Shareholder proxy voting, a process so central to the operations of modern corporations, is poised to be blockchain’s next widespread application. Shareholder voting through proxies has become increasingly common at the annual general meetings (“AGMs”) of modern corporations. Depending on the makeup of a corporation’s charter and bylaws, shareholder votes are required for a variety of actions including board elections, bylaw amendments, and mergers. The constant evolution of corporate governance and the proxy voting process has resulted in a number of inefficiencies that impact corporations on a daily basis.[1]
How the System is Flawed
The inadequacies of the corporate voting process are well documented.[2] Votes are tabulated using an archaic process that involves compiling ledgers that are separately maintained by the numerous stakeholders involved in governance.[3] This regularly results in inaccurate voter lists, an incomplete distribution of ballots, and chaotic vote tabulation.[4] Broadly speaking, these issues deal with transparency, verification, and identification—all of which are at the heart of the advantages offered by blockchain.[5]
Blockchain Basics, Potential, and Limits
At its core, blockchain technology is a sequential, distributed, self-proving database capable of recording transactions in a streamlined manner that is both immutable and verifiable.[6] The term distributed refers to the idea that while the database can be stored, accessed, and altered by various entities, no one of them has a “master copy.”[7] Self-proving means that users can determine the source, timing, and most importantly, the legitimacy of new entries by simply looking at the blockchain.[[8]]
Unlike the current system, where multiple ledgers are distributed and then consolidated to tabulate votes, blockchain voting operates with a single ledger that is shared among all interested parties.[9] Experts believe this could lead to a significant reduction in transaction costs for corporations.[10]
The potential upside offered by blockchain does not come without drawbacks. Strictly speaking, blockchain is not “disruptive,” meaning that it does not offer traditional business models a low-cost solution that can be widely adopted quickly.[11] Instead, blockchain is a “foundational” technology, which means that it had the potential to shake the very foundation of our economic and social systems.[12] Typically, the drawback of foundational technologies is that their beneficial effects are not experienced until widespread adoption is achieved in the market.[13] However, in the United States, blockchain may be headed towards widespread adoption in the proxy voting context.
How Broadridge Could Change the Game
Broadridge Financial Solutions (“BRS”), a financial services company, is betting big on the prospects of blockchain technology in the proxy voting context.[14] After spending years developing a proprietary blockchain ledger for proxy voting, they recently revealed that its pilot run, that occurred last year at Banco Santander’s AGM, was an overwhelming success.[15] What many don’t realize is that Broadridge essentially runs a monopoly over proxy voting services in the U.S.. A quick look at their most recent 10K filing revealed that in 2017, their proxy voting services processed a staggering 80% of the outstanding shares in the U.S.[16]
While the legal implications of Broadridge’s proxy domination may be up for debate, the reality of their vast influence means only one thing: they can single-handedly dictate the widespread adoption of blockchain proxy voting in the U.S. and beyond. If the pilot’s success at Santander’s AGM is any indication of the future, we will soon witness the next widespread application of blockchain technology outside of the cryptocurrency context.
[1] Marcel Kahan & Edward Rock, The Hanging Chads of Corporate Voting, 96 Geo. L.J. 1227 (2008).
[2] Id.
[3] Andrea Vittorio, Broadridge Tests Blockchain for Corporate America’s Ballots, Bloomberg (Feb. 14, 2018), https://www.bna.com/broadridge-tests-blockchain-n57982088782/.
[4] Kahan & Rock, supra note 1.
[5] Anne Lafarre & Christoph Van der Elst, Blockchain Technology for Corporate Governance and Shareholder Activism (Mar. 8, 2018), http://dx.doi.org/10.2139/ssrn.3135209.
[6] Marco Iansiti & Karim R. Lakhani, The Truth About Blockchain, Harvard Business Review (Jan–Feb 2017), https://hbr.org/2017/01/the-truth-about-blockchain.
[7] Todd Kornfeld, Joseph Guagliardo, & Gregory J. Nowak, Expert Q&A on Blockchain Technology in Banking and Financial Services, Thomson Reuters Practical Law Finance (Aug. 9, 2016), https://www.westlaw.com/w-002-7866?transitionType=Default&contextData=(sc.Default)&VR=3.0&RS=cblt1.0.
[8] Id.
[9] Vittorio, supra note 3.
[10] Lafarre & Van der Elst, supra note 5.
[11] Iansiti & Lakhani, supra note 6.
[12] Id.
[13] Id.
[14] Avi Salzman, Blockchain Could Help Fix Proxy Voting Problems, Barron’s (July 6, 2018), https://www.barrons.com/articles/blockchain-could-help-fix-proxy-voting-problems-1530922367.
[15] Press Release, Santander and Broadridge Complete a First Practical use of Blockchain for Investor Voting at an Annual General Meeting, Banco Santander, SA. & Broadridge Financial Solutions, Inc. (May 17, 2018) (on file with author).
[16] Broadridge Financial Solutions, Annual Report (Form 10-K), at 4 (Aug. 10, 2017), (https://www.secinfo.com/d1a6sv.k1q.htm#1stPage).
