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Is Technology Disrupting our Corporate Governance System?
by Professor Gaizka Ormazabal
Nowadays, few business topics draw as much public attention as digital disruption. Internet APIs, smartphones, blockchain technology, machine learning and data analytics (among other innovations) are giving way to the emergence of new business models and transforming the ways firms operate and interact with clients, suppliers, and other stakeholders. In this context, a natural question is whether this wave of technological disruption is also transforming corporate governance.
Recent survey and anecdotal evidence suggests that digital disruption is a major concern for boards. But is technology also transforming the functioning of corporate boards? Is it having any effect on shareholder monitoring? “Not much”, one could conclude at the first sight. However, even if true, such conclusion runs the risk of ignoring important changes that are yet to come.
Some of these changes relate to the functioning of corporate boards. For example, Netflix recently opened access for its directors to all the data on the firm’s internal shared systems. Of course, one could argue that there is only so much information a director’s brain can process. But advocates of technological change would counter that this is not necessarily a problem; artificial intelligence and machine learning can help directors by identifying correlations and by producing better forecasts. Not only that: computer-based textual analysis can help identify mismatches in wording and inconsistencies in numbers. In addition to enhancing access and quality of information, technology could facilitate the preparation of board meetings by automating mundane tasks.
What about shareholder monitoring? Can technology enhance shareholders’ empowerment? Consider the application of blockchain technology to the register of corporate shares. This innovation would enhance transparency; the register would be publicly observable and changes recorded instantly (this is possible through a process of computerized verification of transactions). Moreover, such register would increase stock liquidityby shortening the time required for executing and settling securities trades. This is important, because ownership transparency and stock liquidity go hand in hand with shareholder monitoring. Let us remember why.
First, liquidity is at the heart of an important mechanism through which investors put pressure on firm managers; the possibility of “voting with their feet” (i.e., selling their shares). Second, a transparent share register could attract some investors (e.g., institutions) and repel others (e.g., raiders). This matters because investors often differ in economic interests (for example, in terms of risk preferences or investment horizon) as well as in their ability to influence top corporate managers.
Technology also opens new ways to fight managerial opportunism. For example, consider a firm disclosing its ordinary business transactions on a public blockchain. This disclosure would result in “real-time accounting” (i.e., instantaneous financial information), which would facilitate monitoring of firm performance, and make manipulation more difficult. Similar technological developments could limit other types of managerial opportunism. For example, a blockchain register of insiders’ trades could reduce the profits from misusing private information, as outsiders would be able to observe managers’ trades in real time.
Can technology improve shareholder voting? Consider a firm holding a virtual shareholder meeting with a remote voting system. Remote connection would likely result in higher shareholder participation. Remote voting would address issues such as incomplete distribution of ballots, incorrect voter lists, and problems in vote tabulation.
Technology could also enhance the role of stakeholders in corporate governance. For example, customers could influence firms by sharing their views on social media platforms. Suppliers could protect themselves from client opportunism by using “smart contracts” (for example, consider supplier selling a device that stops working automatically if the payment is not done before a certain date).
Then, can we conclude that technological disruption enhances corporate governance? Not so fast: technological disruption also raises issues. Some concerns are obvious: hacks, privacy breaches... Other concerns are less evident. For example, transparency can induce short-termism and managerial entrenchment (by discouraging potential raiders). All this calls for a careful consideration of the potential unintended consequences of technological disruption. But, of course, let us also not forget that innovation requires assuming certain risks.
Gaizka Ormazabal
Academic Director
IESE Center for Corporate Governance
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