The present era is of globalization where the technological advancements are shrinking the distances between the nations making the world a cozy abode of different origins, ideologies, and people. Living in the 21st century, we are very well aware of the role, digitization has played in bringing a revolution in the process of globalization.
Today, nations are connected from one another through the exchange of data which has fostered to build a society that is free from borders and national legislations. The growth of the digital niche has made it possible for a single-person company to shine as a multi-national firm. Blockchain technology and Security Token Offerings have played an important role in giving a boost to organizations in expanding their business across the globe. They help firms in raising funds from any corner of the world with ease and less complexity.
The new-age technology not only benefits the startup ventures but also aids the already running public multi-national enterprises in a big way especially in the field of corporate governance. These giant enterprises proliferate into varied territories exposing themselves to an array of different infrastructures, markets, legislation, and customer needs. Also, the location of shareholders anywhere in the world lays a direct impact on corporate governance.
Corporate Governance
Corporate governance is an inevitable part of an MNE system as it lays out the roadmap for it to follow in accordance with the needs and aspirations of the shareholders. To achieve the primary aim of shareholder satisfaction, there are many solutions that can be easily employed. One is the laying down of the AGM or the Annual General Meeting where shareholders are allowed to give their votes on the proposals proposed by the management.
With shareholders spread across the globe, the process of organizing an AGM becomes quite cumbersome and expensive too. The more the number of shareholders, the higher are the costs for the enterprise. Sometimes, in order to act democratically, organizations use proxies in place of actual shareholders. In proxy voting, shareholders allow their representatives chosen by them to give a vote.
Proxy voting depends on varied divisions of intermediaries including financial institutions and information service providers. This chain of mediators makes the process inefficient, pricey, and complex because of less transparency. It is crucial to understand the voting mechanism before getting onto the blockchain technology merits. Below are explained the different democratic processes.
Types of Democracies in an Organization
There exist two primary forms of democracy namely direct or pure democracy and represented or indirect democracy. Both forms have their individual set of pros and cons.
Direct Democracy
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In this process, each and every citizen puts his vote in favor and opposition of the proposals directly. Each vote has its importance and the result is taken on the basis of the majority of the votes. Direct democracies are not practically possible in the current scenario as it is nearly impossible to inform all the citizens about all the proposals or topics being initiated. This is a lengthy process and is also quite costly in terms of capital and technological capacities.
Represented Democracy
Represented democracy is the most popular form of democracy owing to the fact that it is practically feasible and acceptable in the present time. In this, citizens vote for a candidate who represents their constituents. However, sometimes there pop up some issues in represented democracies as well. There rises a rift between citizens and politicians as the former fails to trust the traditional parties of elected officials mirroring them. Non-fulfillment of promises and exploitation through corruption often become pre-dominant in a represented democracy.
In terms of organizations, small enterprises exercise direct democracy as shareholders can easily vote on almost all the proposals put forward. The process of direct democracy holds no importance as and when the enterprise grows in a number of shareholders spread across nations. Such giant organizations take up represented democracy in which a board appointed by the shareholders takes a decision on their behalf.
3 Important Features of Democratic Voting Process
The voting process should comply with three important characteristics:
- First, a shareholder needs to know that he/she will be able to submit their vote for it to be counted. This refers to censorship resistance.
- The second characteristic is that he/she after casting the vote needs to know that their vote was included for deriving to the outcome. This is known as a consensus protocol.
- The last characteristic specifies that he/she needs to know that their vote cannot be changed after being cast. This is known as the immutability of votes.
In proxy voting processes or electronic voting in AGMs, the voting details get exposed to some people before the AGM. The research highlighted that nearly 80% of votes are now performed through electronic and proxy voting mechanisms. As the recipient of the votes is already aware of the influence of the shareholders through their votes, it causes information inequalities.
Proxy voting cannot be accounted for correctly and also lacks a proof-worthy auditable data trail which could validate that the votes have not been sabotaged. This leads to the urge to find a method that could get away with all these limitations and this is where blockchain comes into play. Blockchain manages an immutable, verifiable, and traceable data record making it a one-shot solution for all the problems.
Blockchain-focused shareholder voting will promise to facilitate a secure and transparent mechanism of voting during AGMs. Corporations can get an immutable digital copy of voting instructions cast by shareholders. This will allow them to enjoy access by simply joining the blockchain network. The demerits of proxy voting can be easily addressed as the auditors will get a fair chance to scrutinize in real-time the votes being cast leading to a reduction in voting errors and frauds.
In 2016, Russia-based National Settlements Depository created and tested a blockchain prototype for exploiting the proxy voting process. The same year Nasdaq explored blockchain technology to record the ownership of securities and gave voting rights based on those assets to the stakeholders.
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Later in 2017, Broadridge Financial Solutions, JPMorgan, Northern Trust, and Banco Santander also developed a blockchain-based solution to enhance transparency in an AGM. In April 2018, Dutch Bank KAS Bank came up with a pilot solution on Ethereum to channelize shareholder voting onto the blockchain network.
Conclusion
Blockchain-centered proxy voting works wonders for large enterprises through its efficient attributes focused on strengthening the position of the shareholders. In addition to the reduction of voting frauds, the digital security tokens are programmable and so rules concerning the dividend, voting, and other privileges automatically apply to the owner of the token. This, in turn, will give a boost to the corporate governance system of an organization.
