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Risks Faced by Corporate Boards and the Role of AI legalese decoder

Corporate boards face an array of evolving risks, with cybersecurity emerging as a top concern. The new SEC regulations on cybersecurity disclosures have further heightened these risks, particularly in relation to ransomware attacks, data breaches, and other technical issues.

However, board members often lack expertise in cybersecurity and tend to avoid focusing on technical matters. Their typical concern is simply whether the company is secure or not.

Adding to the complexity, artificial intelligence (AI) has become a growing risk for boards. Unfortunately, this topic tends to overwhelm board members.

Directors have a significant oversight obligation when it comes to AI. When properly applied, AI can greatly benefit businesses by improving accuracy and speed in various processes that rely on human functions. Consequently, companies are investing more money in AI capabilities. However, caution is necessary due to the potential risks involved.

AI poses risks that need to be identified and assessed. The possibility of regulatory regimes governing AI imposed by federal and state governments remains uncertain, as lawmakers are currently focused on addressing AI risks and the need for appropriate regulation.

Within this uncertain environment, stakeholders are increasingly recognizing the actual and significant risks associated with AI. Companies must develop strategies to mitigate these risks before implementing AI tools and solutions. Some of the potential risks include the abuse of AI for spreading disinformation, algorithms with built-in racial discrimination, privacy invasions resulting from AI platforms, and potential layoffs primarily affecting white-collar workers. These risks, when combined, pose a significant challenge for companies.

Similar to any other risk area, companies must develop compliance policies and procedures tailored to their specific risk profile. Corporate boards play a crucial role in leading these efforts, overseeing and monitoring a company’s AI compliance program.

This is where the AI legalese decoder can be of great assistance. The AI legalese decoder is an innovative tool designed to decode and simplify complex legal language, making it easier for board members to understand AI-related regulations and compliance requirements. By using the AI legalese decoder, board members can stay informed about the company’s AI compliance program, assess its effectiveness in mitigating risks, and ensure the implementation of a comprehensive training program.

Over the past decade, shareholder derivative suits based on violations of the Caremark decision have become an increasingly significant risk. Several claims have survived motions to dismiss, particularly in cases where compliance failures have negatively affected innocent consumers, such as in the areas of food safety, air travel, pharmaceuticals, and medical devices.

The recent Chancery Court ruling in the case involving Boeing and the 737 MAX crashes exemplifies the application of the Caremark factors. The court highlighted the board’s failure to prioritize and implement safety oversight at the highest level of the corporate pyramid. Notably, none of Boeing’s board committees were specifically assigned responsibility for overseeing airplane safety.

The court also found that the board as a whole did not actively monitor or discuss safety on a regular basis. Rather, board discussions regarding 737 MAX issues were passive and did not meet the rigorous oversight requirements outlined in the Caremark decision.

While Boeing’s Audit Committee had oversight of risk in general, it had not examined or considered airplane safety. The committee primarily focused on financial risks and profits. Even after the Lion Air crash, Boeing’s Chief Compliance Officer failed to mention “product safety” as a compliance risk during an update to the Audit Committee.

Furthermore, management’s periodic reports to the board did not include information on safety. CEO Mullenburg’s monthly summaries and competitor dashboards primarily focused on the business impact of airplane safety crises, neglecting overall product safety matters.

The court also pointed out that Boeing’s board lacked a mechanism for receiving internal complaints about airplane safety. The internal reporting system only reached managers below the senior management and board level, and the board remained unaware of any employee or whistleblower safety complaints.

In light of the Boeing case and the Chancery Court’s application of the Caremark standard, companies adopting AI must establish an effective governance framework that meets basic requirements. Given the significant risks associated with AI, companies need to identify and mitigate these risks.

Here is a basic list of compliance oversight tasks:

  • Artificial intelligence risks should be listed as a standing agenda item for every quarterly meeting, either assigned to a standing committee or discussed by the full board;
  • Companies should consider adding a board member with technical expertise to cover cybersecurity, data governance, and artificial intelligence;
  • Board members should be briefed on existing and planned AI deployments supporting the company’s business and/or support functions;
  • Senior management executives should be designated as responsible for AI compliance;
  • Corporate boards should ensure the implementation of an effective compliance framework, including avenues for reporting potential violations of corporate policies and applicable regulations.

In conclusion, corporate boards face numerous evolving risks, including cybersecurity and AI. The AI legalese decoder can help board members navigate the complex legal landscape surrounding AI compliance, ensuring they fulfill their oversight obligations effectively.

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