Disclosure as a Corporate Governance Tool: Channels and Challenges

Disclosure has emerged as one of the dominant corporate governance strategies of the 21st century. Disclosure’s ascendance in the United States, Europe and elsewhere reflects a pragmatic advantage: disclosure rules are less costly, less prescriptive, and less proscriptive than structural or behavioral interventions. These features make them easier to implement, more compatible with corporate law’s enabling philosophy, and often the only feasible regulatory instrument. 

Such advantages notwithstanding, the US corporate disclosure regime is now undergoing its most searching re-examination in a generation. In January 2026, the SEC announced a comprehensive disclosure review. In May 2026, it issued proposals to permit semiannual reporting in lieu of quarterly reporting, to shrink the universe of public companies subject to the full suite of disclosure and internal controls attestation requirements (a move the SEC branded as ‘transformative’), and to rescind the climate-related disclosure rules adopted just two years ago. A number of other deregulatory proposals are also on the horizon.

At least some of the backlash against disclosure rests on a set of misconceptions about the functions, costs, and benefits of disclosure as a regulatory tool, a subject I analyzed in a recent book chapter. The chapter maps the channels through which disclosure improves governance, offers an analytical framework for thinking about its costs and functions, and identifies a set of persisting and emerging challenges to its effectiveness. This post sketches the framework and then dwells on three challenges with particular salience for the current policy moment: materiality, cost-benefit analysis, and artificial intelligence.

How Disclosure Improves Governance

The chapter summarizes the three familiar causal channels through which disclosure benefits governance. The first is securities price accuracy. Informationally efficient prices allow investors to economize on search costs and allocate capital to its highest-valued use, but they also do distinctly governance-related work: the market for corporate control depends on the ability to identify underperforming firms, and pay-for-performance compensation presupposes the integrity of the stock prices against which performance is measured.

The second channel is internal corporate governance. The disclosure system exerts influence long before any disclosure is made, and even when none is required: because insiders know what would have to be disclosed, disclosure rules deter self-dealing and steer firms toward desirable practices. The disclosure process itself also improves managerial awareness and decisionmaking, informs board monitoring, and enlists lawyers, auditors, and underwriters as monitors of corporate conduct.

The third channel is external corporate governance: disclosure informs shareholders’ exercise of their rights to vote, sell, and sue, and sustains the monitoring done by activist investors and information intermediaries such as analysts, rating agencies, and proxy advisors. 

Private Costs, Social Costs, and Disclosure’s Three Functions

Disclosure’s costs also require more careful accounting than they usually receive. At the firm level, one can distinguish compliance costs—the outlays of generating and publishing the required information—from interfirm costs, the losses of competitive advantage and bargaining power that follow from releasing commercially useful information to competitors, customers, and suppliers. Interfirm costs loom large in firms’ own calculations, but, from a social welfare perspective, they are largely transfers: one firm’s interfirm cost is its competitor’s or counterparty’s benefit. Aggregate social costs are accordingly much lower than aggregate private costs—and the fully diversified shareholders who dominate today’s markets internalize both sides of the ledger, which makes disclosure mandates more attractive than firm-level complaints would suggest. This distinction matters for policy: the loudest evidence in any disclosure debate comes from firms bearing private costs, yet the relevant costs for regulatory design are the lower social ones.

Disclosure rules are also surprisingly heterogeneous. The chapter proposes a functional taxonomy distinguishing an investor information function (the uncontroversial baseline), a behavioral function (rules designed to change firm behavior, from related-party transaction disclosure to comply-or-explain mechanisms of the sort that anchor the entire UK Corporate Governance Code), and a social function (rules that primarily inform non-investor constituencies or generate public discourse). The functions are distinct but not mutually exclusive, and policymakers should be wary of critiques that treat them as incompatible. Disclosure that informs non-investor audiences does not automatically lose its financial relevance to investors. 

Materiality: Malleable and Misunderstood

No concept is more central to the current US debates than materiality. Materiality calibrates firms’ disclosure outputs to the informational needs of the reasonable investor and also serves a gap-filling function. It seems intuitive, but it is complex and malleable: it operates differently in rule design, in the compliance process, and in liability adjudication, and differently again across jurisdictions. In recent years, proponents of a narrow and idiosyncratic understanding of materiality have threatened the SEC’s rulemaking capacity by invoking the Supreme Court’s ‘total mix’ formulation and treating it not merely as the starting point for compliance and regulatory design, but as the complete inquiry. The chapter catalogues the problems with this approach as a matter of policy, regulatory practice, and settled law. 

It is worth bearing in mind that firms’ materiality determinations are predictive, probabilistic, fact-specific, and resource-intensive. Many disclosure decisions nominally conditioned on materiality are really the product of weighing compliance and interfirm costs against liability risk. Overreliance on materiality qualifiers at the expense of line-item requirements for information the SEC has deemed material ex ante invites under-disclosure and undermines comparability across issuers. And because materiality is assessed relative to the size of the firm, the very largest firms can lawfully omit matters that are significant in absolute terms—the ‘too big to disclose’ dynamic I have discussed in other work, which creates materiality blindspots precisely at the large firms that dominate the market portfolio. 

Finally, materiality is diverging across jurisdictions. The IFRS definition of materiality broadly tracks the US financial materiality approach, but the EU’s sustainability reporting standards adopt double materiality, adding a capacious notion of impact materiality that covers actual or potential, positive or negative impacts, across three time horizons and the value chain. When the same US issuer says ‘material’ in an SEC filing and in a report under the EU Corporate Sustainability Reporting Directive (CSRD), it will mean different things and issuers may soon be speaking two reporting languages across the Atlantic.

The Cost-Benefit Asymmetry

Cost-benefit analysis of disclosure rules appears to be a hallmark of good administrative governance. In reality, it presents a structural challenge, because the costs of disclosure are invariably easier to estimate than the benefits: costs are concentrated among disclosing firms, which can supply regulators with plausible estimates of marginal compliance burdens, while benefits are diffused among heterogeneous investors, unpredictable in timing, and nearly impossible to quantify. Because the SEC routinely quantifies costs while declining to quantify uncertain benefits, its rules predictably attract the criticism that they impose precise costs in exchange for vague benefits. Notably, the relevant counterfactual is not a world in which firms voluntarily provide the same information. Voluntary disclosure is selective and strategic, whereas mandatory rules add standardization, comparability, regularity, verification, and legal accountability. This measurement asymmetry creates a predictable deregulatory bias: treating benefits that resist quantification as less real than readily quantified costs will systematically favor retrenchment, even when a rule’s net social benefits are positive.

Disclosure in the Age of AI

The disclosure system was designed on the assumption that disclosure would be written by people and read by people. That assumption no longer holds. Disclosure today is routinely consumed by AI to make automated and semi-automated trading decisions; it is increasingly written by or with AI; and, most strikingly, it is written with a view to its AI readership. Finance scholars have found that AI readership motivates firms to prepare filings that are friendlier to machine parsing and to manage the sentiment perceived by algorithmic readers—for example, by differentially avoiding words that algorithms, as opposed to humans, score as negative. Because human and machine readers process information differently, a body of disclosure optimized for machines may serve human investors poorly. And the capacity to detect and counteract AI-targeted spin is unevenly distributed, creating new informational asymmetries: whereas large institutions can build bespoke models, data pipelines, and detection tools, retail investors must rely on less specialized, off-the-shelf systems. 

There is an optimistic flipside: AI dramatically expands the capacity to analyze disclosure, which strengthens disclosure’s role as an input into governance and further undercuts the perennial ‘information overload’ objection. But regulators must determine whether the same disclosure system can serve human and machine readers, as well as human and AI-assisted preparers, and, if not, what modifications are needed. A regulatory review that asks what should be disclosed without asking who or what now reads and writes disclosure will not result in a true modernization of the disclosure regime.

Overload, Distortions, and the First Amendment

Several further challenges can only be flagged here. The ‘information overload’ hypothesis, which has long been the most intuitive argument against disclosure, continues to lack adequate support. It transplants assumptions from consumer regulation into securities markets without accounting for the fact that disclosure’s utility in securities markets depends on the marginal rather than the average user of information and that the information impounded in securities prices benefits even investors who never read a filing. Paradoxically, following the SEC’s 2020 reform of risk factor disclosure, which had the express goal of reducing disclosure length and ‘information overload’, 79% of companies increased their risk factor page count. The genuine concerns lie elsewhere: informational integrity and the overuse of boilerplate.

Disclosure rules can also create distortions, which should be borne in mind when designing and assessing disclosure regimes. The proliferation of large private companies operating outside the disclosure regime highlights the regulatory wedge between public and private firms and helps sustain perennial pressure to blame disclosure ‘burdens’ for the state of the public markets, notwithstanding empirical work attributing the IPO decline to non-regulatory forces. Foreign private issuers in the United States enjoy an abridged disclosure regime that is considerably less demanding than the regime applicable to domestic issuers. And, in a dynamic that has received scant attention, disclosure requirements incorporating segment accounting rules can distort internal management structures: because reporting obligations follow the chief operating decision maker’s financial oversight, firms may be tempted to shield the CEO from oversight of a line of business precisely to avoid disclosing information about it, sacrificing governance to economize on disclosure. 

In the United States, the evolution of First Amendment jurisprudence presents an additional complication: compelled speech challenges to disclosure mandates may limit disclosure’s continued availability as a regulatory tool. As the chapter shows, mandates requiring firms to disclose the effects of salient matters on their own businesses compel only ‘factual’ and ‘uncontroversial’ information and should withstand challenge under prevailing doctrine. 

The Stakes

Disclosure-based interventions are both a complement to and a substitute for direct corporate governance regulation, and their ascendance reflects real advantages: disclosure is less intrusive and less costly than substantive mandates and prohibitions, and it outsources part of the regulatory function to investors. The current recalibration of the US disclosure regime is best understood as a test of whether we grasp what disclosure actually does. A review that treats disclosure solely as a conduit of information to human investors, that prices costs precisely while leaving benefits unquantified, and that deploys a limited conception of materiality will systematically undervalue the work disclosure does for investors and markets. Any recalibration of the disclosure regime should proceed with a full accounting of what stands to be lost.

This post is based on his chapter ‘Disclosure as a Corporate Governance Tool: Channels and Challenges’, in The Oxford Handbook of Corporate Law and Governance (2nd ed, Jeffrey N Gordon & Wolf-Georg Ringe eds 2025), available here.

George S Georgiev is Professor of Law at the University of Miami School of Law and a Research Member of the European Corporate Governance Institute (ECGI).