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By Hagen Schweinitz
Blockchain is a technology that allows secure transactions without the need for third party verification. Data is distributed over a large number of computers. Participants in a blockchain confirm blocks or transactions; "Smart contracts" automate payments or transfers of data based on predefined rules.
The sectors that are fueled by the conservation and verification of records, such as financial services, government and health care, have the potential to be transformed by blockchain. The technology can record any type of transaction and its application goes beyond the business. For example, the World Identity Network stores key refugee data, such as birth certificates and university degrees, in digital "lockboxes". Ukraine is investigating the use of blockchain in the elections. The Iranian government is preparing to launch its cryptocurrency to circumvent the economic sanctions conducted by the Americans.
These developments have not gone unnoticed in the boardroom. A report by Gartner indicates that although 91% of directors have heard of blockchain, they do not necessarily have a clear idea of its implications, with 36% considering it an opportunity and 21% a threat .
Incorporating blockchain into board work
The rise of the blockchain requires that the board of directors become a technology expert. The directors must consider a series of new aspects of their work.
AGM and greater transparency
A recent work by Lafarre and Van der Elst notes that the annual general assembly (AGM) ritual is changing: "Its important theoretical functions, information, forum and decision-making functions are in fact eroded." This erosion includes blockchain voting based voting platforms, which will lower shareholder voting costs and increase the speed of decision making. A number of stock exchanges and securities settlement organizations in Abu Dhabi, Russia, Canada and Estonia have announced the prototypes of the electronic voting of shareholders in the AGMs.
The directors will have to learn to communicate in a different way with the shareholders. In traditional AGMs, directors may face unexpected questions and may respond "by arm". In virtual AGMs, this "human factor" is missing and expert managers may find it difficult to handle challenging shareholder demands. In addition, large institutional shareholders will have to find new ways to discuss issues with the board outside official channels ("side-stepping").
Consolidated acquisition tactics will change when the transfer of securities becomes transparent. The practice of lending securities and various forms of insider trading will also become more difficult. Blockchain technology could help activists to acquire actions in a simpler and cheaper way, but with less secrecy.
Virtual directors
A step ahead of smart blockchain contracts is the decentralized autonomous organization (DAO), a company without employees, governed solely by software or a virtual board of directors who vote electronically. While this may seem futuristic, a Fortune 500 company is already using the DAO framework. In May 2017, Siemens launched a blockchain initiative that allowed its employees to raise funds with minimal administrative and operational costs for SOS Children's Villages, an NGO that helps socially disadvantaged children.
Token remuneration
In a recent INSEAD knowledge article, Professor Andrew Shipilov suggested creating "token-maintained registries" in which verified profiles of potential directors are visible to the community, linking directors' commissions to certain goals governed by smart contracts. In the United States, the Internal Revenue Service considers tokens issued to individuals in exchange for services as remuneration subject to income and wage taxes. Therefore, companies must determine the fair market value of real currency tokens to report it correctly. The remuneration committees and the appointment must know the relative technical and legal implications.
Relations with reviewers
Accounting blockchain can largely eliminate the need for manual accounting and consolidation as it projects financial transactions in real time. This will significantly reduce the costs of accounting and auditing, especially in large and complex organizations. The technology will also redefine the role and importance of audit firms and the requirements and profile of a financial expert on the board of directors.
ICO and raising of capital
The first coin offerings (ICOs) are a new and powerful financial instrument, with over 18 billion USD collected since 2014. These offers allow companies to raise capital quickly without necessarily distributing shares or triggering the listing and reporting requirements of an IPO traditional. They are interesting but complex vehicles. For administrators, the supervision of this transaction requires new skills, since the traditional financial acumen must be enhanced with technological and legal know-how.
Blockchain and risk
The use of blockchain involves new forms of risk. Previously, investments in technology platforms were multi-year projects, often managed by the IOC, which usually did not have a seat on the board of directors. Decisions about which technology systems or third-party vendors to use have exposed the company to uncertainty.
Smart contracts can automate internal and external transactions. These transactions are based on the code, rather than on the law. However, if the code is law, the code defects are also law and vice versa.
Another risk comes from the jurisdiction of blockchain. For example, if a US company operates a blockchain, it must ensure that non-US banks or exporters can not use the technology to perform commercial transactions related to Iran. Otherwise, the company could be subject to judicial proceedings.
Taking blockchain and board
The commissions face two problems concerning the addition of expert technology directors: a lack of talent and a reluctance to recruit technicians. Deloitte reports that only 3% of public companies have appointed a technology-focused director in 2016. On average, the directors in 2012 were 62 and had spent most of their professional life in a & rsquo; & # 39; digital.
A logical pool of suitable candidates for filmmakers would be the "inner circle" of blockchain technology providers, start-up ecosystems and similar organizations.
A dedicated technology committee could give blockchain an even stronger presence in the boardroom, but this is a rare course of action. Given the overall impact of the risk blockchain, the assignment of a responsible blockchain to the risk control committee could also be an option.
Board managers must make sure that they understand the blockchain and be informed about developments in technology. Leadership training should include this topic. Ultimately, the chair will be responsible for maintaining the "ready for blockchain" advice.
Hagen Schweinitz is a senior customer partner at Korn Ferry International. He is an expert in corporate governance from the point of view of human capital. He has published numerous white papers on corporate governance, non-executive directors in fast-growing technology companies and, more recently, corporate governance in Iran.
The article was published on INSEAD Knowledge.
