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Blockchain-enabled proxy voting on the horizon

Posted on June 13, 2018

Martin Wennerström
Martin Wennerström
Senior Associate, Corporate Governance Research

While blockchain technology is popularly associated with cryptocurrencies such as Bitcoin, its inherent use case lies in its capacity to maintain registries that are at once speedy, secure, transparent, coherent and reliable. As a result, new solutions have either been proposed, or are being developed, for such disparate areas as land registries, insurance, financial products, healthcare records, and smart appliances. Many of these fields are currently overseen by government bureaucracies or other third-parties, with comparatively sluggish manual input occurring for such mundane tasks as data entry, data retrieval, and user verification. Theoretically, blockchain-enabled “smart contracts” would allow these clerical tasks to be accomplished in a fraction of the time.

The proxy voting pipeline is characterized by the presence of several intermediaries between the beneficial owner or asset manager casting the votes and the corporate issuer receiving those votes at a general meeting. These intermediaries can include custodian and sub-custodian banks, financial technology companies, proxy advisers, and attorneys. Depending on the market, each step in this chain often requires the manual processing of physical paperwork, including signed ballots, powers of attorney, and shareholding statements. This labor-intensive process has survived to the present day, despite digitization, due to the difficulty of providing a platform that is both sufficiently secure and accessible to all concerned parties. Meanwhile, systematic voting verification has eluded the industry for many years, with agents having to manually seek confirmation from issuers.

As a result, several market actors have taken tentative steps to usher in blockchain-enabled proxy voting, either through the introduction of technical standards or through pilot projects conducted at general meetings. In November 2017, the US Patent and Trademark office awarded Broadridge Financial Solutions a patent for such a system. Broadridge, which plays a system critical role in the processing of ballots in its home US market, conducted two successful dry runs of a blockchain vote tallying system at the 2017 and 2018 AGMs of Spanish banking group Banco Santander. Similar projects have been conducted by NASDAQ, at the 2016 AGM of Estonian bank LVH Pank, and Kas Bank, a Netherlands-based custodian bank that deployed a pilot version of its own blockchain implementation at its 2018 AGM. Meanwhile, NASDAQ, Swift, and several central securities depositories, have as a consortium developed a set of technical specifications for proxy voting on a distributed ledger. In November 2017, NASDAQ signed an agreement to deliver such a system to South Africa’s central securities depository.

As it stands, both the propagation and impact of these systems are subject to speculation. So far, the technology has been limited to focused trial runs at a limited set of issuers within the financial industry. Wider pilot projects, involving issuers in multiple jurisdictions and industries, will need to be conducted before market actors have sufficient confidence to adopt distributed ledgers as the primary vote tallying method. Adoption may also, especially in several European markets, be met with political resistance, as the facilitation of cross-border proxy voting would bolster foreign investors’ influence. On balance, while institutional investors should prepare themselves for a move away from the current proxy voting pipeline, the shift will be far from immediate. The technology will likely be phased in gradually where both systems temporarily exist side-by-side.

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