Blockchain Technology for Corporate Governance and Shareholder Activism

Research Retrieved: May 2018
Retrieve the paper from ECGI

Issue

Annual general meetings (AGMs) and voting on shareholder proposals are important mechanisms that enable shareholders to oversee directors and managers. However, organizing AGMs is costly for the organizing firms, the participation is a financial burden particularly for small shareholders, and their effectiveness is subject to controversial debates. Lafarre and Van der Elst (2018) discuss current issues surrounding AGMs and shareholder voting, and how the introduction of blockchain technology could help make them more efficient.

Key Findings

  • Theoretical AGM functions might no longer be fulfilled. The authors pinpoint three theoretical purposes of AGMs – informing shareholders, providing a forum, and facilitating decision making – and question whether AGMs still serve them well. Nowadays, SEC requirements enforce timely and consistent information delivery, AGM participation rates are low, and transparency as well as shareholder identification issues complicate remote voting.
  • Blockchain could help make the voting processes faster and more transparent. Since the technology helps to record transactions – such as votes on specific proposals – between parties in an immutable way, the establishment of private corporate blockchains could help to increase transparency, voting speed, and promote the transparency and reliability of voting outcomes. The authors discuss how companies could rely on outside identity verification and illustrate an 8-step implementation plan.
  • A digitalization of shareholder voting could make AGMs redundant. As a large majority of shareholders currently votes by mail, digitalization of corporate voting naturally raises the question whether costly AGMs remain necessary. While some argue that shareholder concerns can be less easily ignored by boards in face-to-face meetings, the authors suggest that the immutability of blockchain could enforce the consistent recording of all raised concerns – and shed more light on management’s willingness to respond to them.

 

Practical Relevance

The authors provide an interesting, detailed overview of recent initiatives testing the introduction of blockchain technology at AGMS, document successful pilot tests, and list initiatives that are currently being developed. A wider implementation of blockchain could revolutionize corporate voting in increasing transparency, lower cost for both companies and shareholders, and facilitate the involvement of small shareholders.