Artificial intelligence, popularly known as AI, is emerging as a revolutionary force in the corporate world. Overall, the impact of artificial intelligence on corporate governance is quite huge, given that the technology is challenging traditional corporate paradigms and reshaping the dynamics of decision-making in the boardroom.
Traditionally, an organization’s corporate governance efforts relied on human judgment. These efforts were often labeled ”reactive” as they primarily addressed issues only after they happened. Moreover, most of them were time-consuming and prone to human errors.
In contrast, shifting to AI means more proactive approaches, data-driven strategies, and actionable insights integral to modern corporate governance. Companies are adopting machine learning, robotic process automation (RPA), and natural language processing (NLP) to automate tasks, evaluate complex data, and recognize and mitigate risks.
Every day, more companies rush to embrace AI, unlock its efficiency, and create more value for stakeholders. But even so, fundamental questions continue to emerge about its potential impact. For instance, how does AI affect corporate governance? Should corporate entities embrace it? And what’s the future of AI governance?
This article will explore those concerns and many others to help you better understand AI governance (which is derived from AI and corporate governance). So, let’s dive in!
Key Takeaway
- AI governance brings together the worlds of artificial intelligence and corporate governance. It’s defined as the framework that governs an organization’s deployment and internal management of Artificial Intelligence.
- AI impacts the boardroom’s decision-making by contributing to administrative and judgment work.
- The boardroom can deploy AI governance at three levels: assisted AI, autonomous AI, and augmented AI.
- Humans have the final decision-making powers in assisted AI, while machines work almost independently in autonomous AI. However, there’s shared collaboration in augmented AI.
- Notable benefits of AI governance include actionable insights, strategic orchestration, transparency, accountability, workflow automation, work efficiency, better customer experience, improved productivity, privacy protection, and risk mitigation.
- Common AI governance problems include legal challenges, ethical challenges, integration challenges, cultural shifts, regulatory uncertainty, and others.
- The future of AI governance is bright, underscored by enhanced predictive analysis, robo-directors, AI-guided ethical frameworks, and regulatory compliance.
What’s Artificial Intelligence?
Artificial Intelligence or AI is a form of technology that simulates human intelligence and boasts problem-solving capability. AI works by ingesting voluminous amounts of data, which it analyzes for patterns and correlations and then utilizes the established patterns to make future predictions.
Its systems are programmed based on cognitive skills like learning, reasoning, creativity, and self-correction, which are associated with human intelligence.
What’s Corporate Governance?
Corporate governance refers to a system of basic rules and practices by which a corporate entity is run and directed. It’s the framework employed to manage and control a given company.
Typically, the board of directors is charged with enforcing the proper corporate governance structure and culture, which includes one that embraces principles like fairness, transparency, accountability, responsibility, and risk mitigation.
What’s AI Governance?
AI governance is derived from the two terminologies explained earlier: artificial intelligence and corporate governance. With the two in mind, AI governance is described as a set of guidelines and practices by which a corporate entity governs its uses and internally manages artificial intelligence.
Generally, an effective AI governance structure ensures that a company adopts the correct ethical standards when using AI and complies with existing regulatory standards. Moreover, it emphasizes the need for human oversight at the most critical decision-making points where AI is involved.
How Does AI Affect Corporate Governance? (The Impact)
AI is impactful in the corporate world, more so around the boardroom. Let’s talk about that.
AI Governance Impact in the Boardroom
The board of directors is always at the heart of making strategic and innately complex decisions for a company. Modern AI is, however, designed to make the decision-making process less complex by playing any of these two roles:
- Administrative Work: AI’s role in administrative boardroom work includes routine and repetitive work like resource allocation, agenda management, meeting scheduling, and meticulous record keeping. AI makes it easy for the board to channel more effort towards these administrative responsibilities.
- Judgment Work: Judgment work includes creative, strategic, and analytical aspects of the decision-making process, which is an area in which the board of directors could deploy AI. AI can help provide data-driven insights that the board can use to minimize uncertainties and counter risks.
AI Governance Categories
While the board can utilize AI for administrative or judgment duties, the extent of its application falls into one of these three categories:
- Assisted AI: Humans remain the primary decision-makers in assisted AI, as machine (AI) is secondary. AI depends on human guidance to perform its tasks. For example, AI can categorize grievances according to severity but doesn’t generate comprehensive reports or suggest possible solutions. That’s usually left to Augmented AI.
- Augmented AI: In augmented AI, machines and humans collaborate in decision-making, and AI matches or surpasses human intelligence. For example, as mentioned earlier, AI may generate comprehensive reports of stakeholders’ grievances and suggest detailed and data-driven solutions.
- Autonomous AI: In autonomous AI, AI has the highest capability and role in decision-making. AI works independently to make complex decisions and take massive actions without continuous human guidance. For example, AI can create disclosures and shareholder reports, schedule interviews, and manage board meeting logistics.
Different Scenarios Where the 3 AI Governance Categories Apply
Roles played by Assisted AI | Roles played by Augmented AI | Roles played by Autonomous AI |
Gather data on stakeholders’ grievances and categorize them based on priority, severity, and possible impact on the company.Analyze sentiments on stakeholders’ communication and dissatisfaction levels.Search through professional networks, databases, and public forums for potential candidates for the board of directors and compile a list based on relevant skills and expertise. | Provide the board with detailed reports on stakeholders’ grievances, underlying causes, and potential solutions.Offer insights on the best industry practices.Provide detailed profiles of prospective board of directors candidates, including their professional backgrounds and industry expertise.Analyze each candidate’s suitability and offer insights on how they can help the company. | Automatically create disclosures and shareholders’ reports and accurately present them.Monitor changes in regulatory compliance and shareholders’ sentiments. Draft responses related to shareholders’ grievances.Automate tasks involved in the appointment process, such as interview scheduling and candidate outreach.Manage board meeting logistics.Generate reports on the appointment process. |
Impact on Employment
As employers quickly integrate AI into their core business, there are bound to be gainers and losers. Let’s start with the gainers, who are likely to be employers.
Employers gain by allowing machines to solve their problems by providing actionable and data-driven insights and recommending possible solutions and risk-mitigation practices. Additionally, they gain by saving money as they don’t have to spend it on salary. They only need to pay a few people who run the AI systems if they have to.
To an extent, employees can also be gainers. That applies if they are motivated to acquire the necessary skills to manage AI systems. Nowadays, we have an increased demand for AI specialists in various sectors.
Concerning the losers;
Employees are likelier to lose than gain once a company enforces AI, as the technology will render some redundant and jobless. According to McKinsey Global Institute, up to 800 million jobs will likely be lost due to machine automation (AI) by 2030.
Of course, this might spell tragedy for workers in customer service, transport, and manufacturing sectors. However, little may be felt by those seated in the boardroom making top-level decisions on behalf of stakeholders.
How Does AI Help with Governance? (The Benefits)
Ai brings numerous benefits to the boardroom, which includes the following:
- Actionable Insights: AI algorithms are proving effective in analyzing historical data, financial forecasts, and market trends to offer actionable insights that corporate entities can employ in their decision-making.
- Strategic Orchestration: AI enables the board to stage-manage a more effective strategic plan that addresses its needs by anticipating potential market shifts through data-driven insights.
- Transparency: With the right AI monitoring frameworks and disclosures on their usage, it’s easier for everyone involved to understand the board’s decision-making. Stakeholders realize that the board arrives at particular decisions in the company’s best interest and not out of self-interest.
- Accountability: AI systems are increasingly becoming clear on who is responsible for what when something fails. In that case, there’s a sense of responsibility, a critical aspect of good corporate governance.
- Workflow Automation: AI automates operations, which makes it easy for a corporate entity to attain its objectives fast and without much hassle
- Work Efficiency: Through automation, AI shortens production time and does most of the heavy lifting, immensely boosting efficiency.
- Better Customer Experience: AI provides insights into customer behaviors, which are integral in improving their overall satisfaction and experience with the company or its products.
- Improved Productivity: Automation doesn’t just bring about efficiency; it also contributes to improved production as production time is reduced and machines can handle more workloads than humans.
- Privacy Protection: Better AI governance ensures that data collected by AI is preserved in a way that observes user privacy rights. In Europe, for example, the General Data Protection Regulation (GDPR) sets clear guidelines for facilitating data privacy at all levels, including AI.
- Risk Mitigation: AI can help a company mitigate its possible impact by identifying risk patterns and potential anomalies. For instance, AI models such as machine learning can predict irregularities and financial fraud to help a company proactively mitigate threats before they are substantiated.
Also Read: Impact of Digital Transformation on Corporate Governance
What’s the Problem with AI Governance? (The Challenges)
AI might have entered the boardroom, but that doesn’t mean it has been a smooth sail. Of course, there are challenges, which include the following:
1. Legal Challenges
With most company acts describing directors as’ persons appointed to join the board’ and necessitating them to have a directors’ identification number (DIN), it precludes AI appointments. Many companies lack the legal framework to recognize AI robo advisors as board members.
Overall, human directors are bound by fiduciary duties like the Duty of Care, Duty of Good Faith, and Duty of Loyalty, but AI robo advisors aren’t. Robo advisors aren’t expected to fulfill such fiduciary responsibilities autonomously.
2. Ethical Challenges
As much as AI can analyze complex data and disclose valuable insights, it can amplify inequalities and perpetuate biases if poorly managed. Ultimately, there could be issues with transparency, fairness, and accountability—integral to quality corporate governance.
To address the ethical concerns, companies will need to observe these ethical principles on data usage:
- Transparency (where stakeholders understand how AI works and make decisions for the company)
- Fairness (where AI is non-discriminatory and objective-driven when assisting the board in making decisions)
- Responsibility (where everyone from AI developers to final users around the boardroom considers the consequences of their actions when interacting with AI)
- Dignity (where AI systems observe human dignity and do not erode human values)
- Human freedom (where humans still retain the ability and freeness to make decisions despite AI integration)
- Confidence (where AI systems are accurate and reliable in offering data-driven insights and during reporting)
3. Integration Challenges
Integrating AI into an existing corporate setting requires much work. Companies may need to invest in the proper infrastructure, train their employees or board, and develop better and clearer implementation strategies. Failure to do so could result in integration failure, and no company wants that.
4. Cultural Shifts
An organization that adopts AI usually experiences a cultural shift as the technology increasingly becomes central to its decision-making process. Unless the board adopts a culture that embraces agility and adaptability, ethical stewardship, and diversity, integrating AI into the boardroom can be challenging.
5. Regulatory Uncertainty
Globally, AI regulatory landscapes keep changing, creating a lot of uncertainty. Jurisdictions vary between countries, which means there are different takes on AI governance. Therefore, companies wishing to integrate AI into the boardroom must ensure compliance with existing laws and stay updated with changes when they happen.
Other Challenges
Other challenges facing AI governance today include:
- Limited accountability associated with governance gaps
- Public mistrust from inadequate governance and privacy risks
- Inconsistent standards as a result of organizations taking different approaches to AI implementation
- Cross-border challenges in observing common AI standards
- Workforce displacement as a result of AI implementation
- Board education, which has to be a perpetual process when enforcing AI
What’s the Future of AI in Corporate Governance?
AI governance might have its fair share of challenges, but that doesn’t discount the fact that it’s here to stay. The future looks bright for AI governance, and there are a few things to look forward to:
a) Enhanced Predictive Analysis
Future advances in AI governance will allow companies to obtain more accurate forecasts of opportunities and risks, thanks to more cutting-edge predictive analysis. We are heading to a future where AI will become more sophisticated and relish better predictive capability, allowing companies to be more versed with emerging trends and engage in more proactive decision-making.
b) AI Robo Advisors
Imagine a boardroom with robo-advisors who act as directors and offer insights. Imagine the robots analyzing the company’s performance and making recommendations!
You don’t have to imagine anymore, as it’s all happening. Robo advisors, popularly known as AI robo-directors, are taking over the boardroom and replacing human directors, who are judged to be impartial and highly intelligent.
For example, Salesforce CEO Marc Benioff reportedly employs an unreleased AI product dubbed ‘Einstein’ to make decisions during board meetings. According to Business Insider, Benioff takes Einstein to his meetings, where he compares the AI tool to 20-30 executives in a boardroom.
Benioff claims he can ask Benioff about anything related to Salesforce and the AI to provide an unbiased response. According to him, he is a better CEO, primarily due to Einstein. Benioff is, however, not the only prominent executive who thinks AI is the future of corporate governance. There are many others, and more are likely to join the bandwagon in the future.
We’ll probably witness a corporate world where more companies rely on AI robo-directors to make decisions in the boardroom and suggest risk mitigation measures, board education, and strategic planning.
c) AI-Guided Ethical Framework
Given the ethical concerns shared earlier, there’s an increased need for better AI-guided ethical frameworks, something we might see in the future. The frameworks will facilitate responsible utilization of AI models in alignment with societal values and standards. Ultimately, that’ll solve another problem: stakeholder mistrust.
d) Regulatory Compliance
We are looking at a future where companies will channel more efforts towards compliance with regulatory bodies. The regulatory bodies themselves will offer more streamlined guidance to facilitate compliance. Collaboration efforts will foster innovation among corporate entities while building up regulatory integrity.
The Wrap!
There’s no doubt that companies are shifting from traditional corporate governance approaches to AI governance because of how impactful AI has been and could potentially be amidst the challenges. Its administrative and judgment roles are critical to the decision-making process, and regardless of the level of assistance a board of directors gets from AI, it’s hard to overlook its benefits.
We at the Center for Corporate Governance understand the need to be wary of AI’s power in today’s corporate world, especially around the boardroom. Consequently, we run a monthly mastery training on corporate governance, exploring AI governance and other emerging boardroom trends. You can check out this eye-opening and skill-equipping program on our website!