Issue #11                                                                                              November 2019
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

Corporate Governance News

Latest developments on proxy voting advice debate in the U.S.
In August 2019, the Securities and Exchange Commission (SEC) issued a press release expressing that proxy voting advice constitutes a “solicitation” and is subject to the general antifraud provisions. On November 1st, Institutional Shareholder Services Inc. (ISS) filed a lawsuit against the SEC. On November 5th, the SEC voted to propose amendments to the rules governing proxy solicitation… read more
Softbank takes over WeWork while stripping Neuman of his controlling grip
Softbank has made a deal which grants it control of 80% of WeWork and gets rid of Neuman’s voting rights… read more
Mediaset and Vivendi to reach an agreement by November 22 
A Milan court has postponed its decision regarding the dispute between Mediaset and Vivendi for the merger of the Italian giant with its Spanish subsidiary until November 22 with the intention of allowing the two parties to reach an agreement… read more
Potential merger between Peugeot and Fiat Chrysler Automobiles (FCA)
According to sources consulted by Reuters, Peugeot and FCA have agreed to pursue a USD $50 billion merger that would result in the world’s fourth largest auto manufacturing group… read more
Thomas Cook’s failure triggers lively debate on corporate excess in the UK
According to the Guardian, the British Committee examining the failure of tour operator Thomas Cook calls for an urgent reform of the audit profession, a strengthening of corporate governance and a curb on executive pay… read more
Boeing and US aviation regulator (FAA) struggle to rebuild trust
According to CNBC, Boeing’s initial response to the first 737 Max crash is highly questionable, as it is that of the FAA which certified the aircraft. Boeing faces criminal investigation and a number of lawsuits, and the longstanding credibility of the aviation authority is under scrutiny… read more

In Case You're Interested...

PwC’s 2019 Annual Corporate Directors Survey

This survey captures views from over 700 public company directors across the United States and covers a spectrum of governance topics, such as board composition, board diversity, social issues, and culture and talent management… read more

2019 U.S. Spencer Stuart Board Index

Spencer Stuart released its U.S. Spencer Stuart Board Index which analyzes the board governance practices of the S&P 500… read more

2019 Spain Spencer Stuart Board Index

Spencer Stuart has released its 2019 Spain Spencer Stuart Board Index which analyses information from 100 companies listed on the Spanish stock market, including the 35 companies that comprise the IBEX 35. The data analyzed corresponds to the end of December 2018… read more

Exploring the G in ESG

S&P Global discusses the Governance component in ESG factors… read more

Climate Action 100+ 2019 Progress Report

Climate Action 100+, an investor initiative representing 370 investors with more than USD $35 trillion in assets under management, to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change releases its first progress report, which assesses the performance of 161 of the world’s largest greenhouse gas emitters in tackling climate change… read more

IESE's Recent Research on Corporate Governance 

“The Value Killers: How Mergers and Acquisitions Cost Companies Billions - And How to Prevent It”

Book (October 2019)

“The New Logic of Purpose Within the Organization”

Chapter (August 2019)

Book: Purpose-driven Organizations: Management Ideas for a Better World, Carlos Rey, Miquel Bastons, Phil Sotok. Cham: Palgrave Macmillan, 2019.
Author: Rey, Carlos; San Cristobal, Jon; Almandoz, John
Read summary

“Almirall: Orientando el futuro de la empresa”

Case (October 2019)

Authors: Caldart, Adrian; Canals, Jordi.
Read summary

“Al Jakani Computers”

Case (October 2019)

“Say on Pay at Citigroup”

Case (October 2019)

Recent Events

IESE CCG organized with ECGI the conference “Corporate Governance and Ownership with Diverse Shareholders”

IESE CCG and the world’s leading research institution on corporate governance (ECGI) co-organized the “Corporate Governance and Ownership with Diverse Shareholders” conference, which took place at IESE Business School, Barcelona on October 25-26. The Conference was sponsored by the Social Trends Institute. The high-level event gathered 107 leading scholars from top-tier business schools, regulators, business leaders, and multilateral organizations. You can access all the papers, speakers’ and discussants’ presentations on the conference website under the tab “Program”. 
Visit the Conference website

IESE CCG hosts ECGI’s Annual Members Meeting

The 2019 ECGI Annual Members’ Meeting took place at IESE Business School, Barcelona last October 24. This event was co-sponsored by IESE Business School, the European Corporate Governance Institute (ECGI), and the European Corporate Governance Research Foundation (ECGRF). It brought together senior academics and thought-leaders in business to discuss a range of important topics. 
Visit the event website 


IESE CCG, the Asian Development Bank (ADB), and representatives from the Securities and Exchange Commission in ASEAN countries gathered at IESE Business School, Barcelona, on October 27, to launch a joint research project.

Upcoming Programs

Executive Program: “Consejos de administración responsables”

Date: January 28-29, 2020
Location: IESE, Madrid Campus
Visit the program website

Executive Program: “Value Creation Through Effective Boards”

Date: May 18-21, 2020
Location: IESE, Barcelona Campus
Visit the program website

A Way to Learn. A Mark to Make. A World to Change
Barcelona    |     Madrid     |     New York     |     Munich     |     Sao Paulo