[Rongeet Poddar is a 5th Year student at West Bengal National University of Juridical Sciences]
The Covid-19 pandemic has had a detrimental impact on businesses around the world. The crisis has forced regulators to come up with prompt responses to maintain social distancing norms in companies. The Ministry of Corporate Affairs has allowed companies to conduct virtual meetings. The Securities and Exchange Board of India has also introduced a spate of reforms to relax the burden of compliance on companies. It has also opened an avenue for ensuring greater flexibility in raising capital by including a proposal to dispense with the open offer requirement. The demands of the pandemic have forced businesses to shift to remote operations. It offers scope for a radical reconsideration of existing business models.
Directors on the board continue to be bound by the fiduciary duties that have been enshrined under Indian corporate law. Section 166 of the Companies Act, 2013 incorporates the duties of directors. The relaxations in several regulatory thresholds mentioned above, however, have raised corporate governance concerns. Following the pandemic, there has been a breakdown of existing communication channels that ensure accountability to various stakeholders in the company.
Investment decisions by the board have also become critical as companies may be reeling from financial stress. The integrity of financial audits has also assumed importance as the dilution of conventional modes of supervision paves the way for corporate mismanagement and white-collar crimes. In such a precarious scenario, the prospect of artificial intelligence (“AI”) in the boardroom requires a comprehensive evaluation to tide over the unique challenges posed by the pandemic.
The superior capacity of AI
The World Economic Forum’s Global Agenda Council on the Future of Software and Society had predicted that artificial intelligence is likely to be on the corporate board of directors by 2026. However, as early as 2014, a venture capital firm based in Hong Kong had given an algorithm named Vital the right to vote on crucial investment decisions. The algorithm’s prowess lay in its robust due diligence capability. It could identify faults in investment decisions, which were oblivious to humans surveying data, and ensure thorough scrutiny of the business decisions taken by the human board. In 2016, a Finnish software company also breached a technological barrier by appointing a bot in its management team to assist data-driven decisions. Thus, algorithms can be utilized to support virtual boardrooms under the supervision of the human operatives.
The transformative capabilities of AI have already been utilized in the medical sector in the advent of the pandemic. However, the immense potential of AI to revamp the corporate boardroom space remains unexplored, particularly in India. Algorithms learn from data sets to achieve a prescribed goal. The data utilized determine how input variables are positioned to predict the value of an output variable. An algorithm fine-tunes its actions by learning from experience. Machine learning systems adapt to changes in data sets over time as they begin to identify new patterns to refine past predictions.
The compliance standards under corporate law have to be translated into algorithmic data sets. This will enable the AI to aid corporate governance functions. Algorithms can make up for the inaccessibility of erstwhile communication channels by addressing the information asymmetry in the virtual boardrooms. It can process an enormous quantum of data. Algorithms can be potent instruments for reading the intricacies of investment strategies and offer suitable recommendations for mitigating risks. The strength of artificial intelligence lies in its ability to break down complex decision-making processes such that red flags can be identified with greater ease, particularly in the sphere of financial audits.
AI can substantially enhance transparency in the consultative processes that are the heart of decision-making. It can accurately mine critical data such as particulars of related party transactions, augment the efficiency of directors and minimize human errors in the process. The flipside of limited human interaction is sluggish decision-making due to the incapacity to obtain and filter relevant information. AI is likely to neutralize the issue in the virtual corporate boardroom and facilitate human directors in the performance of their roles. The utility of algorithms enables the board to make timely disclosures in the interests of various stakeholders. AI tools could also be deployed to keep a tab on the threat of hostile takeovers in volatile sectors by surveying market data.
Algorithms can offer a stimulus to the role of independent directors as well. The Indian corporate landscape is characterized by concentrated shareholding patterns in promoter-controlled companies. Independent directors were envisaged as gatekeepers who would monitor the affairs of such companies such that minority shareholders are not kept in the dark and subject to oppression. AI eases the onerous burden on independent directors to be well versed with company affairs and helps in the discharge of their policing function. If algorithms assume a position of reliability with time, they are also likely to reduce pressures of succession planning in the unfortunate event of a health exigency that threatens to paralyze the normal functions of the board.
The pitfalls of algorithms
The National Strategy Paper on Artificial Intelligence formulated by NITI Aayog also highlights that the “black box phenomenon” can violate the integrity of AI systems. The black box phenomenon refers to the opaque nature of AI, which makes it difficult for human operators to trace the rationale behind algorithmic decisions. The lack of transparency further creates an obstacle for corporate governance. Furthermore, algorithms can be susceptible to manipulation. It presents a significant conundrum as cybersecurity threats have become rampant with greater reliance on technology by companies in the wake of the pandemic.
The dependability of algorithmic decisions hinges on the sanctity of the data set supplied to it. The data may be vitiated by human bias, which will then be reflected in the decisions of the AI. The directors on the board may also face operational difficulties to integrate algorithms into the decision-making process due to the absence of technical knowledge. Algorithms may become a vehicle for abusive practices at the behest of the human operators in the company. Therefore, the unpredictable nature of AI will have to be subdued by appropriate safety valves.
AI is likely to raise unprecedented legal questions and alter the corporate law paradigm in the long term. It has a major disruptive influence by challenging the existing regime of fiduciary duties that human directors have to adhere to under corporate law. There may be a predilection among directors to evade responsibility by contending blanket reliance on the algorithms. The duty of care may never be breached, as it is presumed that the algorithm has meticulously internalized the requisite legal regulations.
The duty of loyalty is also rendered irrelevant as the AI tools, unlike human board members, are assumed to be free from personal bias and thus considered incapable of engaging in self-interested actions. Subsequently, the enforcement mechanisms and liability regimes all have to undergo a significant change to fit in algorithms into the boardroom. The stakeholders in the company are likely to suffer if AI compromises these mechanisms. Likewise, unlike human agents, algorithms cannot be incentivized to comply with legal regulations by inducements such as attractive pay-packages.
Regulators in India have already offered temporary relaxations in compliance to minimize undue hardships. In a post-pandemic era, the corporate landscape cannot afford further regulatory turmoil with the introduction of complex algorithms, as appropriate stabilizing mechanisms have to be developed in response. Critics have highlighted the need to exercise suitable ex-ante control over algorithms in the boardroom. The uncertainty of AI may also invite overzealous regulation on the part of the state and increase the costs of compliance. The cost of monitoring algorithms by internal audits presents a new obstacle that businesses recovering from a pandemic cannot afford to have as they seek a revival of their fortunes. The extent to which the expertise of AI can offset the economic costs of its engagement in boardroom decision-making remains unexplored.
The fundamental premise of corporate law is to ensure seamless coordination among various operators in an enterprise such that the costs of contracting separately with different economic agents can be minimized. In the current scenario, AI tools may only be envisaged as an external aid to human decision-makers in the boardroom to overcome the challenges of social distancing and not as instruments to replace human agency. The ideal approach to adopt would thus be to utilize the capacity of AI as mere digital assistants on the board without necessarily playing havoc with existing governance standards of corporate law. Balancing the two goals will be an uphill task if AI is introduced in the virtual boardrooms in the near future. The inception of algorithms on the board remains contingent on technological progress.
– Rongeet Poddar