Effective corporate governance relies on the separation of managerial and board responsibilities. Management runs the corporation, and the board oversees management to ensure its actions are in the interest of shareholders. In the absence of red flags, the board is permitted to rely on information provided by management to inform its decisions and carry out this oversight role. Because the board is not involved in day-to-day operations, an information asymmetry exists between what the board and management know about the organization. In some situations, this information asymmetry can be severe.
Current board practices reflect how boards operate under this constraint. Management presents information through regularly scheduled board meetings, committee meetings, and ad hoc communications. Boards respond to this information by asking questions and requesting additional information as needed. For some matters, the board contracts with a third party (e.g., consultant, banker, auditor) to provide market information or an external perspective on best practices. Under this arrangement (assuming the board makes decisions with due deliberation and without conflict of interests), it will have satisfied its fiduciary duty to shareholders.
Unfortunately, plenty of examples point to the insufficiency of this arrangement. Many boards have been woefully uninformed about the financial, operating, and strategic risk of management decisions — as borne out by repeated examples of corporate meltdowns over the years. Boards have erred in situations of CEO selection, financial reporting, product liability, compensation setting, and reputation management. One study underscored a surprising disconnect between the information board members say are important drivers of corporate performance and the information and metrics boards actually receive to monitor this performance. Although the proximate cause of the failure identified in the study was the choice of KPIs, the fundamental problem is an issue of information flow between management and the board.
Impact of AI on Governance
AI has the potential to change this dynamic. First, it can increase the volume, type, and quality of information available to management and boards. By making this information readily available, it reduces information asymmetry between management and directors. Board members are much less likely to be “in the dark” about the operating and governance realities of their companies because technology makes it easier for them to search and synthesize public and private information made available to them through AI board tools.
Second, AI increases the burden on both parties to review, synthesize, and analyze information prior to board meetings. Managers and directors can expect to spend more time on meeting preparation because the quantity of available knowledge is substantially greater. Elementary information that was previously reviewed during meetings will be expected to be analyzed and digested before the meeting.1
Third, AI allows for the supplementation (and, in some cases, replacement) of information provided by third-party advisers and consultants. Furthermore, AI can increase the breadth of analysis available to the board, coupling the retrospective review of mostly historical data (prevalent today) with more powerful tools for predictive and trend analysis. These tools will allow boards to be more proactive and less reactive.
At the same time, the adoption of AI in the boardroom will raise significant questions. The most important is about expectations for board contribution. Current governance practice generally places board members in a responsive position to management and the information it provides (the type, structure, and framing of this information). With AI, directors will have access to information that is orders of magnitude beyond management-prepared board materials. AI tools can prompt board members with key questions based on the agenda and suggest analyses that could help reach a decision, such as benchmarking against competitors or linking data to reveal trends. Expectations for a director’s diligence in reviewing and preparing this information will be exponentially higher, and the quality of questions, challenges, and insights should be correspondingly higher.
Of course, executives will have the opportunity to try out their presentations on an AI interface that can prepare them for the questions they should expect. By (confidentially) asking, “What are the greatest weaknesses in the arguments I have made?” and “What are the potential flaws in my proposal?” executives should be better positioned to anticipate and respond to challenges raised by their boards.
A related question is about possible limits to the information boards should/will have access to. In theory, granting directors access to an AI interface that has full access to all data in the corporate data repository means directors have no limit (relative to management) to the information they can access. From a legal perspective, however, boards might not want unrestricted access. Where and how to draw the line (and what information is ring-fenced) requires careful thinking. Boards and their counsel will have to establish protocols about how the board would rely on, for example, AI analysis conducted by an individual director (not provided by management). The impact this will have on fiduciary expectations is unknown.2
Furthermore, protection of this data from cybersecurity threats must be a central consideration. Given the sensitivity and proprietary nature of the data fed into AI models, significant steps should be taken to protect against unauthorized access. The risk will be higher for large corporations with multiple connection points to suppliers, customers, and employees.
Notes
1This expectation is counter to that promised by commercial vendors. For example, in its marketing materials for AI board preparation technology, one company promises that AI will “supercharge meeting prep … uncover how AI can turn hours of preparation into instant insights, delivering smart questions and ready-to-use data in seconds.” In reality, companies that significantly increase information flow to directors report that it increases meeting prep time by raising expectations regarding the level of director preparedness. See: Larcker, David F., and Brian Tayan. “Netflix Approach to Governance: Genuine Transparency with the Board.” Stanford Graduate School of Business, May 2018; and Lim, Phil. “Using AI for Enhanced Decision-Making: 9 Innovative Ways to Boost Board Efficiency and Effectiveness.” Diligent, 24 July 2024.
2Directors are required to act with reasonable care in discharging their duties, including the obligation to make inquiries when confronted with red flags. A director conducting his/her own “research” through AI analysis may uncover activities or decisions that warrant further scrutiny. Failure to make inquiries might introduce legal complexities.
[For more from the authors on this topic, see: “How AI Could Reshape the Boardroom.”]
