Center for
Issue #50
November 2023
Boards of Directors and Artificial Intelligence.
The ongoing rapid adoption of generative Artificial Intelligence (AI) is astounding – not only at the final consumer level, but also at the corporate level. Although views about AI’s nature, potential and impact differ,  it is imperative that boards of directors understand AI since it has the potential to change many companies’ competitive positioning while providing opportunities to accelerate productivity and efficiency. Boards should also consider some AI critical areas. 
The first area of concern is that, with the irruption of AI, proprietary data becomes more relevant and valuable than ever. Moreover, data management, as well as data protection and the risks involved with this, grow in importance. AI is more swiftly making data and data management key elements of any company’s strategy. As data becomes more abundant and vital, boards need to adopt a more comprehensive approach towards data governance and associated risks. 
In this respect, two critical risk dimensions become highly relevant. The first is the clarity of internal policies for training AI with a company’s sensitive data. The senior management team should have a firm grasp of the issues and implications, and the board should approve specific guidelines. Experimentation is critical for innovation but keeping confidential data in house is essential. The second risk involves specific AI solutions as they are developed.  There are growing concerns about whether training AI models with proprietary data and content may generate future legal problems for AI developers and customers. Privacy, regulation and security are still open issues that boards need to consider as risks and should lead to the adoption of additional guidelines regarding data governance and risk management.
The second area of concern is AI’s potential for disrupting an industry and eroding a firm’s competitive advantage. This goes to the heart of the board’s mission: to help develop the firm for the long term. AI has the potential to accelerate new competitive advantages for reaching customers, reducing costs and boosting operational effectiveness. Becoming an early adopter or remaining a follower are both legitimate options for most companies. Boards should discuss the question with senior managers, while investigating risks and opportunities, in order to make well informed decisions. 
The third area of concern is the impact of AI on customer satisfaction and loyalty. Data protection and customer privacy are particularly relevant. It’s easy to make forecasts about how an innovation will change an industry and make some strategies obsolete. Think of the internet and the digital revolution. While the effects of innovation  in some sectors can be game-changing, the potential for incumbent companies to adapt is also relevant. Gaining a deeper understanding of how AI can help companies better serve customers while increasing sales and customer loyalty is essential.  At the same time, time horizons, speed of adaptation and resulting client expectations are also important. If AI, or any automation for that matter, does not help customers, its potential for impact will be diminished.
The fourth area of concern centers on how AI affects learning and development throughout the organization, particularly for senior managers. Beyond all the hype around AI, understanding how to manage and translate it into the firm’s core businesses and functions are critical steps. The board should make sure that senior management is aligned with it in this effort.
Boards should understand that using AI is not a binary decision. A firm will need to learn, develop, experiment, apply, innovate, learn from failures and start again. That said, as with other innovations, a board that governs effectively avoids useless experimentations with overly ambitious changes. It’s better to try new applications gradually, make sure they work and then accelerate scalability based on success.
AI adoption is going to be complex and even painful for most companies. It will also involve taking risks. As with other innovations that can affect a firm’s positioning, boards should energetically seek to understand and govern AI. In this way, companies may not only survive in the new context, but also find profitable opportunities.
Corporate Governance Trends and News.

CEO compensations can be a highly controversial topic, especially when companies are not performing as expected. In fact, this year we have seen shareholders of companies such as Netflix withhold support for top executive pay packages. The article "CEO Shareholder: Straightforward Rewards for Long-term Performance", published by FCLTGLobal provides interesting reflections on factors to be considered when setting CEO remuneration.
Read more here 
The SEC recently issued the Rules on Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure by Public Companies. The rules focus on the disclosures that will be required by publicly traded companies in the US.
ISS has published an interesting report that analyzes cyber-security information and risks already reported by S&P 500 and Russell 3000 companies regarding risk mitigation, training programs, directors' expertise and cybersecurity breaches, among other issues.
Read more here 
Measuring the implementation of corporate purpose is not an easy task, but recent empirical evidence continues to suggest that corporate purpose is related to better company performance. A new article by Professor Claudine Gartenberg posted on the ECGI blog further explores the relationship between corporate purpose and profits.
Read more here 
KPMG and PwC have published their annual CEO surveys. Topics highlighted in the 2023 surveys include board refreshment, economic forecasts and expected risks, technology disruptive factors, talent management and ESG focus and oversight.
Read more here 
and here 
IESE's Recent Research.

Antón, M., Ederer, F., Giné, M., Schmalz, M. (2023). Common Ownership, Competition, and Top Management Incentives. Journal of Political Economy.
Read here
Cohen, S., Kadach, I., Ormazabal, G. (2023). Institutional Investors, Climate Disclosure, and carbon emissions. Journal of Accounting and Economics, 81.
Read here
Bonetti, P., Ormazabal, G.  (2023). Boosting Foreign Investment: The Role of certification of corporate governance. Journal of Accounting Research, 61(1), 95-140.
Read here
Fernandes, N. (2023). Climate Finance.
Read here
Cohen, S., Kadach, I., Ormazabal, G., Reichelstein, S. (2023). Executive Compensation Tied to ESG Performance: International Evidence. Journal of Accounting Research, 61 (3), 805-853.
Read here
Almandoz, J. (2023). Inside-out and Outside-in Perspectives on Corporate Purpose. Strategy Science.
Read here
Canals, J. (2023). Boards of Directors in Disruptive Times. Cambridge: Cambridge University Press.
Read here
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