The Effect of Artificial Intelligence on Corporate Governance
Written by Cassidy Peterson, JD Candidate 2026
Canadian businesses of all sizes are now using artificial intelligence ("AI") to streamline operations, analyze markets, and support decision-making. [1] Whether through automated bookkeeping, customer-service chatbots, HR screening software, or data-driven analytics, AI has become embedded in how modern companies operate. [2]
However, as AI adoption grows, so do the legal, governance, and ethical questions surrounding its use. Canada's regulatory landscape is shifting, courts are paying closer attention to directors' responsibilities, and businesses are being asked to show how they use AI responsibly. [3]
Canada's Evolving Approach to AI Regulation
Canada attempted (and failed) to pass a federal AI law. The proposed Artificial Intelligence and Data Act introduced in Bill C-27, did not move forward. [4] This means Canada does not currently have a single national statute regulating AI.
Instead, AI regulation is emerging through provincial initiatives. Ontario, for example, has enacted Bill 194, which imposes rules for AI use within the public sector, including accountability and risk-management obligations. [5] Other provinces can be expected to follow a similar path as AI becomes more integrated across industries.
With no federal anchor, Canadian organizations such as legal associations, universities, and sector-specific regulators are developing their own best-practice guidance on ethical AI use. [6] These frameworks fill an important gap but also create uncertainty for businesses operating across provinces.
Innovation vs. Precaution
Politically and economically, Canada sits between two competing global approaches: [7] 1. The U.S. model: Light-touch, pro-innovation, minimal restrictions; 2. The EU model: Heavy emphasis on privacy, risk-classification, and mandatory safeguards.
Canadian policymakers continue to debate which direction the country should lean toward, leaving many businesses unsure how to prepare for future legal change.
How AI Impacts Corporate Governance
Directors under the Canada Business Corporations Act and provincial equivalents owe two core duties: [8] 1. Fiduciary duty: To act in the best interests of the corporation; 2. Duty of care: To act with the skill and diligence of a prudent person.
These duties apply even when AI tools are involved, so directors must now ask: Can we trust AI's recommendations? Are the datasets biased? Is the tool privacy-compliant? Can we explain how AI-influenced decisions were made?
If a board relies on AI and something goes wrong—such as discrimination in hiring, biased analysis, a privacy breach, or flawed financial predictions—directors cannot simply point to the algorithm as the culprit. Courts in Canada assess the quality of the decision-making process, not just the outcome. [9] Directors must therefore exercise meaningful oversight, verify accuracy, and document how AI tools support (rather than replace) human judgment. [10]
How AI Can Help Canadian Businesses
When deployed responsibly, AI offers meaningful advantages, especially for resource-constrained start-ups: [11] Data-Driven Insights: AI can process massive data sets quickly, identifying trends or financial risks that humans may miss. Operational Efficiency: Automating reporting, data entry, or routine compliance checks frees up time for strategic planning and reduces costs. Stronger Risk Management: AI can flag anomalies earlier, help predict market volatility, and automate aspects of compliance monitoring. Fewer Human Errors: AI can offer consistency in tasks that are traditionally repetitive and error-prone.
These benefits can give smaller companies a competitive edge traditionally reserved for larger enterprises. But they also come with meaningful risks.
The Risks Associated with AI Use
AI tools are powerful, but without strong oversight they can expose companies to legal and ethical issues: [12] Bias & Discrimination: AI systems often replicate biases in their training data. This can lead to discriminatory hiring decisions, unfair risk scoring, or inequitable customer treatment—potentially violating Canadian human-rights legislation. Privacy Concerns: AI tools often require access to sensitive personal or corporate data. Uploading confidential information to third-party systems without safeguards risks breaches and regulatory non-compliance. Lack of Transparency: AI models may produce recommendations without clear reasoning. This makes it difficult for directors to justify board decisions influenced by algorithms. Over-Reliance & Reduced Human Judgment: Employees or executives may defer to AI outputs without critical thinking, creating governance blind spots. [13]
6 Practical Recommendations for Canadian Companies
1. AI Oversight by the Board of Directors and Management: Directors and managers should stay informed on AI systems used within the business. [14] They should also actively question and verifying AI outputs.
2. Create Clear Internal Policies for AI Use [15] – what AI tools can and cannot be used; rules for handling confidential data; training requirements on AI risks, data-protection practices, bias mitigation and ethical considerations; human-in-the-loop expectations; documentation and reporting standards.
3. Conduct Risk Assessments Before Using AI: Companies should evaluate the kinds of data being processed, any potential harms and biases, less-invasive alternatives available, the accuracy and limitations of the AI tool, and the proportionality of risk to business need. [16]
4. Perform Due Diligence on Third-Party AI Providers – this could include asking vendors for clear contractual protections, security documentation, audit reports, and bias testing results.
5. Consider Creating an Internal AI Governance Committee: For companies relying heavily on AI, a committee can be implemented to oversee transparency, accountability, privacy protections, and policy updates. [17]
6. Keep AI as a tool, not a decision-maker: Boards need to remain ultimately responsible for decisions made. AI should inform judgment, not replace it.
Key Takeaways
Canada's AI regulatory landscape is shifting; founders should monitor provincial developments. Directors remain accountable even when AI is used for analysis or recommendations. Strong oversight, documentation, and internal policies can reduce liability. Ethical, careful AI adoption builds investor and customer trust—especially in sectors handling sensitive data. Early adoption of governance best-practices can become a competitive advantage. AI can support better business decisions, but only when paired with human expertise, strong oversight, and responsible governance.
Note: The above information does not constitute legal advice. No guarantees are made as to accuracy, completeness, or applicability to individual situations.
Endnotes
1. Fitriana Yuniastuti, "Use of Artificial Intelligence in Operational Efficiency and Business Management Strategic" (2024) 3:5 West Science Information System and Technology at 563.
2. Ustahaliloğlu, M. K. "Artificial intelligence in corporate governance" (2025) 7(1) Corporate Law & Governance Review at page 123.
3. Corporate Governance Institute, "AI and Boardroom Decision-Making" (September 2024), online: www.thecorporategovernanceinstitute.com/insights/guides/ai-and-boardroom-decision-making.
4. Blair Attard-Frost, "The Death of Canada's Artificial Intelligence and Data Act: What Happened, and What's Next for AI Regulation in Canada?" (17 January 2025), online: montrealethics.ai/the-death-of-canadas-artificial-intelligence-and-data-act-what-happened-and-whats-next-for-ai-regulation-in-canada/.
5. Ibid; Strengthening Cyber Security and Building Trust in the Public Sector Act, 2024, SO 2024, c 24.
6. Ibid.
7. Brandon Nussey, "The AI Regulation Tug of War: Canada Struggles to Find Balance" (December 2024), online: www.cpaontario.ca/insights/blog/ai-regulation-canada-struggles-to-find-balance.
8. Canada Business Corporations Act, RSC 1985, c C-44, s 122(1).
9. Ibid, s 122(1)(b).
10. Ibid.
11. Ustahaliloğlu, supra note 2 at page 123.
12. Ibid at page 124-125; Corporate Governance Institute, supra note 3.
13. Optiv Security, Inc., "AI Governance and Risk Management" (28 February 2025), online: www.optiv.com/insights/discover/blog/ai-governance-risk-management.
14. Information Commissioner's Office, "What Are the Accountability and Governance Implications of AI?" (15 March 2023), online: ico.org.uk.
15. Andrew MacDougall, Sam Ip, Simon Hodgett & Naomi Chernos, "The Board's Oversight in the Age of AI: Ethics, Compliance and Competitive Advantage" (18 March 2025), online: osler.com.
16. Information Commissioner's Office, supra note 14.
17. Thomson Reuters, "How AI Can Help You Manage Risks" (23 May 2025), online: legal.thomsonreuters.com/blog/how-ai-can-help-you-manage-risks/.
