Director due diligence includes AI literacy, and section 76 of the Companies Act requires directors to act with care, skill and diligence. To act diligently, a director must make informed decisions. Artificial Intelligence (AI) has a wide-ranging impact on modern businesses; it can make or break your business model. The law requires directors to understand AI’s impact on the businesses they direct, so they can make informed decisions. This requirement is reinforced in King V, as governing bodies are tasked with overseeing the use of emerging technologies, including AI.
AI literacy for directors
Directors need to understand their company’s business and its economic effects. This knowledge helps them fulfil their statutory and professional responsibilities. Today, governing bodies need to be not only financially literate but also technology and AI-literate. Directors should understand how AI affects digital transformation, regulatory compliance, decision-making, and operational risks to make informed business decisions.
AI literacy is the ability to understand, use, and critically evaluate AI in a meaningful and responsible way.
Directors’ duties under section 76 of the Companies Act 2008
Section 76 codifies several of the directors’ duties. Specifically, directors have the duty to take “reasonably diligent steps to become informed” before making decisions. This means that before greenlighting AI-enabled transformation in your organisation, directors must understand AI use cases and their outcomes in the business context. Additionally, s76(3)(c) requires directors to perform their functions with the skill, care, and due diligence expected of someone with their general knowledge, skill, and experience.
AI literacy empowers directors to exercise their duties by providing them with the general knowledge expected of someone of their skill and experience. Moreover, AI-literate directors can provide meaningful oversight and governance of AI-related proposals rather than blindly relying on management.
Without AI literacy, directors cannot make informed decisions about AI.
The King Code and the business judgment rule
The King Code helps define what proper due diligence looks like for directors. It emphasises that directors should merge strategy, ethics, and stakeholder interests with effective IT governance. This includes managing AI responsibly. While the King Code is not legally binding, courts treat it as persuasive evidence of proper due diligence under s 76. As held in the Minister of Water Affairs and Forestry v Stilfontein Gold Mining Co Ltd, the King Code sets the standard for director conduct under the Companies Act.
AI projects can expose the director to liability and lead to harmful organisational outcomes. The business judgment rule protects directors who act in good faith and on an informed basis. This informed basis requires “reasonably diligent steps to become informed.” So, directors must take steps to become AI-literate, such as receiving a briefing on AI governance or undergoing AI training.
Directors risk personal liability if they approve AI initiatives without understanding the tech.
Practical actions for directors to take
Boards that embrace AI literacy fulfil their ethical, strategic, and legal responsibilities under the Companies Act and King V. Being AI literate promotes sustainable value and resilient governance because you can make decisions that fix your context and goals. To meet their legal obligations, directors should:
- Acquire a basic understanding of AI in their organisations by receiving a briefing on AI governance or by attending our webinar.
- Establish an AI policy for your organisation by instructing us to create a bespoke AI policy aligned with your strategic vision.
- Delegate responsibility by establishing AI governance teams and training them throughout the AI training programme.
- Oversee AI deployment in your organisation by equipping your teams with our practical tools, including AI inventory templates, available only to AI governance programme members.
