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Blockchain as a tool for Corporate Governance

Lara Pizztao

Blockchain is probably the most talked-about technology since the invention of the Internet, which has the potential to disrupt every industry.

Below, we explore the benefits that the use of blockchain could bring to Corporate Governance and how it could offer smart solutions for classical sector inefficiencies, especially in the relationship between shareholders and the company.

What is blockchain?

Blockchain is a digital peer-to-peer, decentralised ledger that records all transactions. It’s a record of events/data that is shared between multiple parties. This means that once the information is entered into the ledger, it can no longer be altered, making it more secure and protected from any tampering and revising.

Benefits of blockchain in corporate governance  

  • Increases efficiencies by removing the administrative burden

  • Mitigates the risk of fraud for organisations by providing an immutable audit trail

  • Provides greater transparency of ownership

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Opportunities and applications of blockchain

  • Audit trail/ Recordkeeping: Using blockchain to record stock ownership could solve many problems related to companies’ inability to keep accurate and timely records of who owns their shares

  • Entity management: Blockchain capacity for trust and security could facilitate statutory filings from companies to corporate registries and the exchange of information between the two

  • Digital identity: Blockchain uses an embedded trust component, meaning someone doesn’t need to appear physically to prove who they are

  • For shareholders: Blockchain could offer lower costs of trading and more transparent ownership records while permitting a visible real-time overview of transfers of shares from one owner to another

  • Intellectual property: Every industry, from people, manufacturing, services to conglomerates, can be protected from piracy and data corruption

  • Property ownership: Blockchain uses a timestamp that cannot be changed and could be the record keeper for all property and subsequent transactions. It could also enable the ‘almost instant’ transfer of property ownership in a secure way

  • Real-time accounting: Consumers of financial statement information would not need to rely on the judgment of auditors and the integrity of managers. Instead, they could trust with certainty the data on the blockchain and impose their own accounting judgment to make their own non-cash adjustments such as depreciation or inventory revaluation

  • Smart contracts execution: A smart contract is a piece of computer code that is capable of monitoring, executing and enforcing an agreement. Smart contracts can be used for the exchange of money, property, shares, or anything of value in a transparent, conflict-free way while avoiding the services of a middleman. They dramatically reduce costs of verification and enforcement

  • Transparency: Blockchain could provide unprecedented transparency to allow investors to identify the ownership positions of debt and equity investors and overcome corruption on the part of regulators, exchanges, and listed companies

  • Voting: Corporate voting could become more accurate, and strategies such as ‘empty voting’ that are designed to separate voting rights from other aspects of share ownership, could become more difficult to execute secretly. The greater speed, transparency, and accuracy of blockchain voting could also motivate shareholders to participate more directly in corporate governance and demand votes on more topics and with greater frequency

Potential risks of blockchain

  • Investing too early, perhaps when your customers or suppliers are unaware

  • Public blockchains can be expensive if transaction volume is high

  • Your competitors taking the first advantage thereby reducing their costs and pricing

Is blockchain secure?

Blockchains store data using sophisticated maths and innovative software rules that are extremely difficult for attackers to manipulate. It is very challenging, almost impossible, to change any transaction information once it is validated and becomes part of a block. Users on the blockchain have a perfect audit of any changes made to their data – and they can see what was changed, who changed it, and when it was changed.

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