Artificial Intelligence (AI) And The Board:

“Wax On, Wax Off”

The pace of change of AI is accelerating and it doesn’t seem to be slowing down. Effective AI oversight is crucial; Should boards be like Mr. Miyagi (the wax on, wax off coach)? What can boards do to help prepare their organizations for the AI business transformation journey ahead?

“AI is the new electricity” - Andrew Ng

AI is not block-chain; your average person isn’t using block-chain technology to improve their work and personal lives. Neither is AI, quantum computing that may take a while before it becomes mainstream. AI is the new electricity as former Stanford Professor Andrew Ng states; it’s already powering several aspects of work and life. AI is more like the internet, a general purpose technology that offers individuals and organizations the priceless gift of time, talent and reinvention to those who drink from its cup.

A Wall Street Journal article offers examples of how AI is being used by some organizations and its potential benefits. It’s no wonder that c-suite executives are racing to figure out how best to leverage AI. Board directors have an opportunity to offer value as well as provide effective oversight in this rapidly evolving space. However, it may not be as easy as it sounds.

Imagine that at your next board meeting, management will be requesting a board motion for the approval of the organization’s first AI-investment project. This investment was not included in the current approved budget but management believes it’s important enough to bring to the board. As expected, the management team has done their due diligence by providing the critical context and background including a clear business challenge/outcome/value, expected ROI, risks, talent/culture implications and other relevant performance KPIs.

How do you, as a board director provide strategic value and oversight in this case? Especially, if you or the board do not have AI-expertise or competency. Our hope is that this article will help you if/when faced with this situation or something similar.

Side Bar - AI Literacy: What AI can and cannot do

AI might seem like a foreign language to some board directors but understanding some basic fundamentals is not that different from understanding financial statements. And that’s really all that’s needed at the board level. The guide below provides basic AI literacy and its business implications for board directors. We also offer two book recommendations below that will inform a director’s understanding of AI.

There are three foundational principles that boards can adopt if they choose to exercise effective AI oversight and these are:

Goal Alignment: Intentional alignment on the goal of the goal - the second order effect. The goal should not simply be to adopt/implement AI within the organization. It shouldn’t be to solely increase productivity, operational efficiency and business results, although that is crucially important. It’s more than that. In our opinion, it should also be about creating an organizational capability for the future that will serve as the foundation for the future of the organization. However, the important point here isn’t what we believe the goal of the AI goal should be but that the board and management should be aligned on what it is. They can’t afford to be misaligned on AI (and it’s strategic goal) because of it’s massive potential to impact the future of all stakeholders.
Strategic Leverage: As Harvard professor Michael Porter has said; The essence of strategy is choosing what not to do. AI does not fall into the category of what not to do, however, AI is so broad and wide-ranging in its application that it can be easy to assume that most applications give the organization strategic leverage. The critical question to answer is what will strategic leverage look like for your organization 6-12 months and 3-5 years from now. Where will 20% of focused action, yield 80% of desired outcomes and results.
Transformation Momentum: Boards can facilitate, shape and strengthen AI transformation momentum or they can weaken, impede and/or inhibit it. Building and creating momentum can be simple or even easy to do; but it’s also easy not to do. It’s similar to the notion of losing weight, the steps are easy and not complicated. An apple a day keeps the doctor away, the old saying goes - that’s easy to do. Well, a Hershey bar a day is also easy to do. However, only the former, when practiced consistently over time, will build transformation momentum in the right direction. Boards can proactively encourage the use of laddered initiatives to build and sustain AI transformation momentum. As previously mentioned, sounds easy but doing it consistently over time can be difficult.

How then should boards put these principles into practice? The following sections outline effective practices boards can adopt that’ll reflect these three foundational and fundamental principles.

1. Goal Alignment

This is a foundational principle. In the context of AI oversight by the board, it means maintaining intentional alignment on the goal of the goal - the second order effects. There are three questions at the heart of this principle. Is the goal of the organization’s AI strategy simply to improve employee productivity, operational efficiencies, customer experiences and ultimately top-line and/or bottom-line results? Or is it to advance the business’ long-term strategic priorities - In other words is it to begin the process of developing AI capabilities, experience and expertise for the organization to be well/best positioned for the anticipated changes in competitive landscape, consumer behavior and talent needs moving forward?. Or is it both?

In theory, most organizations will say it’s both. However, in practice, there are several organizations and boards that focus exclusively on the first question. They’re asking what can AI do for the business in the short and near term. The second question is often forgotten, ignored or overlooked in boardroom discussions about AI. In some cases, this is because there’s greater focus on near-term goals, opportunities and risks. In other cases board directors just simply have too many critical items to discuss during board meetings or they assume that management has a good handle on it.

Trying to do both would be ideal but in either case, strategic alignment on the goal of the goal is vital and will greatly influence the future success of the organization and its strategic direction. Some of us may remember the phrase wax-on, wax-off from the 1984 movie Karate Kid. In the movie, Mr. Miyagi (the coach) asked the karate kid to wax all the cars using a specific technique that’s shortened to wax-on, wax-off. The karate kid’s goal was to learn to how fight karate and that didn’t align with what his coach Mr. Miyagi was asking him to do with wax-on, wax-off. Both of them didn’t align on the goal of the goal initially until Mr. Miyagi explained and the rest as they say, is history. Like Mr. Miyagi and the karate kid, the board and management have establish strategic alignment on the goal of the goal when it comes to AI investments and an overarching strategy to avoid costly errors, false starts and mistakes.

Board Action: Board directors should consider the following actions to really get to the heart of the strategic AI goals of their organizations

The board should not just ask what AI can do for the business/organization but also who it can help the organization become. As in the case of the Karate Kid; the wax-on, wax-off practice can result in clean cars (what the organization wants) but more importantly it can help organizations become who they want to be in an AI-driven future.
- What not to ask: How are we using AI tools similar to ChatGPT and how much value is it providing? It tends to frame the discussion/response in the context of AI tools and benefits instead of long-term business strategy and disruptive risks
Seek to understand and align on the second order effects, the goal of the goal or strategic objective. This alignment will drive everything from corporate strategy to asset/resource allocation to workforce and culture changes.

2. Strategic Leverage

Let’s illustrate what we mean by strategic leverage and why it matters. Imagine having 1000 AI use cases generated from across your organization and only 15-20% of them deliver 80% of the desired value. It’s Pareto’s principle at work. The challenge for management is that it’s difficult to see Pareto’s principle when you’re in the thick of operations. Boards can and should help management zoom out and prioritize the 20%. They should encourage those projects with high potential for strategic leverage. But how? Surely, they can ask management to prioritize based on which projects will drive the most value (e.g. greatest upside with the least downside and/or other required KPIs for project approval)

Here comes the complex challenge to be mindful of when considering strategic leverage in the context of AI. The 20% of AI use cases that deliver 80% of the value today may likely change in the next 6 months because of how fast AI is moving. While the organization is still implementing the current 20%, a new and different 20% of AI value use cases has already emerged. It’s a moving target. Boards should encourage management to optimize for learning, flexibility and agility as the AI domain is ever changing and what was once a competitive value advantage may be less of a competitive advantage with new advances in AI.

It’s worth noting that alignment on the goal of the goal will help with this challenge also, especially if both board and management align on the goal of positioning the organization for the AI journey ahead without creating more problems in the present, a disciplined additive focus on advancing organizational capability when it comes to AI

Another important consideration for organizations seeking to adopt AI is to remember to keep a comprehensive view of the entire organization when applying strategic leverage. Otherwise, new problems may emerge. Often times an AI initiative improves a business constraint in one part of the value-chain but creates a problem in another part. As an illustration, let’s use a drive-through fast food example. Assume it takes 60 seconds for order taking based on some industry benchmarking and AI vendor testing, management believes that new AI agents can help improve the order taking time, from 60 to 30 seconds. More orders mean increased revenue. So that’s a win, plus the organization can start to develop organizational capability in AI. That’s even better, it’s a win-win. However, if it takes 90 seconds to process the order, this new Agentic AI ordering system will create more problems because the constraint is not the ordering system. The constraint is the 90 seconds it takes to process the order and hand it to you in the drive-through lane.

And that may be okay depending on the organization but the important thing is to make sure that this important consideration is not overlooked and that more broadly, an overall systems approach is evaluated as a whole and not just as piece parts. If AI is going to create strategic leverage without problems, it’s best to focus such efforts on the constraints where possible and/or plan to accommodate the resulting accelerated pace or outcomes of AI within the organization.

Board Action: The board should consider the following for guidance on AI’s strategic leverage:

Request a briefing on the prioritized 20% of AI initiatives and the associated 80% of the expected value
Ask: What’s the plan for other parts of the organization to absorb AI outcomes effectively? The question seeks to understand if the organization can absorb successful outcomes of AI initiatives well
Ask: What contingency plans are in place to handle unintended consequences and risks of increased AI adoption?

AI Board Oversight - Foundational Questions

Is AI oversight different from the oversight of other boardroom topics such as strategy, risk, talent, M&A, disruptive innovation and cyber risks? Yes and no. The important distinction when it comes to AI is that it has the potential to uniquely and significantly impact all other boardroom topics at an exponential pace.

AI is like a massive tide that keeps rising and some organizations will ride the wave and others won’t. Some will navigate through the waters with a sense of urgency and others will ignore, neglect, delay or dismiss it. The oversight guide (including key questions) below will help board directors create an AI mental model to serve their organizations effectively.

AI Oversight Guide

3. Transformation Momentum

In the world of auto racing, the 24 hours of Le Mans (World Endurance Championship) is considered the most prestigious race in the world. In the feature film Ford v Ferrari, based on the true story of 1966 24 hours of Le Mans, there’s a wonderful scene where Ken Miles (Christian Bale) and Bandini (Francesco Bauco) are neck and neck on a lap of the race. But as they approach the corner/curve/turn Ken Miles slows down. He didn’t completely trust the Ford GT400 yet and was unsure about how to navigate the curve. As expected, Bandini, driving for Ferrari, pulls ahead and Ken Miles loses his momentum.

What happened to Ken Miles can happen to boards in the context of AI. It’s easy to lose momentum to other priorities that may emerge around the corner. How does the board navigate the curve on the race track while still keeping the momentum and speed? How do board directors navigate all the issues/curves that may emerge (economic volatility, regulatory complexity (new and emerging regulations), short-termism, de-globalization and geo-political issues, tariff wars, cyber risks, activist/proxy battles) while still keeping the momentum with AI. There’s a tendency for less urgent AI efforts to get deprioritized and the vision starts to get fuzzy and efforts start to fizzle out. There’s a temptation to ease up and let off the gas when the curve approaches This is why board directors have to be very deliberate about creating and sustaining momentum and brings us to our third principle.

The third AI oversight principle for board directors is to sustain transformation momentum for the strategic leverage points identified in 2 above. Oftentimes it’s helpful for board directors to maintain a burst of activity on AI for a while until AI is integrated into the strategy and operating rhythm of the organization. Given the massive potential of AI, such focused emphasis will prove very beneficial for the organization. Clearly, not every AI effort should become a board level discussion but certainly the ones that meet a certain criteria. Making the review of board-worthy AI initiatives a regular agenda item for board meetings signals a clear message to the organization and its stakeholders.

Board Action: The board should consider the following when it comes to sustaining transformation momentum:

Request regular updates on AI strategy. These updates should be business strategy discussions that occur through an AI lens and not AI project updates. The former will focus more on advancing the organization’s strategic priorities using AI than the latter. The frequency of the updates will depend largely on the criticality of AI to the strategic direction of the organization. Some boards may choose to have updates at every board meeting while others may opt for every other board meeting.
Designate an existing committee or a special committee or working group to focus on AI strategy and oversight. This will provide an added level of focus and is crucial to sustaining transformation momentum. When a committee is charged with the responsibility it’s difficult to lose momentum. We recognize that every board may not be able to designate or establish a special committee and that this action is dependent on board composition, size and structure. Some boards may be able to leverage their existing technology, innovation or strategy committees for this function. The most important requirement for this action is to have a clear purpose for the committee that is rooted in the business strategy and values of the organization and not the technology.
Conduct a careful and thoughtful review of CEO incentives to ensure alignment with the right business transformation goals. This is where the goal of the goals will also come into play. Some organizations may choose to integrate specific AI initiatives directly into the CEO goals while others may adopt an indirect approach that focuses on business outcomes (e.g. customer satisfaction NPS scores) but account for the responsible use of AI to achieve better numbers at lower cost. However, these incentives may not necessarily drive longer-term AI business transformation. When possible, align CEO incentives with AI business transformation goals and such alignment should be very thoughtful to avoid inadvertently rewarding the wrong behavior

Miles regains and sustains momentum and Ford ends up winning the race. The 1966 Le Mans transformed Ford and it’s engraved in the company’s history. https://corporate.ford.com/articles/history/ford-gt40-origins-le-mans-committee-victory.html

The principal benefit is to sustain strategic positive momentum on AI and not let it drift off or get de-prioritized.

By so doing, boards will help facilitate progress on meaningful strategic bets.

The underlying principle here is to enable the creation and building of momentum for the strategic leverage points identified in 2 above. By so doing, boards will help facilitate progress on meaningful strategic bets

Review these ladder initiatives at board meetings frequently and initially at every board meeting until momentum is self-sustaining. Sometimes it’s helpful for board directors to maintain a burst of activity on AI for a while until AI is integrated into the operating rhythm of the organization. The principal benefit is to sustain strategic positive momentum on AI and not let it drift off or get de-prioritized. Given the massive potential of AI, focused emphasis will prove very beneficial for the organization. Not every AI effort should become a board level discussion but certainly the ones that meet a certain criteria. Making the review of such board-worthy AI initiatives a regular agenda item for board meetings signals a clear message to the organization and its stakeholders. It will focus the organization on the development of AI capabilities.

Board Action: The board should consider the following when it comes to sustaining transformation momentum:

Request regular updates on AI strategy. These updates should be business strategy discussions that occur through an AI lens and not AI project updates. The former will focus more on advancing the organization’s strategic priorities using AI than the latter. The frequency of the updates will depend largely on the criticality of AI to the strategic direction of the organization. Some boards may choose to have updates at every board meeting while others may opt for every other board meeting.
Designate an existing committee or a special committee or working group to focus on AI strategy and oversight. This will provide an added level of focus and is crucial to sustaining transformation momentum. When a committee is charged with the responsibility it’s difficult to lose momentum. We recognize that every board may not be able to designate or establish a special committee and that this action is dependent on board composition, size and structure. Some boards may be able to leverage their existing technology, innovation or strategy committees for this function. The most important requirement for this action is to have a clear purpose for the committee that is rooted in the business strategy and values of the organization and not the technology.
Conduct a careful and thoughtful review of CEO incentives to ensure alignment with the right goals. This is where the goal of the goals will also come into play. Some organizations may choose to integrate specific AI initiatives directly into the CEO goals while others may adopt an indirect approach that focuses on business outcomes (e.g. customer satisfaction NPS scores) but account for the responsible use of AI to achieve better numbers at lower cost. CEO incentive alignment should be very thoughtful to avoid inadvertently rewarding the wrong behavior

Cars - Wax on, wax off -

This is while trying to focus on strategy, culture and leadership oversight

The third AI oversight practice for board directors is to sustain transformation momentum. The underlying principle here is to enable the creation and building of momentum for the strategic leverage points identified in 2 above. By so doing, boards will help facilitate progress on meaningful strategic bets. Why focus on progress at this stage instead of hard results and outcomes? Because progress is the #1 factor that influences performance and when going for AI transformation, which is a marathon and not a sprint, the progress principle is more likely to sustain the organization on the marathon journey. The question then becomes how can boards facilitate this transformation momentum

In summary, AI is changing rapidly and represents a transformational capability for businesses and leaders alike. Boards have a crucial role to play in this transformation; by proactively engaging management to develop the required organizational capability, boards can help organizations and their leaders navigate the AI journey.

In many respects, AI is a gift, that if used properly and responsibly, that will transform the current way we work and live as well as shape the future of work. As we stated at the beginning, AI offers the priceless gift of time, talent and reinvention to those who drink from its cup. . It is the invention of a new method of invention and boards have an important role to play when it comes to this new method of invention.