Of the eighteen Boards of Directors of ventures various that I find that that I have been involved with over the years, none gave me any confidence about answering the most simple question. “Are you really sure that you know exactly what is going on here?” My sample includes a listed London FTSE quoted company; Dutch, Benelux, US and UK incorporations; corporate cultures that went from start-up to a hundred years of history, experience as both an executive and non-executive board member. As a result, one residual conclusion that sticks with me is the thought that being a non-executive/external director (NED) in a re- regulating networked business world is as isolated and thankless a high risk position as I can imagine. My heart goes out this week to the could not have known/should have known non-executives on the board of Tesco. How could you sit there and not know that the operating margins were fraudulent, bellow the so knowledgeable commentators of the Press. Easily, I think privately. In the cocoon of corporate culture which is the Board who do you believe if not the CFO? And how do you check a suspicion without evidence which even forensic accountants find it hard to unearth?
In the event, I found that I asked the hardest questions I could devise, tried manfully to test the evidence, used my powers of judgement of events and personality as widely as possible and seem fortunately never to have been lynched by the investors and staff who I was pledged to protect. And then, back in May this year, it slowly dawned on me that our world was changing in ways that might make all of this much easier. In a totally different context I found myself looking at the work of a UK company called Aging Analytics. It was a software-based consultancy in the health sector which found itself collaborating with the Center for Biogerontology and Regenerative Medicine to answer a question posed by a Hong Kong-based investor in regenerative medicine. This company, DKV (Deep knowledge Ventures) asked its consultant how it could reduce the risks in investment decision-making (and as I know well, most risk investors are highly risk averse). The answer was a programme called VITAL, and DKV were so pleased with it (or so PR cute) that they appointed it to their board as a non-executive director. (http://www.marketwatch.com/story/deep-knowledge-ventures-appoints-intelligent-investment-analysis-software-vital-as-board-member-2014-05-13.) At the time the story made headlines and then got lost, but it stuck with me as an example of how Artificial Intelligence will be used to buttress our insecurities.
VITAL has access to all of the data derived from the investigations and due diligence that DKV conducts. At the same time it has the open web and closed subscription services used by DKV to consider. And it is constructed as an algorithm to bring weighted judgement to categorisation like “most likely to succeed” or “closest to corporate investment criteria”. In some ways it is hard to imagine why such procedures do not take place in every PE or VC context. At the great NOAH investment show next week (www.noah-conference.com) I expect to see some hundreds of information and eCommerce investments unvisited and unblessed by such due diligence. And emotionally I understand why people want to rely on human experience (nous, hunch, gut, empathy), since so much of what makes these investments work derives from the people running the company, and not the algorithmic likelihood of success. And yet…
Transfer this thinking over into the true role of the non-executive director. Would risk reduction take place if data access internally for a programmatic Director was matched by access to market comparatives and trends, expected performance profiling and weighted risk comparison? For a decade now we in the information marketplace have been trying to understand workflow and support its automation. From accomplishing this in relatively straightforward areas – were the first in tax and accounting? – we have gone on to create complex systems for handling IP, financing the purchase of aircraft, or managing a continental marketplace in heavy industrial plant, to name only a few that I have encountered In recent years. Readers here will know that I think the PR market is ripe for more mechanisation. Yet how will the poor non-exec ever know that these systems are still effective, or need replacement, or are wasting resources? It will be hard enough of executive directors, with their minds diverted by growth forecasts, margins and capex control, to form a view. The view of the executive director will always be warped by performance criteria, which is why the non-exec is vital. But how can he perform if he does not have help in processing what can be known against the key issues of risk, governance, and, as the world’s bankers now know, compliance.
And then there is something else. Once we start installing intelligent systems which monitor risk and control compliance, the friendly neighbourhood regulator will be round. Asking for access. Online. Just for his own performance monitoring, you understand. So the role of the independent director becomes that of the artificial intelligence whistle blower. Of course, businesses will resist and complain, just as the truck drivers did when we forced them to install tachographs and other measuring devices in their cabs 30 years ago. Now that measurement is a fact of life. So it will be with risk monitoring. In time governments and regulators will mandate and specify some of the qualities they need in the output. And non-executive directors will once again grow confident in the knowledge that, while they still do not know everything, they know enough to protect staff and investors to a level that will make 2014 seem like the Wild West in retrospect.keep looking »