek to harm a corporation.” But it’s apparent that the average prominent corporation in today’s America has far more to fear from the country’s rapidly eroding legal and ethical infrastructure (often spurred on by the rapacious corporate leadership itself) than from over-zealous riders of some disclosure hobby horse. If the expensively energy-sucking promise of AI is to be achieved in any field at all, the generation and analysis of corporate disclosure would seem to be an obvious candidate; it’s simply perverse that this increased capacity should coincide with a regulatory push to withhold and roll back. Enough, even, to wipe out the Mona Lisa’s smile…

The opinions expressed are solely those of the author.