How Could Artificial Intelligence Shape the Future of Corporate Governance?

Stories and predictions of the transformative impact that Artificial Intelligence (AI) will have on society are not new.…

Stories and predictions of the transformative impact that Artificial Intelligence (AI) will have on society are not new. Indeed, AI’s capacity to drastically improve the speed and efficiency of desired tasks is evident across various sectors, and the same holds true for corporate governance.

Corporate governance is the system of rules, practices and processes by which a company is controlled. Traditionally, such practices heavily relied on human input, whereby highly qualified and experienced board members help shape and direct company policy. However, these decisions can be made on ‘gut feelings’, which even the most experienced corporate governance experts cannot hope to accurately analyse when looking at data relevant to financial decision-making.

Now, to stay competitive in a dynamic and increasingly globalised market, companies must rely on new technological developments to improve efficiency where possible. Indeed, corporate longevity is difficult to sustain and often short-lived. Leaders on the FTSE 500 change rapidly, with 88% of companies vanishing from the index period of 1955-2018. Thus, new strategies, such as the increased reliance on AI for analytics, storage or cognitive functions, is garnering significant interest in corporate and academic circles.

A central and persistent challenge to effective corporate governance is attempting to ensure that agents act according to shareholder interests as opposed to their own self-interests. By tapping into the wealth of data available to large corporate firms, AI is being utilised to inform governance decision making within firms. By utilising this data-driven knowledge to create meaningful insights, it is similarly hoped that AI could assist in the transition to sustainable finance. Indeed, Ernst & Young have highlighted that from 1992-2008, publicly listed companies within the EU focused predominantly on short-term benefits for shareholders. The strength of AI’s use in corporate governance is therefore grounded in its ability to streamline decision making, whilst also harnessing the best available data to account for the future.

In the future, artificial intelligence is set to play a larger role in the world of corporate governance; as it becomes more refined, its use in governance tasks will become normalised whilst its possible applications will expand. Among these possibilities is the use of AI to enhance collaborative intelligence in firms, such as by ensuring greater analytical accuracy and efficiency in governance tasks.

Perhaps more significantly, however, is the notion that AI could be utilised to supplement the role of directors and boards. For instance, it has been suggested that AI systems will have the potential to determine the outcomes of decisions in the case of a split vote. Meanwhile, more radical propositions could see artificial intelligence replacing human boards in their entirety in the future. Whilst caution should be exercised in the face of technological determinism, increasingly complex business decisions require increasingly intelligent systems; the cost of failure in poor decision-making is clear, and so the impetus for technology-driven corporate governance is on the rise.

This being said, there are some significant obstacles in the way of such a realisation. Firstly, the often-closed nature of board rooms provides an immediate push-back against the expansive use of AI systems in these spheres. From a pragmatic standpoint, board members are in powerful and controlling positions, thus these individuals may be reluctant to relinquish their power to AI systems so easily. Moreover, this closed nature presents an issue in locating datasets from which AI systems would be programmed to augment board member abilities. Significantly, AI systems can only be as effective as the data provided to them; false assumptions could undermine effective governance.

Secondly, AI systems cannot hope to supplant human judgement surrounding moral and ethical issues. Whilst humans can attempt to imbue their ethics into the systems, such a possibility is limited as humans (the programmers) are inherently flawed. For this reason, combined with the notion that a human actor must always remain accountable for governance outcomes, the ‘human’ factor in corporate governance must always remain prominent.

Artificial intelligence will undoubtedly play a significant role in the future of corporate governance. Nevertheless, it is crucial that its development relies on the best available data, whilst also taking into account public interest requirements from the outset. AI systems can operate as a positive force for change, so long as they do not privilege the private interests of their developer or user.

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