By: Kamia McDaniels
Introduction
Delaware corporate boards of directors may fear or be enlightened by the idea of being replaced by artificial intelligence (AI) due to the increasing developments of technology in society. The purpose of this blog post is to discuss the use of AI in corporate governance in Delaware and to reduce directors’ apprehensions to adopt AI within their corporations.
What is AI?
AI is the ability of a computer to use characteristics associated with human intelligence, including reasoning and learning from prior experiences. AI systems can process large amounts of data, reveal patterns to make decisions, solve problems, and provide data for human consideration.[2] The technology learns from the data it analyzes and adapts its behavior based on what it learns to improve its performance of tasks.[3] Delaware boards of directors can benefit from using AI to perform complex duties in a quick, efficient manner.
Using AI in Corporate Governance in Delaware
Delaware law requires corporate directors to comply with the fiduciary duties of loyalty and care.[4] These fiduciary duties include acting in the best interest of the corporation and its shareholders, and being fully informed prior to making decisions on behalf of the company.[5] The use of AI in corporate governance can be beneficial by making the board more effective and efficient in its direction, control, and coaching.[6] The board can use AI to track overall trends in how the business is allocating funds and extract data to align with the goals of the business in various departments.[7]
Foreseeable Technological Implications of AI in Delaware Corporate Law
Fears that AI systems might displace human directors ignore doctrinal and institutional impediments specific to Delaware’s strong reliance on fiduciary duties by courts of equity.[8] Specifically, Delaware courts have emphasized that the most important decisions shall remain with the board of directors pursuant to the duty of non-delegation.[9] In Canal Capital Corp. v. French, the Delaware Court of Chancery held that the duty of non-delegation prevents directors from delegating to nondirectors “in a very substantial way their duty to use their own best judgment on management matters.” Therefore, AI systems are unlikely to displace human boards of directors because the law requires board members to use their own judgment in making business decisions. Delaware directors should stay informed about developments that may impact the business if they choose to utilize AI in helping facilitate business decisions.
Although it is highly unlikely that AI systems will displace human boards of directors, AI systems may eventually be required by Delaware corporate law where the fiduciary duty of loyalty is linked with adopting compliance monitoring systems.[12] In In re Caremark International Inc. v. Derivative Litigation, the Delaware Court of Chancery recognized a director’s fiduciary duty to oversee a corporation’s compliance and ethics program.[13] The duty of oversight is also known as the Caremark duty.[14] Delaware law may require directors to have an effective reporting or monitoring system, which includes AI, that allows them to detect potential risks to the company.
Conclusion
In sum, the use of AI can be beneficial to Delaware boards of directors in corporate governance. Due to Delaware law’s emphasis on fiduciary duties of loyalty, care, non-delegation, and oversight, it is unlikely that AI systems will completely replace boards of directors. However, AI systems can potentially be required in corporate governance by Delaware law where the fiduciary duty of loyalty is linked with adopting compliance monitoring systems.
About the Author
Kamia is a staff editor of the Delaware Journal of Corporate Law at Delaware Law School. She is the President of the Intellectual Property Law Society, Vice President of the Real Estate Student Association, Secretary of the Black Law Students Association, Treasurer of the Alternative Dispute Resolution Society, and a member of Delaware Law’s DEI Student Council. She currently works in the Fair Housing department at the Community Legal Aid Society, Inc. of Delaware, works with the Office of Disability Services at Delaware Law, and worked as a Legal Methods I Teaching Assistant last semester. During Summer 2023, Kamia was selected to partake in Klehr Harrison Harvey Branzburg LLP’s inaugural Diversity Fellowship Program, where she worked as a summer associate in their Philadelphia headquarters. This summer, Kamia was selected as a Dr. Martin Luther King, Jr. intern and will work with the Pennsylvania Legal Aid Network, Inc. to provide legal assistance to low-income individuals. During Fall 2023, Kamia is excited to partake in Delaware Law’s Judicial Externship Program.
[1] Shani R. Else & Francis G.X. Pileggi, Corporate Directors Must Consider Impact of Artificial Intelligence for Effective Corporate Governance, Bus. L. Today (Feb. 12, 2019), https://businesslawtoday.org/2019/02/corporate-directors-must-consider-impact-artificial-intelligence-effective-corporate-governance/ (discussing the impact of AI on effective corporate governance in Delaware).
[2] Id.
[3] Prac. L. Lab. & Emp., Artificial Intelligence (AI) in the Workplace, Thomson Reuters, https://us.practicallaw.thomsonreuters.com/w-018-7465 (last visited Apr. 14, 2022).
[4] Else & Pileggi, supra note 1.
[5] Id.
[6] Michael Hilb, Toward artificial governance? The role of artificial intelligence in shaping the future of corporate governance, J. Mgmt. & Gov. (July 21, 2020), https://link.springer.com/article/10.1007/s10997-020-09519-9.
[7] Id.
[8] Christopher M. Bruner, Artificially Intelligent Boards and the Future of Delaware Corporate Law 2 (Univ. Ga. Sch. L., Rsch. Paper No. 2021-23, 2021), available at https://ssrn.com/abstract=4049784.
[9] Id.
[10] See Canal Cap. Corp. v. French, Civ. A. No. 11,764, 1992 WL 159008 (Del. Ch. July 2, 1992) (dismissing a claim that management fees paid by Canal to Edelman Management, a company controlled by Canal’s majority stockholder, were excessive).
[11] Bruner, supra note 8, at 19.
[12] See In re Caremark Int’l, Inc. Derivative Litig., 689 A.2d 959 (Del. Ch. 1996); see also Paul E. McGreal, Caremark in the Arc of Compliance History, 90 Temp. L. Rev. 647, 648 (2018) (discussing the Delaware Court of Chancery’s decision in In re Caremark).
[13] McGreal, supra note 12, at 648.
[14] Else & Pileggi, supra note 1.
[15] McGreal, supra note 12, at 675.