OYELUDE MOJOYINOLUWA

FINTECH: A1 INDIVIDUAL PROJECT

BLOCKCHAIN AND SHAREHOLDERS’ VOTING

REPORT GENERATED FROM CHAT GPT
INTRODUCTION-CURRENT PROBLEM
The backbone of corporate governance rests on the accountability and transparency of
organizations to their owners; the shareholders. Corporate governance is also fundamentally based
on ordinary shareholders’ participation in a corporation’s decision-making process that provides
direction that a company takes in creating value (Samlal & Jahidi, 2017). Over the years,
shareholders have participated in the affairs of companies through voting systems and the
shareholder voting system is a critical mechanism in corporate governance that allows investors to
have a say in important decisions made by the company.
With the development of financial markets, the complexity of exercising shareholders' voting
rights increased. This gradual expansion resulted in the establishment of intermediaries such as the
Central Securities Deposits (CSD) and the Indirect Holding System (IHS), that extended, and
increased the complexity in the chain of relationship between investors and issuers (Abedin et al.,
2022). Voting rights are only as legitimate as stock ownership for a shareholder. However, it might
be difficult to verify ownership claims nowadays because many shareholders do not directly own
shares in corporations but instead owned shares through these intermediaries (Daniels, 2018). This
system resulted in the emergence of various registration and transfer of share ownership without
following a consistent procedure (Panisi et al.,2019). This in turn created more complexities
regarding shareholders' voting rights and the emergence of proxy voting.
The Shareholder Rights Directive (SRD), which included provisions for remote (electronic)
voting, did not fully mature the shareholder-issuer relationship and it was noted that shareholders
were not always given access to all pertinent information, that votes occasionally went uncounted,
and that third parties may improperly exercise shareholders' voting rights. (Van der Elst & Lafarre,
2019).
Therefore, the current system of shareholder voting is considered flawed as it relies highly on
intermediaried "pass-it-along" arrangements, which are expensive for the shareholders, contain a
lot of inefficiencies, and offer collateralization problems (Panisi et al., 2019). These problems
include the difficulty in verifying shareholders' identities, inefficient communication between
issuers and their shareholders, and confusion arising from unclear voting rules and procedures that
compromise its transparency and accountability tenets (Samlal & Jahidi, 2017). Furthermore, there
is a lack of standardized processes and requirements worldwide, leading to inconsistencies in
shareholder voting practices across countries (Elson & Ferrere, 2018). The efficiency of corporate
governance processes, which are essential for guaranteeing a company's accountability and
transparency, is constrained by all these issues that plague the current system of shareholder
voting.
To address these issues, there is a need for the development and implementation of standardized
processes and requirements worldwide to enhance transparency and accountability in shareholder
voting. A modern technology called blockchain has emerged and is thought of as a potential
solution to this problem. This report will therefore seek to critically review the effectiveness of
blockchain technology in offering a solution to the shareholder voting issue that has been
highlighted.

BLOCKCHAIN INNOVATION AND EMERGENCE IN SHAREHOLDER VOTING

With the financial crisis of 2008, fintech solutions started to take off, capturing the interest of
businesses and individuals worldwide in transforming the financial market infrastructure.
However, blockchain technology as an arm of fintech has drawn most attention due to its emphasis
on key characteristics such as security, transparency, and immutability (Liu et al., 2021).
Blockchain is known as a distributed ledger that may record transactions between participants in
a verifiable and unchangeable way (Van der Elst & Lafarre, 2019b). Blockchain works in a series
of events where the proof of work from the previous block is changed with the new proof of work
after new transactions are broadcast to the network, and a timestamp is added to the blockchain in
a new block, chaining together all earlier blocks. (Lafarre & Van der Elst, 2018). The innovation
of blockchain technology is demonstrated by solving the flaws in “trusted sources” by preventing
unauthorised alterations with a unique cryptographic measure via the proof of work mechanism or
by overriding the errors or malicious intent of a select few during the chain in a way that builds on
the original nodes (Daniels, 2018).
Due to its ability to instantly transmit entirely transparent data on an immutable ledger that only
users of a permissioned network may access, blockchain technology is a vital tool today. Because
blockchain technology is decentralized, it allows for a transparent and secure method of recording
votes, as well as direct communication between shareholders and issuers. This modern technology
has therefore emerged as a possible solution to traditional shareholder voting systems' limitations.
In this system, the live record of share transfer will ensure that the rightful owner casts their votes.
Here, the shareholder would be given a code that would be electronically inputted into the
corporations account, creating a new block that cannot be altered and then sent to the centralized
ledger that holds all votes cast, thus increasing transparency. The ledger would also show the
transfer of ownership title in a public and transparent manner allowing public to see who has voting
rights. Ideally, it is recorded that these rights can also be transferred by way of proxy if the
shareholder wishes to do so by simply providing the proxy holder with the token/code (Hennelley,
2020).
Recent experiments, which showed application examples, have proven the short-term prospects
that this blockchain technology offers. For example, Nasdaq and the Republic of Estonia worked
together on a project to give shareholders of companies listed on the Nasdaq's Tallin Stock
Exchange access to a blockchain-based voting system that intends to improve voting efficiency
(Panisi et al.,2019; Nasdaq 2017). This strategy strives to ensure that voting becomes less labour-
intensive, and shareholders can finally simply exercise their voting rights by getting rid of
intermediaries and the process' complicated nature.
CRITICAL EVALUATION
The advancement and excitement of the world in support of this modern technology is real and
may be rightly so as there are many benefits that await the transformation of systems through its
use. Governments and public houses are also becoming more accepting of this modern technology.
Delaware Blockchain Initiative in amendment of the Title 8 Delaware Act in the United States
shows how a decentralised, distributed ledger system using blockchain could enable organizations
to maintain a single, comprehensive register of their shareholders that is safe, transparent, and
accurately reflects ownership (Laster, 2016). This amendment argued in favour of the use of
blockchain in that issuing companies can now know who their shareholders are and retake control
of transfer of share ownership. Thus ideally, block chain would allow a direct communication line
between shareholders and issuers vanishing the need for intermediaries.
According to studies, the use of blockchain technology can lower corporate organisation and
shareholder voting expenses, raise the effectiveness of the company's decision-making processes,
and increase voting and election transparency (Meng & Xing, 2021). Blockchain technology may
be used to create a framework for voting operations that may be carried out digitally, as well as to
increase shareholder engagement and advance voting rights in publicly traded companies
(Jiménez-Gómez, 2023). Also, blockchain technology offers a possibility to keep data confidential
and forbids data tampering, helping to conduct fair elections and lessen unfairness (Hennelly,
2020). Furthermore, blockchain technology ensures that all stakeholders have real-time access to
the same information, enabling shareholders to more readily exercise their right to vote and make
informed decisions (Laster, 2016).
Like every other technology, blockchain has its drawbacks. The "51% Attack," which happens
when a mining pool seizes control of the majority of the blockchain's mining power and uses it to
rewrite earlier blocks and create new chains that the minority must adhere to, was argued by
Daniels (2018) in his research, as the primary weakness of this technology. The exposure of
corporate data and assets is put at risk by this. The size of the blockchain ledger will also grow
rapidly as more shareholders join in the voting process, which brings us to our second point. This
can possibly result in a bottleneck, which would slow down transaction processing and lengthen
the time needed to finish the voting process (Abuidris et al., 2020). Additionally, this technology
continues to have governance risk. Despite the government's and legislations' increasing
acceptance of this technology, they will probably continue to favour centralised reliable sources
as a balance on further decentralisation and a loss of control (Van der Elst & Lafarre, 2019a).
Shareholder voting on blockchain won't be totally decentralised anytime soon (Daniels, 2018).
Another issue that speaks against the technology is lost blockchain wallets. Personal identification
is stored in these wallets, and it is the user's responsibility to keep them secure. If this information
is destroyed, there is no way for the user to recover it, and the blockchain's transaction history is
permanently gone (Schneier, 2019). If blockchain transactions are made publicly transparent,
Daniels (2019) argues that privacy concerns are also a significant challenge for this technology.
Some managers and stockholders may decide to maintain their anonymity for strategic reasons.
On the other hand, having too many privacy features may encourage illegal activity. He further
argues that the ability of this technology to strike a balance between privacy and usability is a
problem that probably won't ever be resolved.

CONCLUSION
After weighing the advantages and disadvantages of this contemporary technology, the use cases
that are already in use, and the attitudes of investors, legislators, governments, and corporations
towards the development of this technology, it can be concluded that its use will probably be
successful in the near future. Blockchain developments could one day provide the technical basis
for contemporary shareholder voting processes if they are discovered to be both affordable and
successful. Companies may rely more on permissioned blockchain-based systems in the coming
years to manage share registration and shareholder’s voting processes. By eliminating the
intermediaries who make the connection between owners and issuers more complicated, this
technology could completely transform the corporate governance structure and agency issues.
However, as time goes on, the difficulties this technology poses for shareholder voting will become
more apparent to its users, and as a result, trust in this technology may decline. The complexity
and difficulties of the technology itself, however, are likely to add new costs to the previously
enhanced shareholder voting. Blockchain technology development in this area may require
patience. This technology might not be adequate on its own to address the problems shareholders
confront with governance, but it might be combined with other technologies to make up for the
deficiencies of blockchain technology by solving privacy, information storage, and regulatory
concerns. The development of blockchain technology in conjunction with other technologies is
essential for gaining the full confidence of governments and other relevant stakeholders in the
system. This conclusion assumes that while the use of blockchain technology in shareholder voting
will increase, it will not entirely replace trust-based systems.
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