How blockchain can help the proxy process
For general counsel and corporate secretaries wondering what, when and how technology will impact the future of proxy communications, the answer is distributed ledger and blockchain technology - and it’s happening now. Although blockchain is widely known as the underpinning of bitcoin, its application to shareholder communications and proxy processing has the potential to transform how participants plan meetings, reconcile voting entitlements and cast votes.
On March 23, 2018, Broadridge conducted a blockchain pilot with Banco Santander involving its AGM, with JPMorgan and Northern Trust as custodian banks. The pilot ran in parallel with Broadridge’s existing proxy infrastructure and shadowed the existing proxy voting system, using time-tested business rules, technologies and third-party vote audits.
The Banco Santander meeting proved that blockchain technology can provide an end-to-end proxy voting solution, offering new levels of transparency and process efficiency. The new technology operates in real-time, and as such the pilot demonstrated that it can eliminate the need for multiple reconciliations and vote audits, thereby reducing operational risk for participants.
Moreover, the pilot demonstrated that blockchain technology can accelerate the process by reducing steps in processing voting entitlements, particularly when there is a deep chain of custody with global share ownership.
The pilot also illustrated why the benefits of moving proxy voting to blockchain will be shared by all participants in the proxy process, from issuers and shareholders to proxy advisers and custodian banks. The benefits were observed in each of the three stages of the meeting: planning, voting entitlements and voting.
In the planning phase of annual meetings, the corporate issuer or its agent can enter the meeting announcement and agenda directly onto the blockchain. This immutable record or single source of truth gives shareholders more time to research the matters to be voted on.
Access to the meeting agenda is granted via ‘permission’ that is enabled by the technology and accepted by all sides. Only valid participants can make entries onto the ledger.
Participants have long been required answer questions of who holds voteable shares by reporting and resolving entitlements through a series of communications and reconciliation steps. But both the securities themselves and the shareholders are listed on the blockchain, meaning that the process of reconciling voting entitlements is greatly simplified.
That’s particularly helpful in international proxy voting where the chain of ownership may have more layers than in US proxy voting. Outside of the US, custodians work with sub-custodians to hold cross-border positions in various countries.
Technologies and processing can also involve different rules and account nomenclature, which add to the task of physically and digitally gathering votes and tallying them up through multiple intermediaries. Making the process more challenging, shareholders typically have a very short window in which to cast votes - and eligibility is sometimes rescinded after a voting deadline. The pilot with Banco Santander demonstrated that blockchain technology can eliminate complex and at times duplicative reconciliation activities.
Voting on the blockchain is simplified. Given complexities in the chain of custody for global proxy, shareholders have a limited window during which they can vote, and participants have little or no time to address discrepancies regarding positions – including, for example, expired powers of attorney.
Some investors worry that their votes are not counted and that they have limited visibility into vote status, sometimes only ascertaining that their vote was rejected after the deadline. Confirmations of votes can also be difficult to obtain or can be delayed.
The pilot proved that voting on blockchain eliminates such concerns because ‘smart contracts’ provide inherent transparency - as all changes and transactions are listed on a single distributed ledger. Shareholders receive an electronic ‘handshake’ that their vote was picked up by the registrar and will be cast at the meeting. This makes it easier for a greater number of shareholders to have their voices accurately and easily heard. In addition, shareholders can choose to vote anonymously if desired.
Blockchain also has the potential to eliminate costly record keeping. A paper published recently by academics Anne Lafarre and Christoph Van der Elst states that ‘blockchain offers new possibilities to facilitate the agency relationship between corporate actors, thereby creating trust and transparency.’
The authors go on to say: ‘In particular, we see possibilities for reducing the agency costs for both shareholders and companies through the optimization and modernization of the AGM.’ The results of the pilot support their observation.
Robert Schifellite is corporate senior vice president, investor communication solutions president with Broadridge