From Enron to Lehman Brothers, the spectacular failings of corporate leadership can have significant costs beyond the financial. Jobs can disappear, or maybe even an entire company too. When Merck left anti-inflammatory medication Vioxx on shelves despite knowing its lethal side effects, the company became complicit in multiple heart attacks and strokes. The negligence cost Merck $4.85 billion in settled lawsuits and a 27 percent drop in the company’s value. The Firestone tire debacle also inflicted irreparable damage to a major brand; company leadership knew faulty tires were responsible for at least 3,500 complaints, 500 injuries, and 119 deaths and did little to remedy the problem. The once-rudderless leadership of Merck and Firestone are unfortunately not exceptions.
A lack of accountability in corporate governance often leads to disaster. 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.
Using blockchain technology as the vessel for this common framework has potential. Distributed ledger technology (DLT) enabled by the blockchain fosters clearer corporate oversight and top-to-bottom collaboration that can de-insulate leadership. The average age of corporate boards is currently stuck at 61–62 years. Most corporations also have a serious deficit of democracy in corporate decision-making. Blockchain-linked platforms could alter the nature of corporate governance by granting real power to shareholders and bringing management decisions into the light.
Better Shareholder Access to Governing Documents
Facebook and Cambridge Analytica. Tesla’s private-public hysteria. Privacy issues that plague every social platform. It seems like a new corporate scandal hits the headlines every day.
Volkswagen became temporarily notorious for cleverly dodging the Environmental Protection Agency’s (EPS) emissions standards between 2008 and 2018. VW was slapped with $1.2 billion in fines, the largest ever penalty for an automaker. Perhaps shareholders couldn’t have seen these violations or prevented them if they did. But a more transparent oversight framework couldn’t have hurt. VW is a case study in what corporate leaders will do to cut costs and boost the bottom line when they aren’t being watched. When it comes time for the buck to stop, shareholders are usually the ones that are left holding the bag.
But what if shareholders and regulators could review corporate documents simply by logging into a blockchain-enabled database? This could provide an unprecedented level of trust and transparency for the corporate world. It could also be a competitive advantage for companies seeking to avoid a Wells Fargo-like demolition of corporate trust. The blockchain could go a long way towards retiring the image of CEOs as cigar-smoking fat cats who make self-serving decisions in shadowy boardrooms with impunity.
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)
The feeling of powerlessness can have a devastating impact on the human psyche. Whether it’s a struggle with addiction or see your loved ones get older, knowing you are out of control is a scary feeling.
Yet countless stockholders allow themselves to be at the mercy of executives they’ve never even met time and time again. Their only course for steering the fate of a company – the embodiment of their investment – is a farce. The annual general meeting of shareholders (AGM) should give stockholders a voice. It usually doesn’t, and executives continue to act as they please until it’s too late. Need proof?
In February 2017, the South Korean government indicted Samsung leader Lee Jae-yong on charges of bribery and embezzlement. In March, amid the corruption scandal and revelations of design flaws causing some Galaxy 7 Note phones to spontaneously catch fire, company reps apologized to irate shareholders at the AGM in Seoul. The apology was too little, too late for many. Powerless shareholders needed to know of Lee’s actions before they led to his indictment and the pummeling of Samsung stock prices – apologies weren’t going to recoup their financial losses. AGMs need an earnest re-thinking if shareholders hope to wield any power against the likes of Lee.
The current setup of annual general meetings is archaic. Swedish clothing giant H&M held their 2018 meeting on May 8th in the Erling Persson Hall in Solna, Sweden. How convenient for the non-Swedish stockholder!
Remote forms of participation must be implemented if AGMs are ever to be taken seriously. Issues that Ernst & Young’s 2017 AGM trends report details include continued “rebellions” on the part of shareholders toward disproportionate executive salaries and a continued interest in exploring electronic meetings. But what is a “rebellion” without means for change?
Most shareholders can be described as willing captives of a company’s decision makers. While rare instances allow them to influence the election of governors, shareholder meetings are by and large a formality. 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 may be numbered. Choo and others are betting that the blockchain’s decentralized ledger will be a way for shareholders to participate and vote during AGMs. The right to participate in any democratic institution shouldn’t be conditional; AGMs should no longer be an exception to this truth.
Companies Trying to Solve This Problem
- Aragon – Decentralized organizational structures for global corporations.
Imagine waking one day to check on your nest egg and your entire savings – let’s say, $100,000 – had dissolved into the ether. It’s not a hypothetical for many who have been swindled by devious corporate accountants and their enablers.
Countless corporate scandals 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. 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. The means for preventing and monitoring accounting fraud are simply not in place.
2002 was a particularly rough year for corporate accountants and their auditors. The CEO and CFO of New Jersey-based security company Tyco were charged with stealing $170 million. They artificially inflated then sold Tyco stock, ultimately thieving a tidy sum of $600 million. Names such as HealthSouth, Worldcom, Enron, Bernie Madoff, and Freddie Mac all bring to mind willful accounting malpractice. The complete failure of those tasked with preventing and catching rogue corporate accounts begs for a new approach.
Blockchain technology is a ways away from being an suitable replacement for traditional accounting systems. But the technology’s ability to execute high-level mathematical algorithms quickly and cheaply has some pondering how it could eventually be fashioned for the accounting sector. Think about it: corporations could save a ton by downsizing inefficient accounting departments, and regulators could gain a window into real-time accounting processes. This would mean clearer regulatory oversight and, hopefully, the prevention of many would-be accounting misdeeds.