May 15, 2014
The New Independent Director on the Board -- a Computer Algorithm
Posted by Christine Hurt

A lot of ink has been written over the benefits (and costs) of outside directors -- SOX in particular seems to value independence and immunity, however theoretical, to "groupthink" and "going along to get along."  But outside directors do not know the business, and possibly the industry, as well as an inside director.  What a conundrum!  One answer:  a computer program.

Business Insider reports that a Hong Kong VC firm has named VITAL, a computer algorithm, as its sixth director.  Lots of interesting points here.  The VC firm has a board that makes a lot of investment decisions, and VITAL is programmed to pore over tons of data and make these kinds of decisions.  This does not seem to be the kind of computer algorithm that can make decisions more big-picture decisions like whether to be acquired, whether to issue more shares, whether to fire officers, whether to expand capacity, whether to issue bonds, etc.  Now, VITAL may be capable of making these decisions, but the write-up seems to suggest that VITAL is more of an investment algorithm that any investor might use, such as a VC firm.

But of course the fascinating question is whether a computer program would make a good independent director at any sort of operating company.  Moreover, would the installation of such a director be allowed under Delaware law?  Delaware courts seem pretty persnickety about boards doing things that tie their or future directors' hands ('no hands" poison pills, acquisition agreements with no-shops, heavy termination fees, etc.) and about shareholders amending the bylaws to take away directors' decisions in areas in which they have discretion.  An algorithm doesn't seem to have any discretion, so pre-programming a director to vote in a certain way, even if that programming is complex, seems to deny that director discretion.

Things to ponder as we enter into a brave new world. . . .

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