A board of a listed transport company has a tough decision. Management wants approval to raise capital and build a large logistics terminal to service the coal industry.
The board is concerned about increasing the company’s exposure to the coal industry and community sensitivities around fossil-fuel investments. No black or white answer exists: the decision requires trade-offs based on board preferences.
Using blockchain – a technology that enables secure transactions without third-party verification – the board invites shareholders, employees and other key stakeholders to indicate their preference on fossil-fuel investments generally, via an online voting platform.
Stakeholders are asked if they believe the company should invest in coal-related infrastructure and if so, what trade-offs they will accept. For example, would shareholders accept a potentially lower dividend or would employees tolerate job losses?
Armed with this information, directors would know much more about stakeholder preferences. In this hypothetical example, stakeholders are unwilling to accept a significant loss if fossil-fuel investments are avoided. The board still makes its own decision, but is better informed.
Welcome to the future of boardroom meetings. One that could reshape the nature of governance and transform the role of boards from decision maker to decision facilitator.
Of course, the application of blockchain technology to boardrooms is a long way off and not without complication. Encouraging stakeholders to vote on key issues in real time – outside of the Annual General Meeting – is rife with complexity around confidentiality and disclosure.
Nevertheless, blockchain technology has intriguing application to boardroom meetings, structure and content. Blockchain’s great potential is to disrupt intermediaries – or, in this case, boards that are the conduit between the company and its stakeholders.
Associate Professor Gavin Nicholson of QUT Business School says blockchain and other emerging technologies could help boards make better decisions through stakeholder preference aggregation. The noted governance academic and consultant believes blockchain could “drive the next great shift in governance over the coming 20 years,” but stresses its application to governance is, for now, hypothetical.
“The traditional governance model was built on recruiting directors who have skills to make judgements that have a right or wrong answer, usually about a financial issue,” says Nicholson. Increasingly, boards are being asked to make decisions on non-financial matters that have no right or wrong answer, and depend on individual preferences.”
Climate change, the same-sex marriage debate and human rights are examples of Environmental, Social and Governance (ESG) issues that boards face. Each issue has trade-offs: a bank that does lend to fossil-fuel projects loses income; a company that supported same-sex marriage risked a backlash from customers who did not; another firm must balance the savings from manufacturing in a developing nation against potential modern-slavery risks.
As Nicholson notes, decisions based on aggregated preferences rely on representation: boards understanding key stakeholder preferences and making decisions that reflect them. But the traditional governance model provides only a limited form of representation.
In listed companies, only shareholders vote in board elections. Employees, customers and other stakeholders – each receiving greater consideration in board decisions these days – have no say on who represents them on the board (in the traditional western governance model).
This issue goes to a deeper debate on whether boards are agents of shareholders and the company’s role is to maximise profit; or if boards should be agents of a broader group of stakeholders and must govern the organisation’s financial and non-financial outcomes.
If one believes boards are primarily agents of shareholders, it could be argued they are doing enough to understand aggregated preferences. Led by the Chair, boards of the largest listed companies typically meet with key shareholders to understand their views on a range of issues, including ESG matters that are anecdotally occupying a longer part of discussions.
If one believes in the second argument – that boards are becoming agents of a broader group of stakeholders and will spend more time on ESG issues – new mechanisms will be needed to help boards understand stakeholders and give them a greater say on decisions.
Blockchain and voting decisions
Blockchain could be the answer. A 2018 paper published by the European Corporate Governance Institute, “Blockchain Technology for Corporate Governance and Shareholder Activism”, argued that blockchain could offer “smart solutions for classical corporate governance inefficiencies”, notably the relationship between shareholders and the company.
Blockchain can lower voting costs for companies that have many stakeholders, increase decision-making speed and automate verification. For example, the technology would know if the voter is a company shareholder, employee or perhaps a community representative who has an interest in the company-related ESG matters.
“Blockchain could potentially create an alternative decision-making system in board meetings,” says Nicholson. “If the technology realises its potential, part of the decision could be shifted outside of the boardroom, to stakeholders, in real time. The board meeting would be structured to facilitate and respond to stakeholder decision making, or factor it into board decisions.”
“If blockchain becomes a low-cost, efficient and secure way for stakeholders to aggregate their views on issues, and get that view into the boardroom in real time, they will have greater say in decisions. At a minimum, boards will have better understanding of stakeholder preferences when making decisions.”
Nicholson says blockchain could even make boards redundant. “We’re already starting to see companies form without a board, using blockchain. If boards can tightly specify decision-making rules, it’s possible that technology could do all the monitoring and decision making, based on the aggregated preferences of stakeholders. The board’s role would be to design, implement and monitor these decision-making systems for algorithms.”
That would shift power models in boardrooms,” says Nicholson. “If blockchain becomes a low-cost, efficient and secure way for stakeholders to aggregate their views on issues, and get that view into the boardroom in real time, they will have greater say in decisions. At a minimum, boards will have better understanding of stakeholder preferences when making decisions.”
Nicholson says blockchain could potentially solve a “wicked problem” for boards. “Directors are increasingly being asked to make decisions on issues that affect lots of stakeholders who have varying opinions. In the past, boards have had no way of knowing how a large group of diverse stakeholders feels on an issue, even though they represent them. Blockchain could change that.”