It isn’t just investors and analysts that are increasingly leaning on AI tools – a recent CLS Blue Sky blog discusses the current and potential uses of AI by proxy advisors.  It points out that proxy advisors currently use AI tools for preliminary activities like information extraction, classification, and scoring. However, the blog says that the use of AI to help proxy advisors formulate voting recommendations may be right around the corner. This excerpt says that using AI for this purpose involves significant risks, but also offers significant potential advantages:

Such use entails serious risks – including the black-box nature of decision-making processes, the acceleration of unjustified convergence within a single proxy adviser’s recommendations as well as divergence across different proxy advisers, and the institutional embedding of conflicts of interest through training on historical data – which could exacerbate opacity, undue influence, and conflicts of interest. Moreover, AI obscures who is involved in making judgments and where accountability lies, potentially undermining the institutional basis for contesting recommendations or demanding explanations.

Despite these potential concerns, AI can, if properly designed and employed, offer two advantages: accelerating information processing and enhancing the consistency of judgments. AI can quickly and efficiently process large volumes of unstructured data, enabling faster analysis of complex proposals and legal documents. It also allows for pre-formulated evaluation logics, which can reduce subjective variability and arbitrariness, thereby facilitating more impartial assessments.

The blog highlights the elements of the kind of regulatory framework necessary to address the risks of AI while effectively harnessing its benefits, and points to the EU’s Rating Regulation as a potential model.

– John Jenkins