Michael Peregrine advises boards of directors on matters of sensitivity and controversy, often in connection with corporate and fiduciary crises. In this episode we discuss examples of such including Silicon Valley Bank and the board’s role, board diversity, the danger of deference to strong CEOs and the challenges that AI raises for boards.
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The reason I refer to matters I work on as sensitive is because they sometimes bridge the gap from pure legal issues to moral and ethical issues for which there’s a gray area, and they often require a substantial amount of courage for the full board to address them and they are perhaps the most explosive in the sense that they typically involve people of goodwill and faith,
As an example, sometimes a very successful CEO is just unable to make the shift to what I would call the modern board management dynamic with respect to engaging boards, or particularly in supporting corporate compliance…it’s a situation where a CEO is just reluctant to acknowledge the full scope of the board’s duties and responsibilities, just doesn’t get it, and therefore is in direct conflict with the obligations of the board to engage in fiduciary responsible activity.
Silicon Valley Bank
When you have any kind of collapse in the banking industry, in the financial industry, where consumers are hurt directly, you’re going to have everybody piling on.
“I think the Silicon Valley Bank situation is going to continue to be in the forefront for all kinds of directors because it deals with the failure of a heavily regulated industry with sophisticated issues involved, but very basic concerns about how people did their jobs.”
“I think there is a risk that it will cause board members to over-engage if they feel that they’re in situations where management has not done enough to inform them or advise them or keep them in the loop.”
That, of course, leads to micromanagement, which is not good for the company as a whole. I kind of see it, and I see a pullback by the board in terms of reliance on management and taking more on at the board level. And while that’s understandable, I don’t think that’s good in the long term.
JA: It seems like had both management and board been doing what we all think of as their job here, this would not have happened. It’s probably not necessary to clamp down and scrutinize more closely. The question is, why didn’t they scrutinize at all? Why didn’t they have a chief risk officer? Why didn’t they do a lot of things to maybe hold this very, very aggressive and active CEO more accountable for what he was doing?
MP: I think there’s a great likelihood that the Fed will control the dialogue…”We gave them all the information they had. We can’t hold their hand.” And the question was, “What did you do with the information?” I think it will focus on the extent of information that the board and management knew or should have known from the Fed’s review.
“If I’m a chief risk officer of an organization, I’m going to assume that my compensation will increase dramatically.”
I think another question could be, “Well, did the board actually have the competency necessary to do the analysis? Was there a situation where they lack subject matter experts?”
JA: It’s not just a lack of a chief risk officer in just any sector or organization. It’s a chief risk officer in one of the most highly regulated industries in the world, so not having one under those circumstances – that’s something on which people will focus and I think that’s appropriate.
Criticism of SBV Board Diversity
JA: You said the criticism may be unfair, and I’m going to just say it’s way more than unfair, it’s completely, in my view, misplaced. Two things: one, diversity of perspective does mean you’re a better board, but it doesn’t necessarily mean you’re going to be a better board unless the underlying skills and experiences of those members are the right ones. That’s always been true, so whether you have a diverse gender, racial, ethnic, geographic, age – whatever that diversity is – that is probably a good thing, but it only matters if the underlying group of skills together is what is needed for this company.
Impact of the pandemic on the boardroom
Generally speaking, over the last couple of years, I’ve seen the pandemic issue affecting industries in two ways. One is that I think for a period of three years boards have been reluctant to lean in on management because they felt in 2021, and to a certain extent in 2022, “You guys have your hands full. We’re going to lean off. We’re going to let you run it. We’re not going to beat on you. We’re going to ease back on the throttle and let you get the ship back in the right course.”
Now, Boards are seeking to reclaim their lost authority, and CEOs are not so willing to give it up. I think that is an aspect of the pandemic which is important to consider and important for boards to confront that issue with management.
Deference to the “Messianic CEO”
MP: SVB also raises the question of the obligation of the board when you have the Messianic CEO, there can be so much belief in that person that there’s excessive reliance or excessive deference to that CEO when the board feels that that person has the magic beans to do the job.
JA: Michael, that’s a cult, that’s not a board. If you want to join a cult, good luck. But if you want to be on a board being mesmerized by the CEO is not an excuse. It’s never excuse. If you’re going to do that, get off the board and go join a cult.
I think that the gap between a board’s awareness and their ability to do their job in terms of oversight of organizational commitment to AI and , ultimately. risk is huge. I were in a board of an organization in an industry where there were tremendous AI advancements, I would be concerned.
In my view, it’s really the Wild West if you’re a board member trying to manage the organization’s use of AI.
Hello and welcome to On Boards, a deep dive at what drives business success. I’m Joe Ayoub, and I’m here with my co-host, Raza Shaikh. On Boards is about boards of directors and advisors in all aspects of board governance. Twice a month, this is the place to learn about one of the most critically important aspects of any company or organization; its board of directors or advisors, as well as the important issues that are facing boards, company leadership, and stakeholders.
Raza: Joe and I speak with a wide range of guests and talk about what makes a board successful or unsuccessful, what it means to be an effective board member, the challenges boards are facing and how they’re addressing those challenges, and how to make your board one of the most valuable assets of your organization.
Joe: Our guest today is Michael Peregrine. Michael is a partner in the [00:01:00] Chicago office of the law firm of McDermott, Will & Emory and represents corporations and their officers and directors in connection with a wide variety of governance-related issues including corporate structure, fiduciary duties, office- director and liability issue.
Raza: He has served as an outside governance counsel to many prominent national corporations, and he speaks and writes on a range of emerging trends and issues in corporate governance to help leaders understand the implications and how they might be relevant to their own circumstances.
Joe: Much of Michael’s practice involves advising boards of directors on matters of sensitivity and controversy, often in connection with corporate and fiduciary crises. He is recognized as one of the leading corporate governance counselors and is a respected interpreter of the law of fiduciary duties. Welcome, Michael, thank you so much for [00:02:00] joining us today on On Boards.
Michael: Fellas, I’m glad to be with you and thanks for arranging so many governance crisis for us to talk about. Perfect timing.
Joe: Yeah, we do our best.
Raza: Michael, in your intro, we mentioned issues of sensitivity and controversy. Could you give us some examples of that type of matters?
Michael: Sensitivity is often one of the critical skill sets you need to work with today’s board. And by that I mean issues relating to uh, internal relationships, conflicts of interest, interpersonal relationships, issues that relate to conduct violations or potential violations, what I would call human interaction matters other than matters of judgment.
The reason I refer to them as sensitive is because they sometimes bridge the gap from pure legal issues to moral and ethical issues for which there’s a gray area and they often require a substantial amount of courage for the full board to address them and they are perhaps the most explosive in [00:03:00] the sense that they typically involve people of goodwill and faith, people who are in conflicted situations where in retrospect they wish they hadn’t, but again the corporation has an expectation of conduct from them and if they’re unable to deliver it, then we have an issue.
Raza: Maybe any war stories or calls from CEOs that you got without, of course, revealing any information.
Michael: I think that the most difficult ones that I find probably lately fall into two categories; one will be the well-respected, very successful CEO who is just unable to make the shift to what I would call the modern board management dynamic with respect to engaging boards, or particularly in supporting corporate compliance. Those are very difficult. I won’t call it the shift from the Imperial CEO to the modern CEO, but it’s a situation where a CEO is just reluctant to [00:04:00] acknowledge the full scope of the board’s duties and responsibilities, just doesn’t get it, and therefore is in direct conflict with the obligations of the board to engage in fiduciary responsible activity.
The other kinds are situations involving sensitive or negative relationships between board members, conflicts of interest between board members and sensitive relationships that involve tone at the top or lack of tone at the top, and I’m not talking necessarily just about me too obligations, I’m talking about more situations where it’s kind of falls in the category of, come on, you should have known better than to do that.
Joe: Well, there are a few things that have sparked conversation about governance in business more than the recent collapse of Silicon Valley Bank and Signature Bank. We could probably spend the next several weeks talking about this, but we’ll do what we can in the next 20 minutes.
Let’s start with the likely reaction to what’s happened, and I know you have a [00:05:00] recent article on this that you really focus on one particular thing that you think is almost certainly going to happen in the boardroom.
Michael: Well, Joe, as you and I have chatted in the past about this, when you have any kind of situation of a collapse in the banking industry, in the financial industry, where consumers are hurt directly, you’re going to have everybody piling on.
We can sit back and look, and what’s interesting about this is not only are there allegations of failure of oversight by management and by the board, you also have allegations of failure of oversight by the Federal Reserve, which I think adds a kind of complexity. Everybody is going to be pointing fingers at everybody else, which means I think they’ll be trying to outdo everybody else in the allegations of where they were at fault.
But I think taking it from an immediate perspective, I think there is a risk that it will cause board members to over-engage if they feel that they’re in situations where management has not done enough in terms to inform them or advise them or keep them in the loop. When you have calls for much greater accountability of banking industry [00:06:00] officers and directors and much greater financial penalties like clawbacks or otherwise, I think people are going to be on the board saying, “Well, that’s not going to happen on my watch, and the last thing I need is to have increased risks, so what am I going to do about it? I’m going to lean in much more hard on management and we’re going to have a much tighter leash on them because I’m not going to be in a situation where the management team is separated or not fully disclosing to me or doesn’t have a good reporting relationship to me, I’m going to get more involved.”
That, of course, leads to micromanagement, which is not good for the company as a whole. I kind of see it, and I’d be interested in your perspective, I see a pullback by the board in terms of reliance on management and taking more on at the board level. And while that’s understandable, I don’t think that’s good in the long term.
Joe: I certainly agree that that, what I would call overreaction, would not be good. I wonder if the overreaction is in the wrong place because it seems like [00:07:00] had both management and board been doing what we all think of as their job here, this would not have happened.
I know we don’t have all the information. We’re not likely to for a while, but my reaction is, it’s probably not necessary to clamp down and scrutinize more closely. The question is, why didn’t they scrutinize at all? Why didn’t they have a chief risk officer? Why didn’t they do a lot of things to maybe hold this very, very aggressive and active CEO potentially more accountable for what he was doing?
Michael: Well, I think we’ll see starting maybe with May 1st when the Fed, the Fed, I think is anxious to get the blame off of it. So again, that’s what I think is unusual here, and as we know, I’m not necessarily saying this is a criticism. Government is really good at pointing the fingers elsewhere. They have the authority and the information capability to say, “Don’t look at us. Here’s where the [00:08:00] risk is.”
I think there’s a great likelihood that the Fed will control the dialogue and rather than, “Well, we were not aggressive enough in our oversight. We gave them all the information they had. We can’t hold their hand.” And the question was, “What did you do with the information?” I think it will focus on the extent of information that the board and management knew or should have known from the Fed’s review.
The simplest, and I think the most black and white focus is going to be this risk officer situation. Every time a controversy is, it has something simple that people can grasp to and say, “I get that.” And the concept of the absence of a chief risk officer for such a long time will be an obvious area of some focus.
If I’m a chief risk officer of an organization, I’m going to assume that my compensation will increase dramatically because there’ll be an issue of, “Okay, what’s the difference between a chief risk officer and chief compliance officer?” We will be having those discussions, but I do think where was the board dialogue is also easy to understand, and the other thing besides questions about, what did you do with the information you got from the government, what did [00:09:00] you do about the absence of chief risk officer, but I think the other questions could be, “Well, did the board actually have the competency necessary to do the analysis? Was there a situation where they lack subject matter experts?”
There’s been some discussion in the media about that. It’ll be interesting to see where the Fed comes down. But again, you put it into three areas, the obvious ones, what was the absence of risk officer? Any red or yellow flags from the Fed? And did we have the necessary expertise at the board level to ask the questions? I think it’ll break down into those three subjects, which are as you’ve pointed out in the past in our conversations, Joe, that’s applicable to way past the banking industry and I think that’s why as these financial scandals have happened in the past, they always seem to have a much broader application to industry in general and why I think the Silicon Valley Bank situation is going to continue to be in the forefront for all kinds of directors because it deals with the failure of a heavily-regulated industry [00:10:00] with sophisticated issues involved, but very basic concerns about how people did their jobs. We can relate to it.
Joe: A couple of things. First of all, it’s not just a lack of a chief risk officer in any sector or organization. It’s a chief risk officer in one of the most highly-regulated industries in the world, so not having one under those circumstances, I agree, that’s something people will focus on and I think appropriately.
The second thing is, you have previously mentioned that one of the things that will likely result in this kind of increased oversight is the recent Delaware Court decisions that, including the recent McDonald decision, that is changing the mindset, if you will, of what board responsibility means. Could you talk a little bit about that without getting into too much detail about the law, but where is the Delaware Court going and why is that going to be of concern.
Michael: Well, I [00:11:00] think, of course, it has been going for the last four or five years on much greater focus on board engagement. I think that’s just coming out of the pandemic. It is like a switch was flipped and all of a sudden the board’s work portfolio and their responsibility is extraordinarily broad.
In the McDonald’s cases, we see a couple of things. We see a continuing confirmation of the obligation of the board to identify and address red flags. That’s always a useful conversation, but what is particularly new is the conversation about corporate officers having the same fiduciary obligations as do board members.
That’s going to scare a lot of officers. I’m not sure it needs to, because I really don’t think that the liability threshold for corporate officers is going to really change that much, but they will think it will, and it’s important for the board to reach out and say, “No, let’s work together here.”
There is some interesting language in the cases that talk about the board having a right to sue the officers, but that’s not constructive conversation. I think the focus is going to be ultimately on information flow. [00:12:00] The corporate officers are deemed to be in a better position than board members to have that information, get it up there.
In the prior cases in Caremark, it was focusing on the board’s obligation to have an information system set up that they get the information. Now, it’s an affirmative obligation, which I think always existed, but they’re basically naming it. Officers, you need to make sure that yellow flag and red flag information in your area of responsibility gets up the ladder and fast.
Ultimately, this is a helpful conversation because it puts much greater light on the manner in which management could support the board with information flow about, as the Court said, the compliance risk of the organization. In the near, it’s going to cause confusion at the officer level of, “Okay, am I just giving you information about my little area of the world, or if I operate broadly, have a broad portfolio within the company, am I supposed to tell you everything that I know? Will there be the proverbial fire hose of information?”
Boards [00:13:00] should be prepared to stay, “Stop. That’s enough.” There’s going be a natural tendency of officers to do that. How can you fucking blame them? It’s going to take a year or two, I think, for this to settle down. Ultimately, however, from a board perspective, anything that gets more information to them in a quicker timetable is good.
Joe: One of the things you mentioned when we talked last week was that there would be more headwinds for ESG initiatives. Talk a little bit about why that reaction will occur and what you think about it.
Michael: Regardless of whether what you feel about ESG, and I generally view it as E&S because I think the governance issues that are raised in ESG discussions are the same governance issues that any good board is going to address. We know right now that there is high level of political pushback in some states and Washington on ESG principles.
That in of itself could cause some boards to say, “I’m [00:14:00] not going to put my stack in right now on ESG until I see how this shakes out.” But the real problem is, and I think we saw this right out of the box when Silicon Valley Bank shut down, is that those who strenuously oppose the concept of ESG will point to the philosophy and investment standards and board composition issues, the unique aspects of Silicon Valley Bank, and say, “Well, there you go. The fact that it was viewed as the favorite bank for, as they say, “woke executives,” all of this may be super unfair, but I think that there are circumstances that relate to, again, their corporate policies, their management style, their workplace culture, and most definitely their investment strategies that are going to give fodder to those who oppose [00:15:00] ESG, and second of all, cause those who are equivocal about ESG to pause and say, “Well, maybe there’s something to this pushback.”
I’m not in the camp of those, like some governors who have said, “There you go. ESG and banking is bad combination.” I think that’s an exaggeration. It will be interesting to see how the Fed’s investigation and others come out . Among these, I will personally be interested in further elaboration on the bank’s investment strategies, how they chose their clients and the orientation of their board members with respect to general banking background versus broader social awareness and social involvement. It will be interesting to watch this evolve over the next couple of months.
Joe: You said it may be unfair, and I’m going to just say it’s way more than unfair, it’s [00:16:00]completely, in my view, misplaced. Two things: one, diversity of perspective does mean you’re a better board, but it doesn’t necessarily mean you’re going to be a better board unless the underlying skills and experiences of those members are the right ones. That’s always been true, so whether you have a diverse gender, racial, ethnic, geographic, age, whatever that diversity is, that is probably a good thing, but it only matters if the underlying group of skills together is what is needed for this company.
Whether it’s true in this case or not, I don’t know yet, but to look at the diversity and say somehow that’s the problem is so completely misplaced and it’s just an easy way to find blame. It’s blaming something without really understanding the underlying issue.
The second thing I’m want to say about ESG is we have talked a lot on this show [00:17:00] about ESG and that ultimately what it means or should mean is the ability of organizations to look to the long term rather than being wedded to only quarterly reports and quarterly earnings.
ESG is being used by State Street, BlackRock, some of the big institutional investors to tell companies, “You need to be looking at long term. You need to be looking at these issues not because it’s the right thing to do, which it may be, but because it’s better for your company in the long term. We’re not investing for this year. The people that we invest for are looking for years down the road, and so the underlying things that may drive your company, you need to address them.”
That to me is what ESG is really about, not we got to do the right thing for the right people, which is a good thing, [00:18:00] but that’s not what it’s about.
Michael: Agree with you. The kind of purpose equals profits, that conversation that Larry Fink raised just five years ago, to be honest with you, I thought the most important point he’s ever made in any of his letters is the need to address the long-term retirement plans of employees and to make sure they leave the company in fair situation. I haven’t heard enough about that but ultimately, Joe, I think this will work out fairly well because the political blunderbusses have been fired off. I cannot imagine a circumstance in which any report from the Fed undermines the administration’s view on ESG, but we’ll see.
Raza: One of the things that you earlier kind of briefly alluded to was the pandemic, and I wanted to bring it in the context of maybe the SVB things. How has the pandemic changed boards, and was that kind of a factor in some of this? What have you seen in terms of changes for the board due to the [00:19:00] pandemic?
Michael: There are two aspects of that, and I would say I do think it’s important that in the SV Bank situation, commentators are suggesting that there were elements of the board practice that affected their performance, the meeting by Zoom, and I’m not sure about that.
Someone who has to interview board members sometimes in contentious situations, is it better to see somebody in person? Absolutely, I want to read the body language, things of that nature. That’s a credible point, and that’s the first time that’s been raised. We’ll see where that goes.
The work from home commitment, which included work from home by the C-executives was specifically cited in the annual report as a problem, so I think these are issues that are going to get scrutiny.
Generally speaking, over the last couple of years, I’ve seen the pandemic issue affecting industries in two ways. One is that I think for a period of three years, at least my experience is that boards have been reluctant to lean in on management because they felt at least in like in [00:20:00] 2021, and to a certain extent, in 2022, they say, “You guys have your hands full. We’re going to lean off. We’re going to let you run it. We’re not going to beat on you. We’re going to ease back on the throttle and let you get the ship back in the right course.”
That’s been a level of authority that I think many CEOs have enjoyed, and I think for the most part those who would pursue actions against board members, they’re given a pass, but it’s been less scrutiny than before.
Now, however, whether, I don’t know the right term, are we coming out of the pandemic? I’m not sure, I guess. I think things are returning to normal. Boards are seeking to reclaim their lost authority, and CEOs are not so willing to give it up. I think that is a separate aspect of the pandemic, which is important to consider and important for boards to confront that issue with management.
The other thing I’ll say, and this is kind of off the wall, but I believe it firmly. Joe, this goes to your broader point about ESG, and I do [00:21:00] believe that boards have a social voice on the corporate platform to use and some corporations have used that effectively over the last several years on major social issues like voting rights, abortion rights, things of that nature. Sometimes they get nailed by the states for doing so.
But I think the other pandemic-related issue is it’s in everybody’s interests and certainly the interest of corporate stability to point out issues about preparation for the next pandemic. And if there’s a sense, and this goes to Mr. Fink’s comment years ago, government is not doing it. Does the obligation fall on corporations?
I personally think that the corporate social voice should be exercised to raise the attention of the consumer and others on whether or not we are prepared for the next level of pandemic or other type of disease and things that relate to our ability to overcome that which we could not overcome the last three years. Can [00:22:00] corporations start speaking out on that issue? I’d like to see that.
Joe: Yeah, I agree. I do want to say that we talked about the Theranos board, the most infamous bad board in recent public history, and a number of people have raised that board and comparing it to the Silicon Valley board, and I just want to say, way too early to make that comparison.
Theranos was about pure fraud. There was nothing there. There was no product, there was no money. The only money was flowing into her coffers and wasn’t being used to do anything either scientifically, chemically, or physically possible. I think that was the most extreme example.
The only aspect that has some relevance is, what was the composition of the board designed to do? In Theranos’s case, it was designed to raise money. That’s all it was. They had no ability [00:23:00] to provide any kind of realistic oversight, but she was obviously successful in raising a ton of money. She raised almost a billion dollars for nothing, so that seems pretty successful.
Whether ultimately it will turn out that this Silicon Valley board was badly composed, that we don’t know, so I think that comparison really is, you know. It’s too easy to jump to that just as it’s too easy to say, “Let’s clamp down on our CEOs and let’s get more information.”
Michael: Yeah, and it’s interesting. I have viewed Theranos with disappointment in a sense that it has not generated a kind of reliable information someone in my position can use to say the law says X. I’m just not aware of many cases that’s written with formal opinions which have spoken to the liability or contributions to risk of the Theranos board.
That’s kind of similar, Joe, as you may remember in Enron, you didn’t see a lot of long-running cases involving [00:24:00] any of the board members of Enron, but they had a similarity and they were both all star boards, people of extraordinary skill and competence. The one thing that the Enron board left was perhaps one of the most comprehensive internal analyses by the board of a disaster that you’ll ever see.
We didn’t get that in Theranos. I expect there to be a greater record that people in my line of work can look to and say, “Okay, the Fed has said this is the problem.” In other words, I think there will be something authoritative that comes out from a reliable body, whether a Court or investigative agency that gives us some better hint than newspaper stories on what really happened, and that is important because, again, it’s very frustrating for someone who lives in this world on a regular basis. You sense what’s happened at Theranos, but it’s hard to cite to that in any kind of advice to apply.
Joe: Yeah, I think in that case, she was so completely [00:25:00] out of line that the focus became on her, it became Elizabeth Holmes and her trial, her conviction, her getting pregnant to try to avoid going to jail. I mean, her personal story was so outrageous that it took all the attention away from the board, so I think that’s why we lost the benefit of learning anything other than bad boards lead to bad results, but we’ve known that for a long time.
Michael: It also raises the question of the obligation of the board when you had the Messianic CEO, but again, there can be so much belief in that person that there’s excessive reliance or excessive deference to that CEO when the board feels that that person has the magic beans to do the job.
Joe: Michael, that’s a cult. That’s not a board. If you want to join a cult, good luck. But if you want to be on a board being mesmerized by your CEO, which might actually also be true for Silicon Valley Bank, he was preaching a certain approach. We’re making lots of [00:26:00] money. Who are we to get in the way of this? And so that maybe that was going on, but being mesmerized by the CEO is not an excuse. It’s never excuse. If you’re going to do that, get off the board and go join a cult. Put on your robe. Do whatever you got to do, but that’s not a boardroom thing.
Michael: No. But unfortunately we see boardrooms that fit that mold.
Raza: Michael, this kind of seemed like, although I wouldn’t quite call it a spectrum, but from one extreme to the other, on the software side, does it mean that the business judgment rule might be changing or is under attack where the Courts now think, “Well, there’s no law against making bad judgments.” Maybe the board just did that.
Michael: I don’t think it’s under assault, Raza. I think this goes to my earlier comment about boards leaning in. I think that there will be greater efforts on boards to listen to their general counsel about the process, about form. There will be a greater concept of memorializing the [00:27:00] evaluation of risk profiles, but what does the business judgment rule say, it talks about good faith and informed decision making process.
Again, I think you’ll see conservative boards making a special effort to make sure that they have read the material, that the record is clear, that they have asked incisive questions. I think it’s going to include a much greater focus on the question of abstention versus recusal, there is a difference, and I never get it right, but nevertheless, people are going to need to focus on actual or perceived conflicts. In other words, the steps that make the business judgment rule viable, and that’s not a bad thing.
Raza: Michael, let’s talk about another new or newer thing that is emerging called AI. What does it look like that AI would mean for boardrooms? Is it risk assessment of AI that boards need to be aware of? What are the issues with AI that a board should [00:28:00] be looking at?
Michael: It’s a difficult issue in many respects, Raza. I think the most important concern right now, and I was looking at The Times the other day, the flow of information from media sources on the evolution of AI is, in my mind, almost bewildering. I’m one of those people who can’t handle the multiple click mobile devices to start the television set and things of that nature.
But, first and foremost, the speed with which development is occurring, I think there’s a great risk that it’s rapidly overwhelming the board’s ability to understand how it’s being applied, how it’s being acquired, and what are the risks in their own organizations.
In other words, I just think that the gap between a board awareness and their ability to do their job in terms of oversight of organizational commitment to it and ,ultimately. risk is just [00:29:00] huge, and if I were in a board of an organization in an industry where there were tremendous AI advancements, I would be concerned.
I think that’s why you’re hearing some calls for suspension of application. There needs to be some type of timeout to allow the board to catch up and figure out what’s going on here, what is this, and it is exacerbated by the fact that we lack any kind of formal regulation in the United States for this. There are no clear standards which a board can apply in terms of its oversight.
In my view, it’s really the Wild West if you’re a board member trying to manage the organization’s use of AI and the people, the IT folks who know what they’re talking about, the physicians, the scientists who understand this all are running far ahead of the board because the board just simply can’t catch up with the information demand.
Joe: Michael, I would say this, we’re not going to get a timeout. It’s going to [00:30:00] keep moving, and with no timeout in sight, doesn’t it in some ways go back to board composition? If your board is in an industry where it’s really on the cutting edge of AI and needs AI and it’s moving in that direction, you need to have people on the board that can ask the questions that will help the rest of the board understand where you’re going and most importantly, where the risk is and what risk you want to take.
Yeah, let’s bring people in that know something about it. Most board members probably don’t. Most board members are probably, in your category, they, they’re, they’re happy to get their TV on and get to Netflix safely, but beyond that, not so much. And that is not going to be good enough for the board of the future.
Michael: No, Joe, it won’t be because I think what you’re going to see is that those experts, it’s going to be a seller’s market for their services. And if you get one person on the board with that, and I’m not a giant fan of competency-based governance, because there’s just too many competencies as necessary.
I think it’s [00:31:00] going to exacerbate the need for what I call blue guys on the board. The conference board had a report last year that talked about this. We’re going to need rather than just specialists on every subject, people on the board who can see the strategic impact of what’s going on and can apply common sense and who maybe can only monitor their TV and nothing else, but they’ll know enough to say, “This doesn’t make sense. We’re going too fast.” Again, the blue guy on the board ultimately will be as important as the IT expert.
Raza: I think the analogy is also kind of what happened with cyber directors, which is like, “Oh, that became the thing and you need to have a cyber expert.” But really ultimately the entire board needs to be educated, know what the issues. I think for AI, that part is emerging. We’re just getting to learn what are the questions to ask. Hey, for generative AI, does it mean that the company that generated it owns the copyright for the [00:32:00] picture that it created, or explainability of why AI made such a decision to give different credit to a man and a woman in the same household all the way to, ethics and bias questions.
In other words, I feel that like the set of questions that need to be asked is also emerging at the same time that the field is emerging, so it is kind of like very interesting time for boards of how to grapple with that, especially if you are elective.
Michael: That’s right, and whether majority of the board is confident in the information they’re getting about what risk to ask, the absence of some type of uniform education for board members in this area is really disconcerting because when we talk about risk and risk-based governance, when you don’t have a really strong feel for the risk of your investment in its application, you’re flying blind. That I think is going to be an extremely disconcerting position for boards to be [00:33:00] in.
Joe: Well, on that very positive note. I want to thank you for speaking with us today and joining us on On Boards. And thank you all for listening to On Boards with our guest, Michael Peregrine.
Michael: Fellas, thank you so much. What a delightful conversation to have.
Raza: Please visit our website at OnBoardsPodcast.com. That’s OnBoardsPodcast.com. We’d love to hear your comments, suggestions, and feedback. And if you haven’t already subscribed, please just subscribe to our podcast on Apple Podcast, Spotify, or wherever you get your podcast, and remember to leave us a five-star review.
Joe: Please stay safe. Take care of yourselves, your families, and your communities as best you can. And we hope you’ll tune in for the next episode of On Boards. Thanks.