Picture this: the boards of ASX100 companies introduce robo-directors to complement their human ones. This artificial intelligence (AI) 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.

It can work non-stop analysing industry, company and competitor data. Using unstructured machine-learning techniques, the robo-director processes board packs, analyses announcements and measures company sentiment through social media. It 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 AI gives them the governance firepower of many directors. In time, the robo-director receives an equal vote in board decisions and is central to governance decisions.

New machine age

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 take market share from industry incumbents through capital-light, digitised operations.

Less considered is technology’s disruption of the workforce and what that means for board’s risk-management oversight. Does the organisation have the right skills for a new wave of technology? Does the organisation have a culture of lifelong learning and adaptability? Does the head of human resources have a sufficient background in technology?

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.

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 US – a gigantic saving for organisations that automate labour.

One thing is clear: boards that govern organisations with large workforces should be all over this topic.

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.

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

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 HR to get their perspective on how the organisation is preparing for this change and its capacity to adapt to unknowns,” she says.

Inman says the impact of AI 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 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 and 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 “gig” economy. This involves companies replacing full-time and part-time workers with those employed on a project basis.

“Boards need to understand how their organisation is prepared for the freelance economy, which is one of the great megatrends of our time. I see this trend as more of an opportunity than a threat.”

A measured approach needed

Other directors have a more sanguine view. Graham Bradley AM FAICD, says boards should not overreact to automation trends. “There is a deal of alarmism about the prospect of losing jobs to 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 chair 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. “Technology can change quickly, but consumer demand for goods and services often changes slowly. 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 their 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.”

Bradley’s view make sense: boards consistently think about the impact of technology on strategy and whether the organisation will have the right people to execute that strategy over five years. But the big unknown is whether “software will eat the world” – a phrase coined by tech entrepreneur, Marc Andreessen.

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. Where machines see black or white, good directors manage 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 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, 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 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 it is another example of how technology is replacing high-level jobs.

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

About the Governance Leadership Centre

The Governance Leadership Centre is the AICD’s governance think-tank, exploring over-the-horizon issues in governance. Each month the GLC publishes new insights and research. AICD members can subscribe to the monthly GLC e-newsletter by contacting information@companydirectors.com.au or visit the GLC online at:
companydirectors.com.au/GLC