The world is increasingly becoming globalized. Even though some individuals think that the future belongs to the patriots instead of globalists, technology is rapidly making the world more integrated and smaller. Globalization has gone digital with loads of data being exchanged in the 21st century.
The interconnected digital world is making borders to disappear and national legislation is becoming harder to maintain. In the current world, even a 1-person company can become a multi-national assisted by blockchain. On the other hand, Security Token Offerings (STOs) organizations can get funds from anywhere in the world.
The new distributed ledger technologies are benefitting start-ups and existing multi-national enterprises (MNEs). The new technologies can be used to improve corporate governance. In many cases, MNEs span through many territories and jurisdictions. Variables like infrastructure, technologies, legislations, markets, and customer demands are different.
Also, shareholders can be situated anywhere around the world which will directly affect corporate governance.
Proxy Voting and Corporate Governance
Corporate governance is put in place to control how public MNEs behave. The primary objective of this governance is to guarantee that the agent, which is the management of an organization, behaves as intended by the principal shareholders. There are multiple systems in place that will help to achieve that.
For example, in the Annual General Meeting (AGM), shareholders vote on proposals suggested by the management or the other shareholders. But, shareholders are distributed worldwide. Such incidents make shareholder engagement systems to encounter much inefficiency while the stakes are considerably high.
It can cost an organization millions to create a proposal, communicate with its shareholders and coax them to vote in favour of it. The more shareholders an organization has, the higher the costs involved in the communication. AGMs are democratic processes with every shareholder entitled to vote at any AGM. However, they may not be able to attend the meeting which forces the organizations to use proxy voting.
Proxy voting is the situation whereby the shareholders delegate their voting power to a representative who votes when they are absent. This voting method relies on multiple layers of intermediaries that include information service providers and financial institutions. These intermediaries make the voting process inefficient, expensive, and challenging due to lack of transparency. Luckily, blockchain technology can help solve these challenges.
Direct Versus Represented Democracy
Democracy has been around for quite a while but it has not changed over the years. Despite the various forms of new democracy, two main forms of democracy exist: direct/pure democracy and represented/indirect democracy. Each has its benefits and shortcomings.
In this democracy, every citizen decides on initiatives or proposals directly. Every vote counts since the outcome depends on the majority. It originated in the 5thcentury BC. Currently, the only known direct democracy exists in two Swiss Cantons. However, it causes many challenges for today’s society.
Not everybody must be informed about all topics since many topics need decisions quite frequently. If everyone would be always involved, it would take a lot of time and excessive funds to vote on every topic. Thus, direct democracy becomes impractical when used daily.
In the case of represented democracy, citizens vote for a delegate who represents them. That system of elected officials is common in almost all Western-style democracies and it is the most accepted form of democracy. Its popularity thrives on the fact that it is believed to be the most efficient.
But, a represented democracy causes disconnect between citizens and their leaders. Citizens no longer trust traditional parties of the elected officials. The representatives are not strictly held accountable for what they do and they do not keep most of their promises. Also, this method of democracy makes corruption possible.
Power corrupts and, in some cases, the delegates listen to money instead of the people who elected them. Also, the countries with a two-party system limit the choices people have while in the multi-party systems coalitions must be formed to run the country which may take months to achieve.
In both cases, progress is slow. Direct democracies are common in smaller organizations where the shareholders can still vote on all decisions. Everyone joins to determine the company’s strategy. But complex proxy voting mechanisms is not needed in a start-up that has 10 to 50 people with just a few shareholders.
However, direct democracy no longer works when organizations become bigger and go public. Such organizations prefer represented democracy where shareholders appoint a board that makes decisions on their behalf. In the annual shareholders’ meeting, the board is held accountable for their actions.
Characteristics of Democratic Voting Process
When the shareholders vote, there are three guiding characteristics that they should adhere to. First, they need to know that they can submit their vote for it to be counted. That is called censorship resistance. Then, after casting they need to be sure that their vote was included in the results. That is known as the consensus protocol.
Lastly, the voter must be sure that their votes will not be changed after they are cast. That is referred to as the immutability of votes. Without these three fundamental guiding principles, the democratic process is deemed to fail. Until today, the electoral committees and complex proxy voting mechanisms that use trusted intermediaries are trusted by the voters.
Nonetheless, individuals cannot determine whether their vote was included in the result and not changed afterward. Moreover, when it comes to electronic or proxy voting, the voting information is made available to some members before an AGM. Studies revealed that up to 80% of votes are now done using electronic or proxy voting.
The recipient of the votes is already aware of how shareholders are expressing and casting their votes. That may cause information asymmetries and impediments. But, the main challenge with proxy voting is that it is opaque and difficult to tabulate precisely. Audible data trails are not available thanks to the middlemen.
Therefore, it becomes hard to comply with authenticating who cast their votes, if the votes were counted, and whether they were not changed afterward. All these information challenges, lack of transparency, and expensive complex voting mechanisms encourage the need for new solutions. Blockchain comes in handy in such scenarios. It is verifiable, immutable, and traceable.
Proxy Voting and Blockchain Infrastructure
Annual general meetings are mostly expensive but they have low shareholder participation. With the world going global and borderless where investments are made all over, shareholder engagement becomes necessary. However, participating in person becomes quite difficult. If corporations invest in blockchain-enabled shareholder voting, they will get a secure and immutable digital copy of the voting instructions cast by the shareholders during an AGM.
This method guarantees that the shareholders can exercise their rights securely and transparently. On its part, the method can support cross-border investments since the security tokens help in increasing the liquidity of global assets. Furthermore, if a regulator requires gaining access to the instructions, it does so simply by joining the private blockchain network.
All the records are made available to all participating members and that makes the voting instructions verifiable, immutable, and traceable. Blockchain-enabled voting eliminates the complexity of proxy voting during traditional elections while increasing the quality and efficiency of proxy voting.
Auditors can also check, instantaneously, if all the votes have been placed, counted, and ensure that the vote has not been altered afterward. Any type of proxy-voting that is organized on a distributed ledger reduces the voting errors and possible voting fraud.
Notably, a simplified voting process that is transparent and auditable can increase shareholders’ participation for the betterment of corporate governance.
Blockchain-based proxy voting is highly beneficial to the large multi-national enterprises that have shareholders distributed across the world. It enhances corporate governance mechanisms by developing a trustworthy, efficient, immutable, and verifiable voting system. That system minimizes cases of rigging and fraud while simultaneously enhancing transparency which increases shareholder engagement.
The security tokens are programmable meaning that the rules related to voting rights, dividend release and all other privileges can automatically apply to the tokens’ owner. These rules can then incentivize shareholder engagement which results in enhanced corporate governance mechanisms.