How the Board Can Make the Most of Blockchain Read
The rise of blockchain requires the board to become tech-savvy. Directors need to consider a number of new aspects to their work:
AGMs and increased transparency
A recent paper by Lafarre and Van der Elst notes that the ritual of the annual general meeting (AGM) is changing: “Its important theoretical functions, the information, forum and decision-making functions, are de facto eroded.” This erosion includes blockchain-based voting platforms, which will lower shareholder voting costs and increase the speed of decision making. A number of stock exchanges and securities settlement organisations in Abu Dhabi, Russia, Canada and Estonia have announced prototypes of shareholder e-voting in AGMs. Directors will have to learn how to communicate with shareholders differently. At traditional AGMs, directors may be confronted with unexpected questions and they can respond “off the cuff”. In virtual AGMs, this “human factor” is missing, and seasoned directors could find handling challenging questions from shareholders to be nearly impossible. Also, large, institutional shareholders will need to find new ways to discuss matters with the board outside official channels (“side-stepping”).
Established takeover tactics will change as the transfer of securities becomes transparent. The practice of stock lending and various forms of insider trading will also become more difficult. Blockchain technology could help activists acquire shares in an easier and cheaper fashion, but with less secrecy.
A step further than blockchain’s smart contracts is the decentralised autonomous organisation (DAO), a company without employees, solely governed by software or a virtual board of directors voting electronically. While this may sound futuristic, one Fortune 500 company is already using the DAO framework. In May 2017, Siemens started a blockchain initiative that enabled its employees to raise funds with minimal administrative and operational costs for SOS Children’s Villages, an NGO that helps socially disadvantaged children.
Relationships with auditors
Blockchain-based accounting can largely eliminate the need for manual bookkeeping and consolidation as it projects financial transactions in real-time. This will significantly lower accounting and auditing costs, especially in large, complex organisations. The technology will also re-define the role and importance of audit firms and the requirements and profile for a financial expert on the board of directors.
ICOs and raising capital
Initial coin offerings (ICOs) are a new and powerful financing instrument, with over US$18 billion raised since 2014. These offerings enable companies to raise capital quickly without necessarily giving away equity shares or triggering the listing and reporting requirements of a traditional IPO. They are attractive yet complex vehicles. For directors, overseeing such a transaction requires new skills, as traditional financial acumen will need to be augmented with technological and legal know-how.