**6. Blockchain Adoption in Corporate Governance**

This section answers our Research Question 1: What are the current and future use cases of blockchain applications in corporate governance? We discuss applications of blockchain by financial institutions, accounting and taxation and initial coin offerings in two other studies. The work by stock exchanges around the world on blockchain is particularly significant. They signal that tokenization of shares will occur sooner rather than later. The key implementations of blockchain in clearing houses and securities exchanges are provided in Table 6.

Moving exchanges to blockchain platforms would reduce information redundancies, costs and speed of transactions, subsequently improving performance (Mathew and Irrera 2017). However, a common risk with regard to blockchains is the issues of security of private keys (Mathew and Irrera 2017). These are proofs of ownership which can be stolen. In our opinion, multi-signature transactions where signatures of all parties are required before agreement to a transaction may circumvent this issue. Table 7 provides a summary of the implications of blockchain adoption in corporate governance to various market mechanisms and market participants based on prior literature and our opinion.


#### **Table 6.** Present Blockchain Applications in Corporate Governance.

#### **Table 7.** Stakeholders and Blockchain Adoption Implications in Corporate Governance.


#### *6.1. Firm Share Tokenization*

This article explores the effects of blockchain adoption in the corporate governance sphere such as the tokenisation of a corporation's shares. Tokenisation involves placing shares onto a blockchain and the resulting consequences and opportunities. Blockchain could provide unprecedented transparency to market participants to identify the ownership positions and transactions of debt, equity investors and insiders (managers) (Primm 2016). This would decrease moral hazard, fraud and errors by firms, exchanges and regulators alike (Kahan and Rock 2008). The tokenisation of shares allows for increased efficiency, specifically in terms of accuracy and timeliness of shareholder voting, payment of dividends and a myriad of other uses including limiting empty voting (Accenture 2017). Lee (2016) states that blockchain technology has advantages such as cost execution speed and settlement time reduction.

The ability to observe trading transactions historically, as well as in real-time, reduces information asymmetry and would significantly change incentives and profit opportunities for institutional investors, insiders and other traders in general (Primm 2016). In our opinion, securities may be designed to better utilize the ability of smart contracts to be executed autonomously. There are, however, legal issues with the tokenisation of a corporations' shares, which are not discussed in this study. Schroeder (2015) explores the legal implications of virtual assets existing on blockchains, classifying them as uncertificated securities under Article 8 of the Uniform Commercial Code. Other implications of blockchain adoption would be spillovers to mergers and acquisitions. Even market mechanisms such as mergers where building hostile positions for takeovers may be hindered, and blockchains may become a part of takeover defence mechanisms (Schroeder 2015), whilst shareholders might become more passive, similar to what is discussed in Grossman and Hart's (1980) free-rider problem. In our opinion, it is more likely that increased transparency offered by blockchains may change and even expand the role of shareholders in corporate governance.

Malinova and Park (2017) state that identifying buyers and sellers would benefit markets in general and increase market welfare. Thus, based on this argument, digital identity would be preferred over attempts to hiding identity. In the U.S., stock trades generally take approximately three business days to settle (Malinova and Park 2017). Many parties are involved in these transactions, which occur under the Depository Trust Clearing Houses' supervision. Blockchains could reduce settlement times to minutes if not seconds or slightly longer if public blockchains are used, and without the need for intermediaries (Primm 2016), thus reducing costs and commissions involved. In our opinion, significantly improved liquidity would facilitate high-frequency trading and demand for investments in stocks and create new investing strategies, objectives and dynamics.

Insiders'/managers' buy order trades result in significant and stronger market reactions as opposed to sell orders (Brochet 2010). It is our view that blockchains would enable easier differentiation of informed trading, subsequently increasing the information content and absorption into asset prices. This would be a departure from current market dynamics, where speed of bad news and good news absorption to prices is slow (Hong et al. 2000). Market makers would be able to observe all shares traded by investors. This would increase the quality of information content generated (Accenture 2017), thus leading to more efficient prices and reduced risk premiums (Edmans et al. 2016). We perceive that this would spill over to efficient resource allocation in the real economy and also better decision-making internally at firms.

#### *6.2. Corporate Elections*

Corporate elections are one of the many ways blockchains can be used in corporate governance. Current corporate elections are often conducted through proxy voting systems. Kahan and Rock (2008) find that present proxy voting systems are flawed as there are erroneous voter lists, incorrect vote tabulations and incomplete ballot distributions. Listokin (2008) identifies close elections as ending up in favor of management choices. Blockchain can be used to implement accurate proxy voting by allocating eligible voters a token or vote coin as a number that represents their voting power (Boucher 2016). Voters and the firm may observe that votes had been cast validly. However, if desired, they would not observe how particular individuals voted. In our opinion, this would greatly increase the speed of voting and accuracy and would reduce cost and interference by management. Moreover, we believe that increased transparency, speed and reduced costs would result in more shareholder and other interested stakeholder participation. Thus, stakeholders may get involved directly in corporate governance and petition for votes on important firm decisions.

#### *6.3. Empty Voting*

Empty voting involves using borrowed shares or derivative combinations to acquire voting rights on a temporary basis. This mechanism would shield the voter from being exposed to cashflow rights, monitoring or enforcement of those securities (Hu and Black 2006; Christoffersen et al. 2007). Shareholders engage in empty voting to gain immediate profits or for long-term ownership motivations. Using blockchain for corporate elections and shares would prove empty voting more difficult or even prevent it entirely (Boucher 2016). Smart contracts can be used to enforce a stand-down period following the transfer of a share, during which time the share is stripped of its voting rights. Table 3 mentioned earlier provides a summary of the implications of blockchain adoption in corporate governance. This table further links blockchain adoption to traditional corporate governance theories in academic literature.
