New technologies such as the blockchain and artificial intelligence could have profound effects on corporations. Research shows, for instance, that blockchains could be employed to clear and register securities transactions, identify shareholders, administer virtual shareholder meetings, and maintain corporate records and accounts, with minimal risk of mishandling or tampering (see, eg, Geis; Van der Elst & Lafarre; Yermack). Other technologies, including algorithms and artificial intelligence, could have a substantial impact on management. Scholars have questioned, for example, whether artificially intelligent computer programs could substitute, in whole or in part, corporate directors and officers (see, eg, Möslein) or even run corporations without any human ownership, control or intervention (see, eg, Bayern and LoPucki). The changes that lie ahead seem, in any case, potentially significant. But what is so special about these new technologies? Why are they supposed to bring about more dramatic changes than previous technologies? And what transformations can we actually expect for corporate organizations and governance?
In a forthcoming paper, I attempt to provide an answer to these questions by showing that, unlike previous technological innovations, twenty-first-century technologies have the potential to alter the distribution of powers and responsibilities among different corporate constituencies.
Corporate law traditionally distributes power among shareholders, directors, and managers, along five main dimensions: (i) the speed and frequency of the decisions; (ii) the information necessary to decide and who has access to it; (iii) the costs of assigning decision-making responsibilities to a collegial body; (iv) the decision-makers’ incentives and interests; and (v) their competence and skills. These factors contribute to explain why business and monitoring decisions, which require frequent involvement, access to corporate information, and specialized competence and expertise, are generally left to officers and directors. They also explain why shareholders are mainly called on to vote on control and structural decisions, which entail fundamental changes for the corporation (in relation to which directors and officers may bear personal interests), and are typically made only at certain time intervals or infrequently.
The paper argues that looking at if and how technology alters these five dimensions is the fundamental, and yet unexamined, interpretive tool to make realistic predictions on the impact of twenty-first-century technologies on corporate governance. New technologies, such as blockchains, could enable shareholders to obtain greater access to corporate information, without management’s intermediation. They could also lead to more efficient—and therefore more frequent—shareholder meetings, reducing some of the collective decision-making costs that shareholder meetings typically encounter. One could thus expect shareholders to undertake a more active monitoring role over management, to the detriment of the board of directors, or to demand greater involvement in business decisions, alongside managers or perhaps in their place.
New technologies could also entail significant changes for managerial bodies. For instance, machine learning algorithms running on corporate data could help directors and officers make decisions and, in certain instances, could even be delegated the power to decide or to vote on key matters, as in the case of VITAL, the algorithm that was given a vote on the investment decisions of a Hong Kong venture capital fund.
At a closer look, however, such dramatic changes seem unlikely to happen, at least in most corporations. Technology must be able to affect the five abovementioned factors to a significant extent if it is to appreciably alter the distribution of powers within the corporation.
Both management and monitoring tasks require specialized competence and expertise, in addition to time availability and interest in the subject matter, which shareholders too often lack. Technology does very little to change this. It can provide information or recommendations, but it does not provide competence or expertise to those who lack them; and these are crucial skills to both management and monitoring decisions. In this respect, the paper sheds light on the limits to shareholder empowerment in business matters. It also provides an additional argument to support the conclusion, reached by previous scholarship, according to which technology will not actually make the board of directors’ monitoring role obsolete (see Enriques & Zetzsche).
For similar reasons, artificial intelligence and other new technologies are unlikely to substitute directors and/or officers to a significant extent. In many jurisdictions, such as Delaware, the UK, and Germany, corporate law still requires the board of directors to be comprised, at least in part, of natural persons. Even when this is not the case, the need to put together vast amounts of internal proprietary data to run machine learning programs on idiosyncratic issues of the firm might prevent many corporations to effectively use technology within their organizations (see Armour & Eidenmüller). Most importantly, most of the tasks that corporate executives and directors carry out involve skills, such as situational judgment, flexibility and adaptability, that cannot be easily replicated by computer programs. One can thus expect that the new technologies will complement but not substitute corporate directors and officers.
With respect to middle managers, the conclusion might however be different, since hiring, scheduling, and monitoring decisions can be and sometimes have already been entirely automated through algorithms. While the exact extent of these changes will likely depend on firm-specific features, the overall result might be, in many cases, simpler organizational charts and hybridized corporate roles in which management, monitoring, and strategy-setting functions converge.
A previous version of this post was published on the Machine Lawyering Blog of The Chinese University of Hong Kong's Centre for Financial Regulation and Economic Development.
Chiara Picciau is an Academic Fellow at Bocconi University, Milan.