How Blockchain Could Change Corporate Governance for the Better
In 2017, 437 billion shares were voted across 4000 corporate meetings. Many of the voting results had a victory margin of less than one percent!
There’s lots of talk in the blockchain space about how blockchain can be used to facilitate voting in the political sphere, but there is less talk on the very real and very impactful use case of voting in the realm of corporate governance.
Shareholder franchise, the concept that shareholders have a right to participate in corporate decision-making, is at the core of corporate governance. Every year, shareholders are summoned to vote on important corporate agendas like election of new board of directors, modification of bylaws, approval of mergers, etc.
Shareholder voting is expensive and error-prone
Imagine you are one of the many shareholders of a hypothetical company Crypto Inc. Crypto Inc. has decided to appoint a new member to its board of directors. You have been invited to cast your vote in this regard. Unfortunately, you can’t make it to the shareholder meeting. So you decide to mail them your response.
It’s highly probable that many other shareholders also would also not be able to attend the shareholder meeting in person. So most likely, even they would send out their vote in the mail or send their delegate to the meeting as a proxy.
But you wonder: Did Crypto Inc. count your vote? What if they misplaced your mail by mistake or purposefully? If your response was kept confidential or not?
For Crypto Inc. as well, hosting shareholder meetings is a cumbersome process. They are expensive, slow, and prone to errors.
Let’s look at real life examples illustrating problems with the current system…
Many intermediaries get involved as a company tries to put an agenda on vote. For example; brokers, banks, proxy service providers, proxy advisory firms, vote tabulators etc. Any error at any level would get compounded as information travels from one participant to another. At the moment, each participant is seen as a hindrance to efficiency, but the same protocol has to be followed because there is no other option.
In 2017, at Procter & Gamble (P&G), Nelon Peltz wanted to compete for a seat on the company’s board. When the results came out, he lost. P&G claimed victory by 6 million votes out of 2 billion votes. Peltz challenged the outcome, and demanded a recount. A different vote tabulator was appointed and recounting was done. After recounting, Peltz turned out to be the victor by a margin of 42,780 votes.
In February 2008, Microsoft made an offer to buy Yahoo! for $31 per share. The board of directors at Yahoo! declined the offer. Soon after, Yahoo! announced that it received approval for a slate of directors from 80% shareholders. This actually never happened. Broadridge, a proxy service firm, misreported 20% of votes because it didn’t include millions of voters in the final tally.
The current system gives 3rd parties significant power with little transparency, leaving room for serious errors. ENTER blockchain!
Voting on blockchain will by design make the environment auditable without requiring 3rd parties.
In a blockchain-based corporate governance system:
- All ecosystem participants can audit the votes by querying the blockchain at their convenience.
- Shareholders can safely exercise their right to vote without worrying if their vote is counted or not, or if their response was kept confidential or not.
- Such a voting system has the potential to eliminate the complexity and cost of the legacy proxy voting value chain by eradicating/reducing the role of intermediaries.
- Companies would be able to propose voting agendas more frequently at a lower cost. The outcome of the agenda would be much faster and more accurate.
These factors could improve overall confidence in the ecosystem, which can fuel more effective and transparent corporate governance.
A blockchain-enabled shareholder voting system might look something like this in your local development environment.
Specific individuals at Crypto Inc. can create new agenda items. Once the agenda is on the floor, the shareholders can vote from the dapp’s UI. Each vote is committed to the blockchain via a smart contract, so the ecosystem remains transparent and auditable.
Want to build a dapp like the example above? Starting from scratch is time-consuming and frustrating. Generate a custom dapp with DappStarter, then tailor to fit your needs. DappStarter accelerates blockchain development so that you can focus on your smart contract’s business logic, saving weeks of learning and development time. You can see DappStarter in action here.
You can create your own dapp using DappStarter in three simple steps:
Step 1 : Choose your blockchain
At the moment, DappStarter supports three blockchains — Ethereum, Harmony, and Klaytn with more blockchains being added frequently.
Step 2: Select your front end framework
You can choose your favorite frontend framework to power your dapp!
Step 3: Customize features to fit your needs
The dapp code generated by DappStarter has many out-of-the-box features, including smart contract code, tests for your smart contracts, a web app front-end, and a server-side API. You can leverage these features to build your proxy voting dapp.
Access Control
Access Control Block gives you, as a company, granular control over who can manage your contracts and control their options. For instance, if you want to start or stop voting capabilities, you would use this block.
File Storage
Most apps store information, but storage is incredibly expensive on the blockchain so any information stored for a dapp should use decentralized file storage options. For example, if you want to upload the agenda doc, this would be a good fit!
Authentication
For any dapp that deals with voting, authentication is fundamental to ensure only the shareholders are able to vote. With DappStarter, you will not need to worry about implementing an authentication system on your own, this feature will be available very soon.
If you feel there should be more out-of-the-box features, feel free to let us know!
Click on the CREATE DAPP button. This will point you to a unique Github repository generated on-the-fly for you. You can find your code here. This is going to be your playground!
You can make modifications according to your business logic in Contracts/Dapp.sol file. For instance, you may want to define response options for your voting agenda. Different voting agendas may require different response answers. For example, consider a hypothetical voting agenda “Do you want Ms. CryptoQueen to be a part of board of directors?”. The response can be YES, or NO, or ABSTAIN. Another voting agenda can be “Who do you want to be the CEO — Ms. CryptoKitty or Mr. CryptoDog?” Here, the response may change — you’d choose between Ms. CryptoKitty and Mr. CryptoDog.
This is just an example of one of the many subtleties you as a developer would need to cater to.
Blockchain technology is becoming increasingly important and as the technology continues to evolve, new use cases emerge. Corporate governance, specifically relating to shareholder franchise, is a fantastic use case that has the potential to leverage the auditability and privacy that blockchain can offer.
