How can Blockchain enable Governance?
Corporate governance has come under the spotlight over the past few years and is a critical part of organisations’ overall corporate strategy. Cygnetise’s CEO, Steve Pomfret, explains “why” and how potentially blockchain technology could help this in his latest feature in Global Banking & Finance review.
Why are corporations and financial institutions focussing so much on governance?
The interest in the corporate governance practices of corporations and financial institutions has increased dramatically over the past two decades. Mainly due to the collapse of some large corporations (due to fraudulent activity) in 2001-2002, the financial crisis of 2007-2008 and more recently, the surge of ESG business criteria.
What does corporate governance really mean?
A dictionary type definition of corporate governance is:
‘The collection of various mechanisms, rules, and processes used to control. Quite literally a framework used to ensure the organisation is sufficiently governed.’
Governance protocols identify the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, stakeholders, and their employees) and include the rules and procedures for making decisions in corporate affairs.
However, governance is not restricted to the upper echelons of an organisation. To be effective, governance policies must permeate throughout an organisation and be implemented at all levels. An example of this is the management of corporate signatures which has a direct impact on everything from contract management to the signing of company cheques/checks and times-sheets.
Such governance is necessary because of the possibility of conflicts of interests between stakeholders, shareholders and senior management (and their delegated authorities).
ESG: Environmental, Social responsibility and Governance
When failures in corporate governance occur, the impact can be wide-ranging and catastrophic. Infamous examples are to be found in Enron, MCI and Parmalat. The media brought the collapse of Carillion to the public eye and with it, the importance of Corporate Governance:
“The collapse of Carillion is a lesson in how not to do Corporate Governance and companies should see it as an opportunity to reassess their processes…..Carillion’s case shows 10 areas of weakness. Red flags were not raised, whether through negligence, complacency or incompetence.”
The reality of the collapse?
Carillion was Britain’s second-largest construction and outsourcing operation, a FTSE 250 company with annual revenues of £4.4bn. The liquidation had repercussions for all stakeholders: the shareholders who lost their investment; the 43,000 employees whose jobs were threatened; the 28,000 pension scheme members whose retirement income was reduced; the thousands of suppliers, sub-contractors and creditors whose invoices were at risk; and the many local communities and customers, including the government, who faced non-delivery.
Governance here is the ‘G’ in the much talked about ESG investing, which has now started to take a central role in corporate strategy and policy agendas pushed by the ever-increasing pressure for its integration from investors, governments, and the general public. Inevitably, business and politics will drive this momentum forward. Such is the importance of governance as part of sustainability that it fits alongside environmental and social matters.
Backed by the United Nations, the PRI – Principles for Responsible Investment, is an organisation offering guidance on ESG and now has over 7,000 members across 135 countries. ESG is here to stay.
What is ESG and why it matters?
The Future of Work: Corporate Governance in the new digital-first economy and remote working environment
It has always been difficult for large organisations to maintain sufficient governance protocols with thousands of client and counterparty relationships, thousands of employees and offices spread across many jurisdictions. Now there is the added challenge with widespread remote working enforced by lockdown measures due to the COVID-19 global pandemic, that are likely to stay.
On the positive side, technology has advanced exponentially and solutions are available to help. In-fact we have technology that is ‘ahead of its time’ because we aren’t using it to its full potential. Why is this? Mainly due to a natural resistance to change, and perhaps fear of the unknown.
But the change is finally happening after COVID turned the world upside down.
For example, video conferencing is now a critical form of communication, as are electronic documents and signatures. So, with remote working becoming the norm, how can we maintain optimal business continuity and, arguably, why weren’t we doing this anyway?
However, is a migration to new work practices, ‘the Future of Work’, and the adoption of new technologies sufficient to maintain and improve governance? Probably not.
As further digitisation occurs, governance control measures need to be updated and enhanced. The governance policies and applications need to work hand in hand with the changes in technology and business protocols. A disconnect between the two nullifies the benefit to both.
There has been much talk about how blockchain will be a technology of the future providing a decentralised control on the movement of data.
What is Authorised Signatory Management?
Find out in our latest special report where we discuss the fundamentals of Authorised Signatory Management. Download
Blockchain, can it enable Governance?
Blockchain is most commonly associated with cryptocurrencies, such as Bitcoin. However, it has a myriad of uses that can actually help organisations enhance and engage their governance protocols.
There are companies out there that are very effectively building applications that use blockchain technology and are gaining adoption from established corporates and organisations. These organisations, in turn, are already reaping the benefits of its integration.
Rather than delve into the complicated principles and coding mechanics of the technology, it’s best just to look at the benefits that it provides.
These inherent benefits of blockchain that can be directly related to corporate governance include:
Ownership – Owning and controlling your own data. Customers of blockchain-based applications are usually in charge of their own data and can do with it whatever they wish, including who can see their data.
Responsibility – Data is shared on a peer-to-peer basis, so there is no 3rd party required to be an intermediary, or conduit.
Accountability – Data cannot be deleted, so there is a permanent record that can show all changes made.
Security – The data is validated and encrypted in various nodes, or copies of the same storage facility (database). This makes the data tamper-proof from external parties.
A great example of this in action is JP Morgan’s Liink. This was formerly known as the Interbank Information Network (IIN), it is used for banks to share additional data that is sometimes required when making payments. This means they don’t have to email or send the information separately.
With the ever-increasing focus on governance we can expect to see more examples of the JP Morgan solution coming into use. Innovative technologies will provide the platforms that will allow companies and organisations to safely share data in trusted environments. This, and the acceptance that mass adoption of good governance principles is the quickest route to raising the bar, will set us in good stead for the future and significantly reduce the chances of repeating the mistakes of the past.