The quality of a corporation’s leadership hierarchy, systems, and culture separate the best from the rest. From Enron to Lehman Brothers, the spectacular failings of corporate leadership have proven to cost thousands of jobs and, in extreme cases, can lead to the complete extinction of a formerly well-regarded brand. Other examples of blurred corporate accountability leading to shareholder suffering include Merck’s decision to leave Vioxx, which caused heart attacks and strokes, ultimately leading to $4.85 billion in settled lawsuits and a 27% drop in the company’s value. The Firestone tire debacle also did irreparable damage to the brand, its employees, and shareholders when it was discovered that tires known to be faulty by leadership were responsible for at least 3,500 complaints, 500 injuries, and 119 deaths.
The decisions to ignore risk for hope that the public will not find out about corporate negligence is precisely the sort of problem that modern, opaque corporate governance models foster. To address the issues plaguing corporate governance, Deloitte and others propose a “common, global framework” by which corporate leaders can be assessed on a more uniform standard.
The decision to rely on the blockchain as this common framework has many benefits, from easy global interoperability to the ability to store corporate information for shareholder oversight without concern about those documents being altered or stolen. With the average age of corporate boards currently stuck at 61–62 years and most corporations having a serious deficit of proxy access for corporate decision-making, blockchain-linked platforms that allow remote participation by shareholders would prove a fundamental shift toward a more democratic paradigm.
Better Shareholder Access to Governing Documents
One does not have to search long or hard to find high-profile examples of failures in corporate governance that were, at least in part, due to lack of transparency. Volkswagen is known for its recent circumvention of emissions standards, for which it was slapped with $1.2 billion in fines, the largest ever penalty for an automaker.
Perhaps shareholders could not have seen or prevented these violations through a more transparent oversight framework, but VW’s history illustrates that the German automaker was not an unlikely culprit for such a scandal. A former VW personnel manager, Klaus-Joachim Gebauer, was discovered in 2005 to have routinely procured prostitutes for labor reps, billing the soirées as corporate expenses. There were also simultaneous criminal allegations of shady front company arrangements being investigated. VW is not alone in acting questionably when leadership believes they aren’t being watched, and shareholders are usually the ones that are left holding the bag when scandals inevitably emerge, from Enron to Lehman Brothers and beyond.
The ability for shareholders to view critical corporate documents and announcements by logging into a blockchain-enabled database could provide a measure of trust and transparency for the corporate world. This could provide a competitive advantage for companies that seek to avoid a Wells Fargo-like plummeting of corporate trust, and also serve as a built-in measure to keep corporate governors honest.
Companies Trying to Solve This Problem
- Boardroom – Placing key governance procedures on the Ethereum blockchain to increase transparency.
- Vanguard/Symbiont – Using Blockchain to improve index data transparency.
Annual General Meeting of Shareholders (AGM)
In February 2017, head of Samsung Lee Jae-yong was arrested was indicted on charges of bribery and embezzlement. In March, amid the massive corruption scandal and revelations of battery and design flaws that caused some of their Galaxy 7 Note phones to spontaneously catch on fire, representatives from the company formally apologized to irate shareholders at the annual shareholder meeting in Seoul. In March of 2018, Samsung shareholders approved a stock split to make it easier for investors to obtain shares.
While the Samsung example would seem to indicate that shareholders and their meetings represent a significant source of influence over corporate decision-making, this is an outlier. The way that annual general meetings are set up is archaic. As an example, Swedish clothing giant H&M announced their 2018 meeting would be held on May 8th in the Erling Persson Hall in…Sweden. The idea that stockholders from around the world would travel to Sweden for less than a day to attend a shareholder meeting is laughable, which is why remote forms of AGM participation must be implemented. Some issues that Ernst & Young’s 2017 AGM trends report found include continued “rebellions” on the part of shareholders toward disproportionate executive salaries and a continued interest in exploring electronic meetings.
Shareholders, in most cases, can be fairly described as willing captives of a company’s decision makers. While rare instances allow them influence in the election of governors, shareholder meetings are by and large formalities. High barriers to access, time constraints, and other factors prevent complete participation in shareholder meetings. Jimmy Choo held the first electronic AGM in 2016 for a UK-listed company, an encouraging sign that the days of in-person AGMs are no longer viable. Tailoring the blockchain’s decentralized ledger technology to create a more involved, impactful means for shareholders to have their voices heard during their annual general meeting could foster greater accountability and democratic leanings among governors.
Companies Trying to Solve This Problem
- Aragon – Decentralized organizational structures for global corporations.
There is an abundance of corporate scandals that arise directly from shady, intentional accounting feats of deception. The founder of Waste Management — the biggest name in waste management — was charged in 2002 with cooking the company’s books, falsely inflating profits to the tune of $1.7 billion over five years. Worse, corporate audit company Arthur Andersen, which also played a central role in the Enron accounting scandal, was accused of assisting in the Waste Management scheme.
It turns out 2002 was a rough year for corporate accountants and their auditors, as the CEO and CFO of New Jersey-based security system company Tyco were charged with stealing $170 million and artificially inflating then selling Tyco stock, ultimately making themselves a tidy sum of $600 million. Names such as HealthSouth, Worldcom, Enron, Bernie Madoff, and Freddie Mac all bring to mind willful accounting malpractice, but also complete and utter failure in terms of those tasked with overseeing, preventing, and catching these sort of corporate accounting scandals before they blow up.
Blockchain technology is a ways from being an effective replacement for traditional accounting systems, but the technology’s ability to execute high-level mathematical algorithms quickly and cheaply has led some to ponder how it could eventually be fashioned for the accounting sector. Corporations could save massive sums by reducing currently-massive accounting departments, and regulators could be granted a window into real-time accounting processes in order to provide greater regulatory oversight and, hopefully, prevent the sort of accounting scandals that serve as stains on America’s economic history.