Blockchain’s Implications for Corporate Governance
By Meher IndoliyaBlockchain, despite its versatility, is a concept that is still mostly associated with cryptocurrencies. However, potential applications of blockchain in managing corporations are both promising and transformational.
Blockchain essentially deals with distributed ledgers of data. In a given network, blockchain technology allows for distribution of data and transaction records across many devices, or “nodes”, which facilitates a more participatory, informed, and transparent environment. Transactions are written into “blocks” which are then linked into a secure “chain” that constitutes a ledger shared with the nodes. Blockchain is the tool behind cryptocurrency for precisely this reason – it is trusted to accurately record and protect transaction details. It guards against potential threats with its distribution of information – if there is an attempt to tamper with the data, it will be limited to a single server and therefore evident, while the identical records of that data located on other devices will remain accurate and unaltered.
One can apply this same logic to corporations. Blockchain can use distributed ledger technology (DLT) where data is shared across multiple servers to provide reliable and accessible information to shareholders, and in the process, eliminate potentially convoluted channels of communication and intermediaries. Blockchain’s utilization of DLT means that it creates a decentralized database with public records, where shareholders have easy access to updated, accurate, and secure information. For example, shareholders can directly and clearly access share ownership, which is a crucial part of corporate governance. This may also simplify functions like voting, which under traditional corporate governance, is challenged by issues such as shareholder voting costs, proxy advisors, incomplete information, and manipulated or inaccurate vote counting.1 Using blockchain as a tool to carry out corporate functions can therefore contribute to overall efficiency and solve dilemmas that arise in traditional governance.
The use of blockchain to manage corporate functions and distribute data also opens up the possibility of using smart contracts. Smart contracts are contracts that are stored on blockchain and automatically executed when all the actions required under them are fulfilled. This automation eliminates any time-consuming, costly, or unnecessary processes that traditional contracts may require. Smart contracts also enhance trust and transparency by providing immutability for their terms and reducing the aspect of human error that can complicate traditional contracts. Agreements and their enforceability are therefore much more streamlined under smart contracts.
Corporations can go so far as to replace their existing traditional corporate structure by setting up decentralized autonomous corporations (DAOs), which are blockchain-based corporations that utilize smart contracts in order to operate and are directly member-run rather than run by a central authority. Instead of a top-down hierarchical flow of information and authority, the structure of DAOs is horizontal, and shareholders themselves hold more power rather than having to delegate to directors or managers. This can create a more efficient organization by bypassing the restrictions that can be inherent in traditional corporate governance such as limited direct shareholder engagement, insufficient or corrupted information, red tape, little flexibility, and human error.
While many corporations have already started using blockchain, smart contract use has been increasing, and DAOs have been launching since 2016, the use of all these technologies in corporate governance can sometimes cross over into legal grey areas and unprecedented territory regarding regulations, especially since there are few laws that specifically address blockchain’s integration into companies. One key issue is the balance between the public and transparent data that blockchain use facilitates and the need for data privacy. Governance for DAOs is also another unclear realm – DAOs are not legally classified as corporations, which raises questions of how they should be regulated under the law.2 Resolving the challenges that arise from incorporating blockchain into corporate governance is crucial as these technologies face increased development and popularity; a comprehensive legal framework that provides clear rules and processes when it comes to dealing with these issues is essential to blockchain’s future in this area.