Governance in the new machine age

Boards must understand the digital economy’s impact on their organisation’s current and future workforce.

Picture this: Within 10 years, boards of ASX 100 companies introduce robo directors to complement their human ones. This artificial intelligence receives the same data as other directors and uses a software algorithm to make governance recommendations.

At first, the robo director is viewed as an extra resource: a tool to analyse big data, test board decisions and give a different perspective. But as the algorithm becomes more intelligent, the robo director is found to make better board decisions on average.

There is no emotion, decision-making bias or risk of the robo director being “captured” by management and favouring executives. There is no competing board work or danger that the robo director will be influenced by internal boardroom dynamics.

The robo director works non-stop, constantly analysing industry, company and competitor data. Using unstructured machine-learning techniques, it processes text from board packs, analyses announcements and measures company sentiment through social media. The algorithm identifies patterns and early-warning signs from an ocean of data, in real-time.

Based on this early success, more organisations introduce robo directors and some reduce their board size, knowing the artificial intelligence gives them the governance firepower of many directors. In time, the robo director receives an equal vote in board decisions and is central to the organisation’s governance decisions.

This hypothetical scenario is one of many that could play out as the new machine age redefines the labour market and creates unprecedented opportunity and risk for organisations. Although machines will never fully replace human directors, boards are not immune from the integration of technology in decision-making and the workforce.

Technology-driven disruption is a hot topic in boardrooms. However, the debate has mostly focused on business-model disruption; that is, how insurgent companies are taking market share from industry incumbents through capital-light, digitised operations.

Less considered is technology’s disruption on the workforce and what that means for boards through their risk-management oversight. Does the organisation have the right skills for a new wave of technology? Can it get them? How quickly will current skills become redundant? Does the organisation have a culture of lifelong learning and adaptability? Does the head of human resources have a sufficient background in technology?

These are just some questions that boards are asking. Understanding how technology will affect the business model and strategy is not enough; high-performing boards must know their organisation will have the right people, skills and culture to execute that strategy.

A slew of academic and commercial research suggests profound change to the workplace is ahead. Robots could replace 47 per cent of all jobs by 2035, predicts University of Oxford associate professor, Michael Osborne. Lower-skilled jobs in accommodation and food service have an 87 per cent risk of automation and transportation jobs have a 75 per cent risk.

The board of a hotel chain, for example, must consider how robots will one day deliver room service, clean rooms and check-in guests. In transport, boards are discussing how autonomous vehicles could make millions of lower-skilled jobs redundant. Boards of agriculture companies need to know how big data will transform crop planting and harvesting, and how drones and other robotics will affect farm labour.

McKinsey estimates up to 45 per cent of work activity could be automated using existing technology. This activity is worth US$2 trillion in annual wages in the United States – a gigantic saving for organisations that automate labour.

The scary part is that nobody knows how much – or how quickly – technology will disrupt the global workforce in the next two decades, such is the pace of change. Or how far technology will extend from automating routine jobs to knowledge-based ones.

One thing is clear: boards that govern organisations with large workforces should be all over this topic. Deeper immersion of technology in more jobs could destroy organisations that cannot adapt fast enough to this change or fail to grasp opportunities.

David Beatty, Conway Director of the Clarkson Centre for Business Ethics and Board Effectiveness at the University of Toronto, says technology’s impact on the labour market will intersect with the rise of shareholder activism.

“Fortune 500 companies now have at least two to five activist firms looking at them,” Beatty says. “If there’s the slightest suggestion that a listed company is slow to embrace technology, compared to its rivals, and has an inflated cost base, activists will be all over them. The market will force companies to stay on top of robotics, artificial intelligence and so on.”

Beatty says large companies will need to be more open with their strategy and workforce requirements in the digital economy. “Boards must source external opinions to validate information given them by management on the organisation’s workforce capabilities and culture. The days of boards being fed information only from management are fading.”

He says boards, generally, are behind the curve on technology’s impact on labour. “Directors in their 60s and 70s have seen the effect of automation on productivity, but I doubt they have grasped the impact of big data or artificial intelligence on the workforce. The solution is not putting younger, tech-savvy directors on boards; it is opening up the communication of strategy to more outsiders, to get external views on whether the organisation’s workforce approach is appropriate.”

Human capital and governance

Understanding the organisation’s human capital needs of the future is becoming a bigger board issue, says Launa Inman, MAICD. “Directors will need to spend more time on human resources issues as they relate to strategy. They need to know their organisation has the right people and skills to adapt to some profound shifts in the workplace.”

Inman, a former managing director of Target Australia, Billabong International and Officeworks, and current non-executive director of Commonwealth Bank, is an expert in organisations with large retail customer bases – fertile ground for labour-market disruption.

“I sense boards are having more discussions on the skill-sets required for the future and spending time with the head of human resources to get their perspective on how the organisation is preparing for this change and its capacity to adapt to unknowns,” Inman says.

Financial service companies, for example, are introducing robo advisers that use software algorithms to recommend and monitor investment portfolios for clients. This low-cost, automated advice is expected to disrupt parts of the wealth-management sector.

More law firms are expected to use artificial intelligence for routine legal work and accounting firms will use it to supplement audit and other functions. Even media companies overseas are using algorithms to write basic stories on company reports.

Inman says robotics will transform the Australian logistics sector and redefine retailing. She points to Amazon’s use of robotics in its warehouses and its ability to “disrupt itself” through technology. “Amazon has completely disrupted the speed of delivery and pricing models for delivery through robotics. The implications from Amazon, for labour in retailing and the broader supply chain, are very significant.” Amazon is expanding in Australia this year through new distribution and fulfilment centres – a move that could pressure retail margins.

Inman says the impact of artificial intelligence will extend beyond the labour force. “Robotics is fundamentally changing how consumers interact with organisations, across more industries. Boards will need directors who can think through the impact of technology on the organisation’s workforce and how that affects customer interaction.”

Christopher Koch, GAICD, says boards will need to introduce data science skills, to prepare for a step-change in the impact of technology on the workforce. “If I was forming a board for a large organisation today, the first director I would recruit would have a background in technology who understands data science or statistics; someone who can draw insights from big data and form a view on how technological changes will affect the organisation’s workforce in the future.”

As deputy chief financial officer of Freelancer.com, Koch is at the forefront of technology-driven disruption in the labour market. Freelancer.com, a global micro-jobs site with 25 million users, is a key player in the so-called gig economy. This involves companies replacing full-time and part-time workers with those employed on a project basis.

High-level jobs are increasingly being outsourced. NASA, for example, in 2015 partnered with Freelancer.com to help design Computer Aided Design (CAD) models of tools to be used by Robonaut 2 on the International Space Station. Freelancer.com set up crowdsourcing contests for its users to build tools for Robonaut 2 – the first humanoid to enter outer space – and help NASA on robotic maintenance of the space station.

“Thanks to technology, there is an increasing level of sophistication and complexity in work that can be undertaken by freelancers around the world,” says Koch. “Boards need to understand how their organisation is prepared for the freelance economy, which is one of the great megatrends of our time. Technology will make more jobs extinct and allow gig-economy workers to focus on higher-level tasks. I see this trend as more of an opportunity that a threat.”

A measured governance approach needed

Other directors have a more sanguine view of technology’s near-term impact on the workforce.

Graham Bradley, AM, FAICD, says boards should not overreact to automation trends. “There is a deal of alarmism about the prospect of losing jobs from technology. But historically, machines have replaced human labour for 200 years, to the great benefit of humankind and wealth creation.” Bradley is chair-elect of GrainCorp, a former chairman of Stockland Corporation and a past president of the Business Council of Australia.

Bradley says technology’s effect on the workforce will be more gradual than some studies suggest. “I don’t see this change as a sudden cliff that companies could fall over. For example, the impact of autonomous vehicles is, in my view, vastly exaggerated.”

Bradley adds: “Technology can change quickly, but consumer demand for goods and services often changes slowly. There’s a risk that governments overreact to sensational headlines about how many jobs could be replaced by machines. Yes, workers with lower skills or those who cannot adapt may struggle as technology automates routine jobs. But new jobs will be created to support this change and as new services are invented.”

He says boards must be aware of these trends and the impact on their people skills. “Boards have spent more time asking management, particularly the human resources executive, about skills being built, what new talent is being attracted and whether the organisation has set the right targets for the skills it needs for the future.”

Boards must be alert to new technology and challenge management to report on its implications, Bradley says. “Boards should encourage a culture of innovation in their organisation so that it has the people, processes and mindset to adapt to whatever is thrown at it, embrace change and thrive in conditions of uncertainty.”

He says directors must spend extra time analysing technology trends. “It is still the exception rather than the norm for boards to visit Silicon Valley and too many directors rely on popular media for their information on technology. There’s lot of talk about robotics now, but directors who are well-read on technology would have seen this trend coming years ago.”

Bradley’s view make sense: boards consistently thinking about the impact of technology on strategy and whether the organisation will have the right people and capabilities to execute that strategy over five years.

But the big unknown is whether boards can keep up with the pace of technological change, or how quickly “software will eat the world” – a phrase coined by tech entrepreneur, Marc Andreessen. And whether machines will be needed in boardrooms to process an exponential increase in technology, find value in it, and supplement the skills of human directors.

At face value, the concept of a robo director seems an extreme example of technology in the workplace. Effective governance requires relationships, emotional intelligence, empathy and creativity – a human condition that artificial intelligence lacks. Where machines see black or white, good directors can see shades of grey.

But in time, machines could do routine governance work and perhaps take on higher-level tasks, such as structuring executive remuneration, audit oversight, and test organisation strategy through big-data analysis.

It’s happening. The Hong Kong venture-capital firm, Deep Knowledge Ventures, appointed the world’s first robo director in 2014. The algorithm, named Vital, is analysing trends in life science companies to predict successful investments. Vital, an equal member of the board, is expected to be given an equal vote in the company’s financial decisions.

It will take time before Vital can work autonomously or there is enough data to test its decisions over a long period, but the algorithm is yet another example of how technology is replacing high-level jobs.

If artificial intelligence can make sound governance decisions – a field that is based on intuition and experience – it will surely disrupt most professions.