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HomeArticleUsing Blockchain to improve Corporate Governance

Using Blockchain to improve Corporate Governance

Blockchain technology can positively change the way businesses operate, allowing them more control over corporate and financial matters. It provides the possibility to make decision-making processes more efficient, eliminates unnecessary intermediaries, automates tasks and protects shareholders’ right to corporate information. Tokenized Business Organizations offer new ways to do business, and with those, new legal challenges.

The digitization of rights: Tokens.

A token is a digital item (that operates within a blockchain network) which represents either the right to perform some operation or a physical object of value[1]. It is the virtual representation of an asset, a good or a right. There are many classifications of tokens, however, for the purposes of this article we will focus on their legal and financial-accounting classification.

In terms of their legal classification, tokens can be classified as security tokens, if they meet the requirements to be considered negotiable securities[2], and non-security tokens, if they do not[3]. The classification will depend on each jurisdiction regulation. [1] [2] For example, in the USA, Bitcoin is not classified as a security due to lack of centralization and is therefore seen as a commodity.

Due to their accounting-financial classification, tokens can be classified as debt tokens or equity tokens, depending on the rights they confer to their holders. Holders of a debt token could, for example, be entitled to receive a fixed income; holders of an equity token, on the other hand, would receive a variable income depending on certain pre-established requirements[4], for example, if the company has reported profits.

Share tokenization allows us, among other things: (i) to automatically verify the rights that each shareholder wields; (ii) perfect company business records; (iii) peer-to-peer voting control and proof that the shareholder’s vote is really counted[5]; and, (iv) privacy for each shareholder by having a unique access through his public key (the share certificates) and private key (the password chosen by the shareholder).

Deploying tokenization and setting up a commercial company on the blockchain is not a simple task, but it is an interesting one. For a company seeking to migrate to a blockchain network, amendment of the corporate bylaws would not only be advisable, but essential. It should provide, for example, for (i) the intermediary that will function as the network permit holder; (ii) the alternative dispute resolution methods, in the event of a conflict between shareholders, suitable for the company; (iii) the method of authentication of the identity and legitimacy of the shareholders; (iv) the oracle (program that allows adding off-chain information to the blockchain) to update the network; (v) the method of notification that will serve as notice to the Shareholders’ Meetings; and, (vi) the method of validation of the decisions adopted and the notarization, as the case may be, among others that according to the specific case will have to be analyzed. The lawyer-engineer teamwork is vital for the success of the project.

Another benefit is that shareholders would be able to know the necessary requirements for the adoption of a given resolution, and the system would not allow resolutions that go against the company’s bylaws. All decisions and operations of the company will be recorded on the blockchain, allowing to identify them individually, keeping the proper and detailed accounting record, achieving a perfect management.

Furthermore, we can improve compliance by resolving the “agency problem” that arises when the interests of a party known as the principal depend on the actions of another party known as the agent […] the problem lies in getting the agent to act in the interests of the principal and not for its own benefit[6].

The doctrine of the matter has pointed out that a corporate governance infrastructure based on blockchain could bring benefits to both the company’s shareholders and the company itself, as it could contribute to maintain in a decentralized and reliable database the information of the company and its shareholders, and would improve the deficiencies that occur in the General Shareholders’ Meetings, thus strengthening voting rights and shareholder activism[7]. Also, there are authors such as Wuul A. Kaal who mentions that through decentralized forms of governance based on blockchain, agency costs could be reduced by a wide margin and inefficiencies arising from agency relationships could be reduced to the point where they could disappear[8].

In conclusion, the adoption of blockchain technology in the corporate world offers numerous advantages, including the creation of a decentralized backup system for a company’s data. By having digital access to all their information, companies can easily locate and print any required data, thus improving their internal operations and ensuring compliance with legal requirements. Additionally, blockchain technology enables faster and more cost-effective decision-making processes, leading to increased efficiency and productivity within the organization. Overall, embracing the blockchain ecosystem is a smart move for any forward-thinking company looking to enhance their operations and gain a competitive edge in the market.

Emiliano Hernandez Castañeda

Picture by leelo thefirst

[1] Llessie D, Sobolewski M, et al. 2019.

[2] Article 2 frc. XXIV, Securities Market Law.

[3] Noboa Velasco, P.O. “The implementation of blockchain in corporate processes in Ecuador.” USFQ Law Review, Vol 9, no 1, July 2022, pp. 39-58, doi: 10.18272/ulr.v9i1.2567.

[4] Idem

[5] Harvard CMSA. (February 19, 2019). “The Modernization of Corporate Governance: Blockchain as a Solution?” [Video Archive]. YouTube. https://youtu.be/kqfd_pSblYE

[6] Carreño, J. (May 2022). “Blockchain and Corporate Governance: A disruptive alternative for the mitigation of agency problems in contemporary corporate law”. Bogotá D.C., Universidad de Los Andes.

[7] Véronique Magnier and Patrick Barban, “The Potential impact of Blockchains on Corporate Governance: A survey on shareholders’ rights in the Digital Era.” Journal for the international and European Law, (2018), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3307521papers.ssrn.com/sol3/papers.cfm?abstract_id=3307521.

[8] WulfA.Kaal, “Blockchain Solutions for Agency Problems in Corporate Governance.” University of St. Thomas, Legal Studies Research Paper No. 19-05 (2019), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3373393papers.ssrn.com/sol3/papers.cfm?abstract_id=3373393.

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