What is a Synthetic Director?

What is the Responsible Machine Problem?

The Responsible Machine Problem is the name given to the fact that the law is currently only designed to accommodate human stakeholders. To date, even corporate entities are ultimately governed by human stakeholders. Systems of punishment are not designed for non-human actors.

In key jurisdictions around the world, the law requires a company director to be a natural person [1]. This is consistent with existing legislation and the common law being predicated on rights, responsibilities and penalties for legal non-compliance to ultimately be placed on or with a ‘person’.  This problem (the Responsible Machine Problem[2]) will need to be addressed by lawmakers many times over the next decade and will impact, not only the law applicable to directors, but all areas of the law.

We emphasise the importance of legal accountability for Synthetic Directors and the need for legal personality to protect internal and external stakeholders interacting with the Corporation.  Accordingly, granting legal personality to Synthetic Directors should not be unconditional. We propose a list of bare requirements to recognise that a Synthetic Director is a separate entity that may functionally operate with complete independence from its creators/developers. These conditions include registration with appropriate agencies and a unique identifier as a Synthetic Director, evidence of de minimis functionality and appropriate sanctions for aberrant behaviour.

While personal liability through legislation and common law may be imposed upon humans that direct and manage AI systems, there are practical and legal challenges with relying on strict human responsibility alone in the future. With respect to a Synthetic Director, the universe of potentially liable persons for errant behaviours are the developers, creators, or the legal person (e.g. company) which provided the resources for the development of the Synthetic Director.  In the case of civil or criminal actions which require mental intent (such as fraud) it may be difficult or even inappropriate to attribute the requisite intent to a particular individual and accordingly, the law in these circumstances may not provide recourse for an injured party harmed by the actions of a Synthetic Director.  Further, a responsible human may be too far removed from an actual decision or action of the Synthetic Director to attribute fault to the human. The realistic possibility of a Synthetic Director alone being responsible for making an aberrant decision or action which its creators, developers or funders are not reasonably able to foresee draws a crucial distinction between a Synthetic Director and a corporation or any other traditional non-human legal personality. A corporation, partnership or unincorporated association ultimately depends on a human in the loop to make a decision, whereas the Synthetic Director is expected to be able to independently make decisions for itself with limited or no human direction.  Technically, this may be achievable without the Synthetic Director being sentient or having the ability to ‘think’ as we currently understand ‘thinking’.

For these reasons, there is merit in potentially granting legal personality to the Synthetic Director in order to protect internal and external stakeholders who may be harmed by its actions. To iterate:

(a) The increasing capability of AI will mean that discharge of directorial responsibilities by AI becomes feasible and widespread;

(b) A Synthetic Director presents potential enhanced capabilities over a human director. The capacity to review more relevant information quicker, undertake more efficient decision making, and to be less prone to environmental biases (e.g.improper influence and fraud) than human counterparts means that there may be productivity gains and other attractive benefits from Synthetic Directors. Individuals and investors may prefer to be shareholders in a Corporation governed by a Hybrid Human/Synthetic Director Board than in a corporation where the board is comprised solely of natural persons; and

(c) From the perspective of third-party protection, if the above two propositions are accepted, then the Synthetic Director itself should have legal personality to be subject to legal sanction not only for the benefit of injured parties but also to empower regulators to deter aberrant behaviour. This provides an additional avenue of relief to the extent that action against individuals is not appropriate.

Proposed Conditions for granting legal personality to Synthetic Directors

However, two key caveats are identified in relation to conferring legal personality to Synthetic Directors. First, such legal personality is not unconditional.  Conditions which lawmakers may wish to impose on a Synthetic Director in exchange for conferring legal personality may include the following:

Registration: All Synthetic Directors should be registered with the appropriate local and international agencies and should have their own unique identifier (such as a registration number or digital fingerprint).

Identification as a Synthetic Director: All Synthetic Directors should have a signifier in their names such that they are readily identifiable as a Synthetic Director in all interactions.

Functional Synthetic Director test: A Synthetic Director must be able to provide reasonable evidence of its capability to discharge de minimus functionality, i.e. those things necessary to discharge the Synthetic Director’s legal obligations. For example, functionality akin to a constitutional obligation to comply with basic directorial duties, for example, the duty to prevent insolvent trading. This evidence would need to be provided as a condition to registration of the Synthetic Director, but also possibly on a periodic and ongoing basis to confirm the continued functionality of the Synthetic Director in what is a dynamic and rapidly evolving arena where corporate or shareholder harm occasioned by a Synthetic Director (or at least with an early generation Synthetic Director) may be elevated.

Synthetic Director sanctions: Economic risk allocation does not solve the role of “skin in the game” whereby personal liability and the potential for adverse action against a natural person promotes alignment of interests and actions to comply with the law. Even with limited recourse vehicles, there is still a responsible person (in the case of a company, directors still owe director duties to the company, and in certain circumstances to, or are personally responsible for harm inflicted on, third parties e.g., misleading and deceptive conduct).The applicable governmental authority regulating Synthetic Directors should be conferred with powers to suspend or terminate a Synthetic Director and exercise rights of forfeiture against Synthetic Director assets. While it is impossible to imprison a Synthetic Director, effective sanctions may include suspension or termination of the Synthetic Director’s ability to access data which is a critical input for a Synthetic Director to operate effectively.  If the Synthetic Director is developed with a meticulously calibrated loss factor aimed at minimsing regulatory non-compliance, there is a heightened probability of adherence to legal standard.  Further, to prevent “phoenixing” of a sanctioned Synthetic Director, there would have to be a means of identifying the code of a phoenixed Synthetic Director from the underlying code of a Synthetic Director that has been sanctioned.

Economic reserves: It may be feasible to improve the economic risk of Synthetic Directors to counterparties by imposing some form of credit support. This could be in the form of actual asset backing (i.e. collateralisation) to meet potential claims or guarantees provided by individuals or legal entities of substance or insurance, Synthetic D&O Insurance.  Such Synthetic D&O Insurance to provide a sufficient level of cover for the Synthetic Director activities, obligations and liabilities with no material exclusions.  A counterargument to this is that without some form of collateralisation, a Synthetic Director represents a similar risk profile to external counterparties as corporate or other limited liability vehicles which have minimal asset backing e.g., shell companies. In which case it is a matter of caveat emptor for parties that fail to do their due diligence (assuming that the Synthetic Director is registered and identified as a Synthetic Director pursuant to conditions 1 and 2 above and subject to sanctions described in condition 4.).

Intent of a Synthetic Director: Causes of actions and offences which presuppose mental intent will need to be adjusted for Synthetic Directors, given there may not be a governing ‘mind’ in the legally understood sense. This may involve abolishing the mental intent from such causes of actions and offences to the extent a Synthetic Director is involved or relying on a completely objective (and possibly expert determined) test to determine what the Synthetic Director should have done.

It is important to highlight that recognising legal personality of Synthetic Directors should not abrogate personal responsibility of human actors such as natural person directors to the extent they are involved in corporate decision making and governance.  Granting legal personality to a Synthetic Director expands the recourse available to external and internal stakeholders to both the Synthetic Director and human directors (as appropriate), rather than a liability shielding mechanism for any one responsible person.  The liabilities of responsible human actors and the Synthetic Director should be on a non-mutually exclusive continuum that reflects the involvement of the human actors and the Synthetic Directors in the actual decision making and governance of the Corporation.

The integration of Synthetic Directors as part of a Hybrid Board with natural person directors is both a paradigm mindset shift and a logical extension of using AI to enhance organisational capability. While challenges exist, particularly addressing the Responsible Machine Problem, the fusion of human ingenuity with machine intelligence offers unprecedented enhancements in strategic insights and potentially, competitive advantages for Corporations audacious enough to lean into the AI-infused future.