Shareholders´ Activism: The impact of Blockchain in Corporate Governance

Corporate law as a subject has significantly changed in recent years. These changes have led to an exhaustive review of the systems, procedures, and standards of corporate stability, governance, control, and democracy as elements of analysis and starting points for generating modern responses to the various challenges and economic risks faced by companies in the execution of their corporate agenda.

Historically, the use of the term “corporate governance” with the connotation it has today, according to Cheffins, dates back to 1976, in an official report by the U.S. Securities and Exchange Commission (S.E.C.), and its subsequent consolidation crystallized in 1978 when a report by the American Law Institute promoted the multidisciplinary study of corporate governance (Cheffins, 2012).

One of the first widely accepted definitions of corporate governance is offered by Cadbury Report (1992), in which corporate governance is defined as the system by which companies are directed and controlled. Through good corporate governance, key aspects of companies and societies are strengthened, such as good practices, trust, commitment, participation, communication, and transparency.

 

Blockchain: The future of corporate governance

Blockchain is an immutable, anonymous, inviolable, and decentralized ledger, which is also the underlying force behind cryptocurrencies such as Bitcoin. According to Magnier (2018), blockchain offers a revolutionary application of cryptography and information technology to the age-old problems of financial record keeping, while creating high hopes regarding lower cost, greater liquidity, more accurate record-keeping, and transparency of ownership.

Haber and Stornetta (1991) initially proposed the blockchain structure to time-stamp the creation of intellectual property, such as a digital document, in order to fix ownership rights with the creator before it can be copied by others. The first reference to this data structure as a “blockchain” came from Nakamoto (2008), whose innovations with bitcoin included connecting the blockchain concept to a public ledger jointly updated by numerous participants in an open-source network.

The blockchain market is relatively small but has grown since Bitcoin gained popularity in the last decade. According to a 2017 global market study by Juniper Research, worldwide, 40% of all enterprises and 60% of large corporations are considering implementing blockchain over the next 10 years (Akgiray, 2019).

Services that rely on the decentralized nature of the blockchain, such as identity or voting, change the balance of power, increasing citizens’ control over democratic processes. Taking these benefits into account, Blockchain can inspire new service delivery models for governments. At this point, it is also necessary to think about other governance structures, such as business or corporate ones.

One of the biggest challenges of governance over the blockchain is understanding how to design and build systems that balance the interests of each of these stakeholders and ensure the success of the network, regardless of how that success is defined (De Filippi and Loveluck, 2016). Thus, blockchain governance is about how decisions are made, not the decisions themselves: who chooses and how they choose, rather than what is chosen.

According to Yermack (2017) and Lafarre (2018), blockchain has great potential to provide efficient solutions to many problems that negatively affect current corporate governance systems, for example:

  • Increased transparency of ownership and ownership changes
  • Efficient and fair shareholder meetings
  • Real-time accounting

Each and every one of these changes could drastically affect the balance of power amongst investors, directors, and shareholders. For investors, blockchain could enable the identification of ownership positions and reduce the opportunity for rent-seeking or unfair behavior by regulators, exchanges, and listed companies. For directors, the technology could enable faster and more affordable stock acquisitions, but possibly with much less secrecy than under the current system. For shareholders, blockchains could offer lower trading costs and more transparent ownership records, while allowing real-time visible observation of share transfers from one owner to another.

However, it should be noted that the impact of these benefits will depend on the type of blockchain used, whether public, as is the case with Bitcoin and other digital currencies, or restricted, such as the model currently being tested by several established financial institutions and consortiums.

 

Latin America, Blockchain and Corporate Governance: A long way to go

According to Lee (2016), the most prominent proposed use of blockchain technology in corporate finance has occurred in Australia, Estonia, and the United States. In Australia, the Australian Stock Exchange announced in January 2016 its intention to redesign its clearing and settlement systems using blockchain technology. In Estonia, the Stock Exchange began in 2016 to conduct shareholder voting on a blockchain platform. In the United States, a U.S. public company called Overstock.com began accepting subscriptions for a stock rights issue via a private blockchain in 2016.

In Latin America, the use of blockchain technology has been growing gradually and is expected to reach US$1,356 million by 2024, according to data from the consulting firm Frost & Sullivan and calculations by Procolombia’s vice-presidency of Innovation and Sector Intelligence in 2019.

While the potential of blockchain may be extraordinary, it may not promote trust without effective governance. For blockchain technology to have a transformative impact on financial markets and institutions, regulatory methods must also be able to adapt. Trust is imperative for any area of social life. When divorced from legal enforcement or regulation, blockchain-based systems can be counterproductive or even dangerous. Poor corporate governance can assume a major role in financial scandals and crises.

On the other hand, excessive or premature enforcement of legal obligations could also hinder innovation and thus miss the opportunity to leverage technology to implement policies that promote more efficient, transparent, and scalable corporate governance built on trust.

The generation of trust without the need for an intermediary, is one of the great contributions of Blockchain technology, due to the immutability of blockchain records. Therefore, this is an opportunity for corporate governments to innovate and redefine their value in the market, and improve their internal processes and organizational structure. Moreover, by including blockchain in their innovation programs, and establishing it as a critical component of the enterprise architecture, corporate governments will learn how to unleash the full potential of the data-driven service.

Today the world is facing not only an economic but also a social crisis, so it is relevant to establish corporate governance linked to the promotion of efficient and transparent markets, in line with current legislation and the needs of each particular nation.

The future of blockchain is yet to be determined, but for such a future to be prosperous, the technological, legal, business, and political sectors of society must work together, as long as each sector recognizes the possibilities and unique characteristics of the other sector.

 


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Cámara de Comercio de Bogotá. (2019). Así va el negocio de blockchain en Colombia. Available at the following link. Last accessed on June 4, 2021.

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Haber, S. and Stornetta, S. (1991). How to time stamp a digital document, Lecture Notes in Computer Science 537, 437–455 (Advances in Cryptology—CRYPT0’ 90).

Lafarre, A;  Van der Elst, C. (2018). Blockchain Technology for Corporate Governance and Shareholder Activism. ECGI Law Working Paper (390/2018)

Lee, L. (2016). New kids on the blockchain: how bitcoin’s technology could reinvent the stock market, Hastings Business Law Journal 12, 81–132.

Magnier, V; Barban, P. (2018). The Potential Impact of Blockchains on Corporate Governance: A Survey on Shareholders´ Rights in the Digital Era. InterEULawEast: Journal for the International and European Law, Economics and Market Integrations. 189-226.

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Shah, N; Napier, C. (1992). Shared Vision and Beyond. Cadbury: London, Inglaterra. Available at the following link. Last accessed on June 3, 2021.

Yermack, D. (2017). Corporate Governance and Blockchains. Review of Finance, Vol. 21.

 


Michelle Bernier is an attorney specializing in international law and commercial law. She is currently studying Master of Laws and International Business, with a double degree from the Universidad Internacional Iberoamericana in Mexico and the Universidad Europea del Atlántico. She is also a part of Students for Liberty’s inaugural cohort of Fellowship for Freedom in India.