Blockchain in Financial Services

The problem with proxy voting — and how blockchain can help

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Corporate governance controls how publicly held companies behave. It guides how decisions get made, from setting broad objectives to the smallest internal controls, and helps protect the interests of all the company’s stakeholders, such as shareholders, management and members of the community.

All this may sound abstract, but there’s a very real physical forum where it unfolds. They’re called annual general meetings (AGMs) and they’re all about shareholder voting. AGM voting is widely regarded as notoriously inefficient and costly, especially in the way it handles shareholders who vote remotely, a process known as proxy voting. In a simple scenario, management puts forth a proposal and shareholders vote on it.

Blockchain technology has the potential to make it better.

High costs mean high stakes

One reason the stakes are so high is that it can cost the company millions to support a proposal, mainly in communicating with shareholders to persuade them to vote a certain way; the larger the number of shareholders, the higher the cost. And because it’s so costly, it’s imperative for those supporting proposal to have a sense of whether it’s likely to pass or not. If it’s not going to pass, the last thing they want to do is pour good money after bad.

Interested in how to improve governance with blockchain?

Which gets to what is perhaps the biggest problem of the proxy voting: it’s opaque, complex and often hard to accurately tabulate. Much of it can be traced to a category of shareholders known as objecting beneficial owners (OBOs), whose defining characteristic is an unwillingness — an objection — to giving up their voting anonymity. In addition to making it essentially impossible to communicate with them before a proxy vote, it’s hard to track their voting. What further complicates OBO voting is the fact that middlemen — such as tabulators and proxy communications firms — handle so much of the process. The lack of an auditable, end-to-end trail makes it hard to verify that votes were cast properly and counted.

Anonymity plus transparency equals blockchain

We at NuArca recognized that blockchain technology enables an opportunity to transform the proxy voting process by providing a secure, anonymous and auditable channel for OBOs to cast and record their votes. Partnering with AST Fund Solutions, which has deep experience and a major share of Wall Street’s proxy votes, NuArca created a blockchain-based proxy voting network. The solution is based on our proprietary immutable record-keeping technology, known as TransactChain, which we developed using the IBM Blockchain Platform.

Our blockchain-based proxy voting solution is game-changing because it creates anonymity for OBO shareholders while still allowing them to participate directly in the voting chain. Maybe the biggest impact: OBO votes are immediately represented within the proxy voting cycle, so that the people behind proposals can see, in real-time, the exact status of voting positions. That means they can make the optimal decisions — around whether to spend more, where to spend it and how much to spend — to achieve their desired outcome.

Want to see how blockchain can help streamline financial services?

A path to spending optimization

Today, our blockchain-based solution is being used by some of the largest funds in the US to conduct their proxy voting, and the numbers — and results — are impressive. We’re seeing customers with more than 8 million shareholders, representing nearly 4 trillion shares outstanding, able to get an instantaneous snapshot of where voting stood, which enabled it to make decisions on where to spend its remaining funds to get the vote that it wanted. That capability — to predict voting outcomes — was completely impossible before.

Ultimately, the ability to predict outcomes translates into spending optimization, or more voting bang for the buck. It means that instead of blindly throwing money in the attempt to solicit proxy votes — which can cost tens, or even hundreds of millions of dollars — companies can make smarter choices based on the predicted likelihood of achieving their voting outcomes.

Watch Todd Cooper talk about transforming proxy voting with blockchain:

From time to time, we invite industry thought leaders, academic experts and partners, to share their opinions and insights on current trends in blockchain to the Blockchain Pulse blog. While the opinions in these blog posts are their own, and do not necessarily reflect the views of IBM, this blog strives to welcome all points of view to the conversation.

Chief Executive Officer and Co-Founder of NuArca

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