How blockchain could reenergise the AGM

Blockchain can offer smart solutions for classical inefficiencies in the corporate governance field and, in particular, for improving the old-fashioned and rigid annual general meeting (AGM).

That’s the view of two academics from Tilburg Law School in the Netherlands, Anne Lafarre and Christoph Van der Elst, who recently published the paper, Blockchain Technology for Corporate Governance and Shareholder Activism.

They say AGMs are generally considered dull mandatory yearly rituals and their important theoretical functions –information, forum and decision-making – are de facto eroded.

They make a strong plea for the modernisation of the AGM using blockchain technology, noting that this technology can substantially lower shareholder voting costs and organisation costs for companies. It can also increase the speed of decision-making and facilitate fast and efficient involvement of shareholders.

Discussing their paper in the Harvard Law School Forum for Corporate governance and Financial Regulation, the academics discuss the procedural flaws that undermine the AGM’s functioning in practice.

For example, they note: ‘Shares are usually held through complex chains of intermediaries, especially in the case of cross-border voting.

‘These intermediaries not only add transaction costs to shareholder participation per se, there is also high uncertainty that information, including the record of shareholder votes, is correctly channelled between ultimate shareholders and companies in remote participation.’

The academics say the main problems with the current chains of intermediaries and remote voting systems have to do with transparency, verification and identification – issues that are directly linked to the advantages of blockchain technology.

They add that the recent prototypes of blockchain-based AGMs discussed in their paper show that modernisation of the AGM is practically feasible and perhaps just around the corner.

‘Given the large opportunities we expect more initiatives to be launched soon, probably before our contribution’s ink is dry. Nonetheless, it is important to recognise that the blockchain-based AGM would also raise important corporate legal questions, including whether it is desirable to abolish the physical classical AGM. And if it is desirable to organise decentralized blockchain-only AGMs, how much of the forum function would then be incorporated in this technology?’

Their paper follows news that the Australia Securities Exchange (ASX) plans to use distributed ledger technology (DLT) to replace CHESS, the system it uses to record shareholdings and manage the clearing and settlement of equity transactions.

The Australian Securities and Investments Commission (ASIC) has also released an information sheet (INFO 219) to help entities considering operating market infrastructure, or providing financial or consumer credit services, using DLT.

‘We expect that the range of potential applications of DLT will grow exponentially over time,’ notes ASIC. ‘This could have far-reaching implications for our stakeholders and affect the way these entities operate and the structure of the market in which they offer their services.’

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