Welcome Aboard Mr. 0101101: Inducting AI in corporate boardroom

-Harshita Malik | corplaw@vinodkothari.com

From zeroes and ones, to limitless possibilities, Artificial Intelligence (“AI”) has traversed a remarkable journey from theoretical concept to pervasive reality, revolutionizing industries, societies, and daily life. AI has significantly impacted various aspects of our daily lives and industries, including agriculture, finance, education, transportation, and entertainment. Corporate governance is also experiencing this transformation. This article provides an insight as to where AI stands in between the boardroom strife.

Bystanding the profound technological advancements, the 21st century has ushered in an era defined by big data and computational power, setting in motion for deep learning through AI research.

AI on the Board

A survey^[1] conducted by the World Economic Forum’s Global Agenda Council on the Future of Software and Society in 2015, with a view to estimate  the time span in which significant technological advances would manifest in day-to-day life. 45% of the respondents believed that the tipping point of AI being the first machine on a corporate Board of Directors (“BoD”) would have occurred by 2025.

In February 2024, UAE’s International Holding Company appointed an AI named Aiden Insight, developed in collaboration with Microsoft, as a member of its BoD. Aiden Insight is expected to perform data analysis, risk assessment, compliance monitoring, and other tasks to support the company, but it will not have voting powers on the board.^[2] Further, Aiden Insight made its debut on the Board on May 6, 2024. According to the press release, the Company stated that Aiden Insight demonstrated exceptional analytical skills by anatomizing decades of business data. It provided a clear breakdown of performance metrics, highlighting IHC’s existing revenue streams and pinpointed opportunities for enhanced profitability, significantly enriching the discussion within the Board. 

This concept is not entirely new, in 2014, Deep Knowledge Ventures, a Hong Kong-based company, announced the appointment of software as a board member. Recognized as the world’s first robot director, this software was responsible for voting on the company’s investment decisions.^[3]

AI in Corporate Governance

AI has already automated clerical and operational tasks which are routine in nature. Streamlining of operations has provided BoD a way to work in the most efficient manner by driving their attention towards the core areas. Saddling up the horses of AI, directors can run through an extra mile in ensuring good corporate governance practices.

Having said that, AI has been progressively evolving the governance role of directors in several significant ways:

• ESG Analysis: As analysis of Environment, Social and Governance (“ESG”) factors by AI is based on large amount of data, directors are being provided with deeper insights on how these factors will have a concussion with business operations and long-term resilience.
• Risk Mitigation: Mitigating risks has been a crucial role on the part of directors and a very significant one for the companies and AI being proactively managing the same by assisting the BoD has completely transformed this process.
• Automation of Routine Tasks: Routine compliances being automated, AI has been shifting the locus point of attention of directors to significant strategic discussions and decision making
• Stakeholder Engagement: With AI pitching in analysis of trends, feedback and sentiments of shareholders and other stakeholders, directors are able to respond more efficiently being accountable to every stakeholder.
• Talent Management: Directors can leverage AI analytics for ensuring that the organisation attracts, retains and develops top talent.
• Compliance and Ethics: Ensuring compliance and ethics, being a subjective task, is continuously assisted by AI with complex programming to detect any deviations or anomalies.
• Decision Making: AI is enabling directors to take important decisions based on facts and statistics which has been simplified and put together at a single place for easier use instead of relying on human intuition.
• Cybersecurity: Ensuring security be it physical or digital forms a shield against unknown external threats and the same is being addressed AI-powered cybersecurity systems.

Categories of AI in Decision-Making

In 2020, PwC released “An Introduction to Implementing AI in Manufacturing”^[4] to help lay out how AI can be deployed across different companies. According to PWC, there are four types of AI:

Categories of AI

Embracing AI in Director’s Chair

Integral to corporate governance are Independent Directors (“ID”). IDs form the very lynchpin of corporate governance and are responsible for providing unbiased oversight, strategic guidance and monitoring decisions to safeguard the interests of stakeholders. Simply replacing IDs with AI or any other board member for that matter won’t solve the purpose of achieving good corporate governance. The more accurate approach is to employ AI tools in the boardroom to enhance the efficiency of directors instead of replacing them altogether. Harnessing AI will facilitate directors to take well-informed-decisions, maintain ethical standards, place the organisation strategically in a position to capitalise technological advancements and gain a competitive edge. However, the principle of oversight of delegated duties shall apply to directors in order to perform their fiduciary duty by checking the morality and fairness of AI decisions, and balancing them with stakeholder interests.

“For every action, there is an equal and opposite reaction”- Newton

Achieving seamless integration of AI presents significant obstacles and ethical considerations. Pre-programmed AI algorithms limit the extent to which it can foresee situations. As AI is an artificial person, one cannot hold it responsible or the person who programmed it in case of any shortcomings. The dependency of AI on huge amount of data puts the decision making process of directors in jeopardy as AI algorithms can be biased if they are trained on biased data or biased rules. Any programme, however precise and accurate it may be, can never replace human intuition, empathy and contextual understanding.

AI and Legal Challenges

Considering the recent examples as discussed above, the appointment of AI to the BoD is more in the capacity of a board observer rather than formal director. In India, the Companies Act 2013 (“the Act”) mandates that only natural persons can be appointed as directors under Section 149, requires them to apply for a Director Identification Number (DIN) and meet the eligibility criteria under the Act such as not being disqualified, limitation on maximum number of directorship, age restrictions, etc. Whereas in the UK, the Companies Act 2006 allows both natural and corporate persons to become directors. However, since AI does not qualify as either a natural or corporate person, its appointment as a director still raises questions on the practicality.

Further, Section 166 of the Act requires directors to adhere to duties and obligations and be accountable to the Company and the stakeholders as per Reg. 4 of Listing Regulations. They are also subject to penal provisions for certain breach of duties. However, the application of these provisions to AI would pose significant challenges.

Conclusion

The current legal framework does not clearly address the inclusion of AI in corporate boardrooms, which is built upon humanist principles. While AI offers substantial benefits for boardroom decision-making, its successful integration requires careful consideration of ethical implications, effective change management, and ongoing adaptation to technological advancements. However, going forward, the potential growth of AI presents fascinating opportunities, which will likely prompt redefinitions in legality, governance practices, and ethical deliberations.

Our related article on the topic:

1. Governance by technology: The future of corporate governance (This article has been published in the August, 2022 edition of ICSI Chartered Secretary journal and can be accessed here. )

^[1] https://www3.weforum.org/docs/WEF_GAC15_Technological_Tipping_Points_report_2015.pdf

^[2] https://www.ihcuae.com/photo/plugin/article/2024/1715086662_file_1.pdf

^[3] https://www.globenewswire.com/news-release/2014/05/13/635881/10081467/en/Deep-Knowledge-Venture-s-Appoints-Intelligent-Investment-Analysis-Software-VITAL-as-Board-Member.html

^[4] https://www.pwc.com/gx/en/industrial-manufacturing/pdf/intro-implementing-ai-manufacturing.pdf#page=7