Blockchain as a tool for Corporate Governance

Blockchain is probably the most talked about technology since the Internet and has the power to disrupt every industry. In this blog, we explore the benefits that its use 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.


Why might Blockchain be important to businesses?

  • 20% to 40% increased efficiency of data and digitisation from single source of truth
  • 75% reduction of operational risk capital requirements and working capital,
  • Up to 25% revenue enhancement as a result of better customer experience and new markets
  • 85-95% reduction in reconciliations and errors

** Indicative benefits case based on selected KPMG Blockchain projects, 2016-2017

What is blockchain?

Blockchain is the digital, peer to peer and decentralised ledger that records all transactions. It’s a record of events/ data that is shared between many parties. More importantly, once the information is entered, it cannot be altered.

  • Records transactions
  • Establishes identities
  • Validates contracts
  • Safely stores technology

Benefits of Blockchain in Corporate Governance  

  • Increasing efficiencies by removing the administrative burden
  • Mitigating the risk of fraud for organisations by providing an immutable audit trail
  • Providing greater transparency of ownership

Opportunities and Applications

  • Audit trail/ Record keeping. Using blockchains to record stock ownership could solve many problems related to companies’ inability to keep accurate and timely records of who owns their shares

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

  • For shareholders. Blockchains could offer lower costs of trading and more transparent ownership records, while permitting visible real-time observation of transfers of shares from one owner to another

  • Intellectual Property. Every industry, from people, manufacturing, services to conglomerates, can be protected from piracy

  • Property Ownership. Blockchain uses a timestamp which 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 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. Blockchains 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. Thanks to blockchain, 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

Risks involved with 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 and safe?

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, when it was changed.


References

  • Blockchain: Where the board should start by KPMG here
  • Bitcoin and the Blockchain as Possible Corporate Governance Tools: Strengths and Weaknesses by Fiammetta S. Piazza here
  • Corporate Governance and Blockchains by David Yermack here
  • Blockchain technology for Corporate Governance and Stakeholders Activism here