Time and time again, corporate scandals remind us of the importance of the mechanisms aimed to ensure that agents within corporations perform their tasks and duties in line with the long-term interests of their shareholders (and other stakeholders, as the case may be), rather than pursuing their immediate self-interest. This prompts the question we seek to answer in a working paper accepted for publication in the Hastings Law Journal: If laws, best practices, ethical standards, and market pressures have so far been unable to tackle this core corporate governance challenge, can technology – more precisely algorithms and data-driven machines – with their more powerful, disinterested, and unbiased information-processing capacity, be better at monitoring corporate agents?

Breath-taking advances in information technology (IT) are characterizing the 21st century, from big data analytics, artificial intelligence (AI), and machine learning to distributed ledger technology, including blockchains, and smart contracts.

For the purposes of our research, we refer to these technologies in the corporate context collectively as “CorpTech.” In particular, CorpTech comprises all solutions relating to corporate governance broadly defined, including tools to set executive compensation, identify candidates for top positions within the organization, manage risk, enhance compliance, and facilitate investor relations, corporate voting, and the internal workings of the board of directors,.

Some scholars have predicted that CorpTech can solve all corporate governance problems for good and even make boards of directors superfluous. Aspects of corporate governance with respect to which commentators have made this prediction include shareholder identification, shareholder proposals, proxy fights, electronic voting, virtual shareholder meetings, digitalized compliance and risk management, disclosures, and shareholder activism.

We argue that such predictions are based on what we call the tech nirvana fallacy; that is, the tendency of comparing supposedly perfect machines with failure-prone humans.

We acknowledge that CorpTech is bound to have a significant impact on corporate boards: New technologies will in fact enhance them by improving the information collection and processing tools available to them. Yet, we show that “Will CorpTech replace boards?” is the wrong question. The inherent features of technology and corporate governance reveal that even well-programmed CorpTech leaves untouched the core issue of corporate governance: conflicts of interest among the relevant corporate stakeholders.

CorpTech will not significantly change what boards do, namely monitoring managers and mediating between them and the company’s shareholders and other stakeholders, because technology will not by itself solve the core corporate-agency problems.  The main insight of our research is in fact that corporate agency problems cannot be coded away:  Those in control of the CorpTech will continue to control the corporation and therefore preserve their ability to engage in self-serving behavior.

In the CorpTech age, the key question then becomes, “Is the human being that selects or controls the firm’s technology conflicted?” If so, CorpTech itself will be tainted. In fact, the problems arising from the transition to CorpTech-dominated governance may, in the short-term, make things even worse: Insufficient understanding of the promise and perils of CorpTech and over-confidence therein may even aggravate agency problems within firms.

Based on this insight, we focus on the tech manifestation of agency problems within corporations and identify – after considering possible market, governance, and regulatory solutions – elements of a governance framework for the CorpTech age. As building blocks of a governance framework for the CorpTech age, we propose to tackle CorpTech manifestations of governance issues through rather traditional means, namely CorpTech board committees and disclosure of tech governance arrangements.  These old-style tools, imperfect as they may be, can reduce the risk that CorpTech exacerbates corporate governance issues by making it even easier for managers to pursue their own agendas.

Only when humans relinquish corporate control to machines, may the problems at the core of corporate governance be solved; but by then humans will have more pressing issues to worry about than corporate governance.

This post comes to us from Luca Enriques, Professor of Corporate Law at the University of Oxford, and Dirk A. Zetzsche, Professor of Law, ADA Chair in Financial Law (Inclusive Finance), Faculty of Law, Economics, and Finance, at the University of Luxembourg. It is based on their recent article, “Corporate Technologies and the Tech Nirvana Fallacy,” available here. A version of this post first appeared on the Oxford Business Law Blog.