The Impact of the Digital Transformation of Business on Corporate Governance. An Overview of Recent Studies

Journal of Corporate Finance Research, Vol. 13, No. 3, pp. 35-47, 2019

13 Pages Posted: 17 Jul 2020

See all articles by Ilya Ivaninskiy

Ilya Ivaninskiy

National Research University Higher School of Economics (Moscow)

Date Written: 2019

Abstract

This article presents a survey of recent studies on the impact of digitization, and particularly blockchain technology, on corporate governance and the principal-agent conflict in companies. The principal-agent conflict has been a centerpiece of the corporate governance research for more than 40 years. However, recent technological developments, and blockchain in particular, has created new avenues for exploration.

We survey the implications of blockchain for the principal-agent conflict in three parts:

1) the organisational environment, and the creation of the conflict;

2) common observable instances of conflict;

3) actions necessary to maximise the value of blockchain implementation.

We limit the studied conflict to the relationship between shareholders and management. We also limit the blockchain use cases to those currently in testing. The applications for blockchain in securities trading and for corporate functions automation via ‘smart’ contracts are both analysed. We also evaluate the implications for investor activism.

Our results indicate that passive investor behavior is at the core of the environment that creates conflict. One of the key drivers of low activity is a non-transparent voting process resulting in low participation rates. Studies indicate that blockchain can solve this issue, thus mitigating the conflict, and is an attractive proposition for board members. The most frequent instances of conflict are related to the composition of boards of directors and compensation schemes observed at shareholder voting. Using blockchain for settlement would eliminate ambiguity in shareholder registers and prevent such strategies as “empty voting”. Smart contracts promise automation of governance functions like audit, which also weakens conflict. Even skeptics agree that voting is a promising application for blockchain. However, there is evidence that blockchain poses its own problems, and that smart contracts are associated with practical risks. Some critics argue that blockchain is less efficient than conventional corporate procedures.

Blockchain is among the top digital technologies that business leaders have to monitor closely. As such, this overview of the most up-to-date thinking on the subject is relevant for anyone interested in the future of corporate governance and the digitization of business processes. This evaluation serves to highlight the current status of this innovative resource, outlining for both professionals and newcomers what exactly blockchain’s potential uses and implications are, while also outlining where a lack of quantitative research creates opportunities for further contributions to the research field. This study will also be instructive for those investigating blockchain implementation and the optimal characteristics of the solution.

Keywords: corporate governance, blockchain, digital transformation, board of directors, corporate voting, proxy contest

JEL Classification: G32, G34

Suggested Citation

Ivaninskiy, Ilya, The Impact of the Digital Transformation of Business on Corporate Governance. An Overview of Recent Studies (2019). Journal of Corporate Finance Research, Vol. 13, No. 3, pp. 35-47, 2019, Available at SSRN: https://ssrn.com/abstract=3635068

Ilya Ivaninskiy (Contact Author)

National Research University Higher School of Economics (Moscow) ( email )

Moscow
Russia

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