Use Of AI As Key Managerial Personnel In Corporations
Author: LawSphereX
Category: Technology, Cyber & Privacy
Published:
Updated:
USE OF AI AS KEY MANAGERIAL PERSONNEL IN
CORPORATIONS
Khushi Soi, Symbiosis International University, Nagpur
ABSTRACT
The world is in a race to perform better than the next best, and thus, it has become essential in today’s world to use the next best strategy to overtake others in the race. One such strategy is the use of Artificial Intelligence. The following paper discusses the use of artificial intelligence in the workplace and in the context of the company's key managerial personnel. It describes the various roles and responsibilities designated to the Key Managerial Personnel, namely, the Chief Executive Officer, Manager, Managing Director, Company Secretary, Whole-Director, and Chief Financial Officer of a company. Furthermore, the paper explores the aspect of Artificial Intelligence performing the tasks of the Key Managerial Personnel and the liabilities that may arise from the same.
This also sheds light on the question of accountability in terms of the failure of artificial intelligence, which is addressed in the next heading, that is, the suggestions for the regulatory framework regarding the use of artificial intelligence in a corporate environment. The following heading provides the real-world examples from around the world where Artificial Intelligence has acted or is acting as Key Managerial Personnel in the functioning of an organization. Thereafter, the authors explain the key findings from the paper as a result of the proposed usage. Lastly, the paper concludes that – although there are various pros of using Artificial Intelligence in the corporate world as key managerial executives, there are cons as well.
Therefore, weighing the pros and cons is necessary before using artificial intelligence as key managerial personnel in the present day and in the context.
INTRODUCTION
Key Managerial Personnel are a group of executives tasked with the strategic management, planning and development of the company. While Artificial Intelligence is largely known for the plentiful benefits that it provides in performing its designated tasks. And combining the two would result in an Artificial Intelligence as an executive tasked with the functioning of a company and to take operational and strategic decisions of a company for optimal results. The same is true in today’s world; even India is not far behind in following this trend. And this is why it is necessary to understand the legality behind the workings of such organizations and the accountability on the account of error or failure.
The various officers designated as Key Managerial Personnel are tasked with a variety of works which can make or break an organization, are essential for the administration of an organization, governing of the employees, their roles, responsibilities, obligations and liabilities. And the burden to perform these tasks would shift upon the Artificial Intelligence programme. Consequently, it is a challenge in itself regardless of the multifunctional use of Artificial Intelligence. Because, as discussed later in this paper, India is yet to decide on its laws on Artificial Intelligence. Therefore, in the case of liability, it would be difficult to blame one person for the same. Since Artificial Intelligence is a multifunctional platform programmed for performing specified or unspecified tasks for specific purposes which may range largely from a single function to unlimited functions.
More so, because of the Artificial Intelligence being an ever advancing platform that learns from interactions and experiences, it is difficult to point fingers on the accounts of failure. The paper discusses the various definitions and meanings assigned to the Key Managerial Personnel in the Indian legal context and to the Artificial Intelligence, according to various thinkers. Further, the paper highlights roles that are performed by these executives in the organizations and the scenario where Artificial Intelligence would be designed to these positions and were to perform these roles. Next, the authors discuss the liabilities of the Artificial Intelligence, if they were to arise, in performing these tasks, followed by the instances of Artificial Intelligence programs being used as Key Managerial Personnel in today’s world with the examples of various companies all over the world.
Furthermore, the paper expands on the key findings from the same, and lastly, the conclusion after exploring the intermingling of Artificial Intelligence in the Corporate world as Key Managerial Personnel.
LEGALITY
Let us start with the basics i. e. the meaning of the word ‘personnel’ in Key Managerial Personnel (“KMP”). According to the Oxford Learners Dictionary, it means “people working in an organization”. Likewise, the Cambridge Dictionary describes the same as “people employed in an organization or a company”. On the other hand, the Black’s Law Dictionary interprets the word as “employees working in an organization”. The Act does not define the term ‘employee’, but the same has been dealt with in other statutes like the Payment of Wages Act, Labour Relations Act, which pertain to the protection and safeguard of employees by the employers against over exploitation. Again, the term employer has not been defined, but is more or less interpreted as the people holding key managerial positions in a company or an organization.
This brings us to our present dilemma, that is, firstly, who can be in the KMP positions in a company? And secondly, what categories of companies are required to appoint KMP? The KMP are a group of people in charge of the company’s day to day operations. They have been entrusted with decision making and the company’s smooth functioning. The KMP are those skilled and qualified professionals who are responsible for the managing as well as various regulating the compliances and due diligence of the company. The Companies Act, 2013 (“the Act”) read with the Companies Rules (Appointment and Remuneration of Managerial Personnel), 2014 mandates certain categories of companies to employ Whole-time KMP, these include every listed company and every other public company that has a paid-up share capital of Rs. 10 Crores or more, every other public company that has a paid-up share capital of Rs.
5 Crore or more. Companies having paid-up share capital of Rs. 10 Crore or more are mandated to appoint a Company Secretary. DEFINITION: KMP & AI
Company Secretary • Whole-time Director • Chief Financial Officer • Such other officers, designated by the Board as KMP but are not more than one below the directors in the whole time employment • Such other officer as may be prescribed” The definition provided by the statute lists down the type of KMP in a company, and at the same time gives freedom to the competent authority or government official to include “such other officers” as KMP as designated by the Board “who are not more than one below the directors in the whole time employment”. Therefore, the definition makes it clear that there are other officers who can be nominated as KMP as the Board deems fit.
B. ARTIFICIAL INTELLIGENCE As of now, there is no legal definition of artificial intelligence (“AI”) in the Indian context, however other systems of law have attempted to define the same under broad contexts. But again, the character of AI is too broad for it to fit a limited set of definitions. Therefore, various thinkers have tried to define the same following different approaches, some of which are – Jarrahi broadly defines AI as “intelligent systems with the ability to think and learn. ”, whereas Turner defines the same as “the ability of a non-natural entity to make choices by an evaluative process. ”, among others. AI is generally able to “support three significant business needs: automating business processes, gaining insight through data analysis, and engaging with customers and employees.
” The function of AI can be categorized into three types, which are assistance, augmentation, and autonomous AI. During the initial stage, known as assistance, AI carries out specific tasks while ultimate decision-making power lies with humans. In the second stage, augmentation, AI aids humans in decision-making, allowing for mutual learning. Finally, in the third stage, known as autonomous AI, the machine replaces human intelligence and serves as the key decision-maker.
Some scholars believe in the limited use of AI, using it as an aiding tool in decision making, while others support the idea of delegating duties to the AI for efficient results. In the new age of technology, AI is bound to replace humans in various aspects of life, it being an efficient, and cheaper source of management and decision making in the long run. The paper attempts to discuss the use of AI as KMP in Corporate Decision Making. ROLES & RESPONSIBILITIES AI AND KMP Section 2(51) of the Act highlights as to who can be KMP, which includes a person appointed by the Board, whereas section 203 of the Act expands on who can be appointed as the KMP. Both of which require the presence of an individual. Therefore, in the traditional sense of the wording, the Act does not include the presence of AI as KMP.
However, the same can have an entirely different interpretation if one were to consider the status of legal personhood, which, being a larger and conflicting subject in itself, is not the subject of this discussion. The paper focuses on the responsibilities and liabilities of KMP and whether the same can be attributed to AI if it were to function as the KMP in a company. Therefore, the following consists of a discussion regarding the various KMP as AI in a company. CHIEF EXECUTIVE OFFICER (CEO) A “CEO” is an officer of the company, who has been designated as such by the Act1. The CEO is responsible for the daily operations of the company while ensuring efficient functioning of all the departments. The same is responsible for the overall leadership of the company.
Additionally, the CEO ensures compliance with the principles of corporate governance to ensure the implementation of highest standards of ethics and corporate code of conduct. Therefore, in order to be the CEO of a company, the skill set required is decision making, unable to easily be manipulated, capable of leading others and maintain and grow shareholder value, among others2. The overall decision making is dependent on the CEO to conduct the day to day operations of a company and thus its crucial role, if substituted by AI can have
1 The Companies Act, 2013 § 2(18).
2 Barclift, Z. Jill, Corporate Governance and CEO Dominance, Social Science Research Network (2011).
varied effects, that is to say, An AI would much easily process large amount of data as compared to individuals going through a number of documents, and identify trends and opportunities to make a strategic decision beneficial for the company. It would optimize the use of available resources through strategic allocation and ensure efficient functioning of the organization. As far as the financial planning is concerned, the use of AI would reduce the risks of error or failure and create a financial model that is efficient as well as viable for the functioning of a company. In terms of corporate governance, it would reduce governance lapses in the company as well as protect the inside information from the hands of those who desire to leak it. AI could manage relationships with stakeholders by assessing their interests and patterns and bring about a beneficial collaboration.
Moreover, it could drive innovation and advancement by analysing and identifying market trends, patterns and relevant approaches to achieve the best possible results. MANAGER A "Manager" is a person who, under the supervision, control, and guidance of the Board, is responsible for overseeing the overall or most significant aspects of a company's operations. This includes directors or any other individuals fulfilling the role of a manager, regardless of whether they have a formal employment agreement3. The same is, thus, responsible for the operational management of the company while imparting the appropriate support and guidance to the employees of the company. They ensure resource allocation to various departments and projects and monitor the performance of individuals to take corrective actions, wherever necessary.
The utilization of AI for performing the task of a manager would ensure efficient allocation of resources and work delegation, a continuous monitoring of employee performance with real time feedback and identification of areas of improvement, effectual analysis of data to come to a strategic operational decision, proficient conflict resolution in case of conflict of interest among employees or among other executives of the company, an AI would analyse the situation and identify interests and behavioural patterns to come with the best solution to mitigate the situation.
3 The Companies Act, 2013 § 2(53).
MANAGING DIRECTOR
A “Managing Director” is a director who is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director4. The MD's primary responsibility is to develop and implement the company's strategy. This involves setting long-term and short-term goals, identifying and analyzing market opportunities, and developing plans to achieve the company's objectives. The MD also oversees the company's day-to-day operations, including budgeting, staffing, and marketing. In addition to their strategic and operational responsibilities, the MD is also responsible for ensuring that the company complies with all applicable laws and regulations. This includes ensuring that the company's financial statements are accurate and that it is meeting its tax obligations.
The MD is also responsible for overseeing the company's corporate governance practices and ensuring that they are aligned with best practices. AI as Managing Director would be responsible for the formulation and execution of the company’s strategic plans through systematic analysis of data, overseeing the company’s operations, management of resources through optimal planning, budgeting and finance allocation, compliance of corporate governance principles and practices, and maintaining stakeholder relations. COMPANY SECRETARY: A “Company Secretary” or “Secretary” is appointed by a company to perform the functions of a company secretary5.
The same is responsible to look after the efficient administration of the company, ascertain the company’s compliance with statutory and regulatory requirements, ensure that the targets and instructions of the board are implemented, and compliance with secretarial standards. A Company Secretary maintains filing, registration and record keeping as required by law
4 The Companies Act, 2013 § 2(54).
5 The Company Secretaries Act, 1980 § 2(1)(c).
including the filing of various forms with the Registrar of Companies like annual returns, maintaining the register of members, register of charges etc. , and maintain the minutes of the meetings. The same also plays an advisory role to the Board on various legal and regulatory matters, corporate governances and compliance related issues. AI as company secretary would ensure statutory and regulatory compliances of the company’s documents, assist in upholding the corporate governance principles, maintain records, plan meetings, ensure proper filing of documents, communication with stakeholders and offer advice on legal and regulatory matters. WHOLE-TIME DIRECTOR: A “Whole-time Director” is a director in the whole-time employment or during the entire working hours of the company6.
They are a part of the conducting the daily operations of a company and hold a higher stake in the functioning of the company. Managing Directors are a type of whole time directors. CHIEF FINANCIAL OFFICER (CFO): “CFO” is a person appointed as the Chief Financial Officer of the company7. They are responsible for handling the company’s financial status and keeping a tab on cash flow operations, creating contingency plans for financial crises and in doing the financial planning. The CFO ensures the compliance with financial and accounting standards as well as the regulatory requirements related to financial matters. The same is held responsible for establishing and maintaining internal effective system of internal financial controls in the company. In other words, they lead the treasury and financial functions of the company.
The CFO reports the financial matters like budget, financial statements etc. to the Board. AI as CFO would create detailed financial plans by leveraging data analytics with forecasts and optimize allocation of resources and generation of revenue, it would also reduce the risks of error in calculating and assessing the same in respect of volatility of market, currency fluctuations and credit risks to ensure financial stability of the company through operational
6 The Companies Act, 2013 § 2(94).
7 The Companies Act, 2013 § 2(19).
cost management and effectual investment decisions by assessing potential risks. Other key responsibilities or obligations of the KMP or officers at default or related parties includes: Disclosure of their nature of concern or interest on the matters that are proposed to be transacted at a meeting in the explanatory statement in the notice of such a meeting8, Rights of the KMP to be heard at the meetings of the Audit Committee when the same considers the auditor’s report but in the absence of the right to vote9, Prohibition of KMP to forward dealings in securities of the company10 and Prohibition of KMP to indulge in insider trading11 etc. LIABILITY OF AI ENTITIES Along with the various benefits that comes with AI performing as KMP, there are various lacunae and risk factors involved with the usage of the same.
This involves programming biases which means that there is some inherent biasness in the AI while performing tasks because of it being programmed with the same. This can result in conflict between programmers, where traditionally it would be individual executives, raising ethical concerns. Likewise, the potential of error in decision making and judgement could result in business harming outcomes like financial losses and ruining of stakeholder relations. While the accountability of the same cannot be ascribed entirely to one person. Furthermore, the most prominent disadvantage would be job displacement by the AI in case the position is entirely replaced. Moreover, error in assessing legal requirements could result in a legal liability of the company’s stakeholders where the assessment of fault would be difficult.
Another concern is data privacy and safeguard of the company’s information and employee’s data in the software from being potentially misutilized. INSTANCES OF AI AS KMP Here are a set of instances where AI has been used as KMP in companies around the world: • A Japanese Company, in 2022, Sumitomo Mitsui Banking Corporation (SMBC) appointed an AI called Watson AI as a director to the Board and was made responsible
8 The Companies Act, 2013 § 102.
9 The Companies Act, 2013 § 177.
10 The Companies Act, 2013 § 194.
11 The Companies Act, 2013 § 195.
in providing insights and recommendations to the Board on a variety of subjects like strategic planning, risk management etc. • In the same year, a company, C3. ai, appointed an AI called Val as its CEO. Val is a language model from Google AI which is trained in a massive dataset of text as well as code. The same is responsible for making strategic decisions in the company regarding markets and products. • An AI called Elena was positioned as CEO in a Russian company, Cognitive Technologies, in 2019. The AI is a conversational platform that can interact with consumers, answer queries and make decisions. • HDFC Bank in India appointed AI-CFO in 2021 to help manage its finances. The same was responsible for analysing data, generating reports and providing recommendations to the CFO of the Bank.
• In Japan, a company called Fujitsu appointed an AI named Finn as CFO, in 2021, and was designated to analyse financial data and make decisions regarding the same. • An American company named Walmart, in 2020, appointed an AI called Atlas to manage its inventory and perform tasks like tracking the inventory levels, forecasting demand and placing orders of supplies. The same also appointed an AI called Shelf Aware, in 2021, as the manager to person these tasks as well as tracking customer behaviour and optimizing the store operations. • A Chinese company named Tencent designated an AI called Xiao Ice as its Managing Director at its AI lab and was made responsible for overseeing the deployment as well as development of AI technologies at Tencent.
• In 2023, Tata Consultancy Services (TCS), an Indian company, appointed an AI called Tata Assist as its Company Secretary to deal with the legal and regulatory compliances of the company, hold the Board meeting and provide corporate governance support. • While in 2019, Infosys, also an Indian company, appointed an AI called Anjali as its Company Secretary, responsible for ensuring legal and regulatory compliances of the company. • An Australian company called Link Administration Holdings, in 2018, positioned an AI system, Aubrey, as its company secretary who was responsible for ensuring compliance with all the applicable laws and regulations in the country.
• Mastercard, an American company, appointed an AI named Albert, in 2017, as a Wholetime director of its Board, responsible to provide the Board with recommendations and insights on a variety of matters like cybersecurity, fraud prevention etc. • Alibaba, in 2018, appointed an AI called Alibaba Cloud ET for the position of a Wholetime Director, designated with the responsibility of helping the company in the development and implementation of new AI technologies.
RECOMMENDATIONS
With the advent of new technologies and the game of AI in the present scenario, the statutes need to be amended as per the requirements of the present day to include these technologies. This is because, with the increasing usage of AI, as seen above, in the present world and the intertwining of the virtual world with that of the real, it is becoming increasingly difficult in holding one accountable for their actions. The AI as it suggests learns on its on as it evolves with interactions and experiences, therefore, it is difficult to put a finger on who to hold responsible in the cases of legal liabilities because again, AI is a tool, a machine programmed to work on set patterns to come to an analytical conclusion.
Hence, the statutes are required to provide regulatory clarity by defining AI in the Indian context and the permissible usage of the same in different aspects of decision making in corporate, and if so, the liabilities on the accounts of failure.
FINDINGS
The primary findings from this paper include: AI as a multipurpose tool for performing various tasks with precision and efficiency but at the same has its cons as well, these include technical failure, ethical concerns, privacy issues to name a few. While the world today is increasingly dependent on AI as a model for achieving optimal results and thereby interconnecting the same with various aspects of the organization, it is important to weigh the cons with its usage. While the advantages of the same cannot be ignored and the efficiency of the same cannot be set aside, it is necessary to have an all-inclusive approach in determining the future as well as the working of an organization.
CONCLUSION
The present paper explores the intermingling of AI and KMP in the present world in a legal context, that is to say, the same is understood through the lens of the Act. While the roles of various KMP indicate the significance of the same in the management and governance of the company, the use of AI to perform these tasks have various effects which include the pros as well as the cons. AI is a great tool for efficiency, optimal results, headache of governing a set of employees and what not. The same makes performing different tasks easier and faster with better creativity and efficiency. But the effectuation of the same also results in conflicts because of the ambiguity in the scenarios of default because the AI is a multi-functional and multipurpose tool, the same learns through interactions and experiences, and thus, no one person can be blamed for its actions.
Moreover, Indian law is silent on the governance of AI software and its usage in companies as executives. Along with that, as much as there are cons, because the same results in job displacement, ethical concerns, accountability issues to name a few. Even though the real world has adopted to the technology of AI in the management of companies, still, in order to function in the present Indian context, it is important to define the same along with the liabilities in situations of failure. Therefore, the paper sheds light on the understanding of KMP in the Indian legal context with AI as its substitute or assistant in different scenarios. Moreover, it suggests the need of a regulatory framework to regulate the working and functioning of the same in the Indian context to clear out the crevices or ambiguities surrounding the concept.