Introduction
Traditional corporate governance mechanisms have consistently faced challenges rooted in the so-called agency problem, a concept tied to the separation of ownership and management, particularly evident in larger corporate structures. This issue first identified and framed by Adam Smith, highlights the inherent tensions that arise when control is delegated from shareholders to managers.
Under the traditional perspective, corporate governance focuses on the configuration of the Board of Directors in public companies. These are typically large, listed entities owned by investors who acquire shares in exchange for capital. In such structures, the sheer number of shareholders and their fragmentation often results in no single entity holding decisive influence over governance. Consequently, a clear division emerges between shareholders—who act as principals—and managers—who serve as their agents.
Shareholders delegate governance responsibilities to managers, as direct management by all capital contributors, often numbering in the millions, is impractical. However, the fragmented and diluted nature of shareholding—common in large companies—reduces individual investors’ ability and incentive to directly monitor management. This delegation, while necessary, creates fertile ground for conflicts of interest. Indeed, due to weak control systems, managers might end up acting to maximize exclusively their own utility, prioritizing personal gains over the company’s welfare, thereby exposing organizations to inefficiencies, reputational harm, or even legal liabilities.
In such scenarios, executives might manipulate or selectively disclose financial reports, pursue empire-building strategies, resist take-overs at the expenses of shareholders’ best interests and seek unjustified remuneration by altering compensation structures within the company. Also, in entities lacking effective corporate oversight mechanisms, managers are led to take excessive risks, embracing potentially harmful strategies for the company while shielding themselves from the negative outcomes.
The cumulative effect of these behaviours undermines trust, transparency, and accountability of investors towards corporations, and – according to the research on the topic – might result in weakened economic performance. In this context, the adoption of various governance tools has proven insufficient to address agency-related challenges effectively. As demonstrated by several corporate governance scandals in the recent past, traditional governance systems - such as investors’ oversight, management incentive plans, appointment of independent board members, and activist control – failed to protect stakeholders from executives’ misaligned conducts and their outcomes.
Building on the key features of the agency problem and its potential to undermine corporate performance, this paper will examine solutions introduced by recent technological innovations. In particular, it will explore how blockchain technology can address these challenges by providing innovative mechanisms to enhance governance systems. Part 2 will explain how blockchain technology works in practice and will address its innovative character in comparison with previous systems of recording. Part 3, on the other hand, examines different ways in which blockchain technologies – due to their inherent features - can solve issues pertaining to the agency problem: from enhanced transparency and accountability to better voting systems and accounting. Lastly, the paper will evaluate the implications of these disruptive innovations with an eye on moral and ethical questions.
By examining the potential of blockchain technology to address these persistent issues, this paper aims to contribute to the discourse on how innovative tools can enhance transparency, accountability, and ultimately, corporate governance.
Blockchain: overview and essential features
Luckily, recent technological innovation become a major driver for improving the decade-old corporate governance. AsBrennan, Niamh M., Nava Subramaniam, and Chris J. Van Staden solemnly put it, “a revolutionary paradigm shift is well under way on how we think about business structures and governance as a consequence of disruptive technology and innovations (DTI)”. Technological advances such as artificial intelligence (AI), the Internet of Things (IoT), and distributed ledger systems such as blockchains, have led to unprecedented changes, often disrupting the way goods and services have traditionally been produced and consumed.
In particular, it is interesting to address the impacts of such innovations on governance systems in the fields of accounting, finance, management, as in each of those fields they call for more agile, complex and futuristic approaches.
Among such technological breakthroughs, blockchain in particular stands out as a tremendous alternative to classical financial ledgers, potentially reshaping the functioning of stock markets and, specifically, the governance instruments of the companies listed therein thanks to its unique characteristics. Before getting a deeper insight into its transformative potential, though, it is of utmost importance to lay down the aforementioned key features that paved the way for blockchain’s recent worldwide adoption.
First of all, blockchain might be regarded as a distributed ledger of a peculiar nature, representing in the first place “the technological evolution of a tool as old as commerce”. Indeed, while past transactions were recorded mostly on paper, nowadays the recording process occurs through computers. Differently from “archaic” means of recording, though, algorithms allow people to collaboratively create and share distributed ledgers, within a network of multiple sites, geographies, and institutions. Each participant to the network will then be entitled to access it and visualize changes to the ledger as they occur; at the same time, the information documented in it is shielded safe from external unauthorized invasions via cryptographic “keys” and signatures, which are unique for each user (meanwhile, controlling users’ relative powers). Essentially, by operating on a decentralized peer-to-peer network, the blockchain ledger serves the ultimate aim of recording transactions between parties in a verifiable and immutable way.
The blockchain system distinguishes itself from conventional ledgers also in the sense that, oppositely to classical recording systems whereby a previous register is being overwritten, each new transaction is grouped together in a block with other transactions and is added to the system in a linear and chronological way (hence, the name of “blockchain”). In absence of a trusted intermediary the validation of a transaction relies on a process for achieving consensus among all the participating parties or nodes. Thereto, each block contains a record of the previous block header to ensure the immutability of each transaction. As a result, the blocks are chained together and as a result, in order to change a transaction, one not only has to modify the concerned block, but also all following blocks. Once a block is finalized, it becomes immutable and goes permanently into the ledger. Thus, blockchains are able to provide a non-alterable timestamp which certifies the existence of the data file in that specific status at that moment in time. The ledger contains every transaction made in the past and is then replicated in many identical decentral databases that are simultaneously updated when changes are made to one of them. Due to its characteristics, the blockchain is capable of ensuring transparency to the users, as each transaction is immutable and visible to everyone with access to the system. Crucially, anonymity can be guaranteed to the participants to the network: each of them is provided with a unique identifying alphanumeric address (the public key) and can remain anonymous as transactions occur between blockchain addresses.
It is also noteworthy to highlight that information can be stored on a private or permissioned blockchain register, too.Unlike public ledgers, a ‘permissioned’ one is generally controlled by a central organization or by a group of participants, so that participation is restricted and controlled, and not open to anyone. Here, only authorized parties have access to the network, and they must have permission to interact with transactions on the ledger.
How can blockchain technologies contribute to solving agency problems
Better transparency and reduction of the structural information asymmetry
Firstly, embedding distributed ledgers in corporate governance might help shareholders in reducing the persistent condition of information asymmetry that weakens their position with respect to their managers’. The way blockchains work, indeed, cam extraordinarily enhance transparency within the corporate framework and ensures a closer shareholders’ supervision over the Board of Directors behaviors.
Generally, blockchain enables the digitization of assets - such as stock - and transactions in a highly secure and transparent environment, where (share) ownership can be constantly tracked throughout the whole settlement cycle.Therefore, the issue of "ownership transparency" that currently affects shareholding through intermediated accounts can be significantly mitigated, enabling real-time identification of beneficial shareholders. Thus, if used by public listed companies in an unrestricted, open format for share registration, blockchains would allow shareholders and other interested parties to continuously monitor the institution's ownership structure and track any changes in real-time. Once the information has been properly uploaded to the blockchain, stakeholders would be able to track modifications in the ledger as they occur, thus benefiting from a seamless and immediate flow of information regarding the owners of the stock, the performed transactions and, ultimately, the operational choices of the company. Such information would thus be readily accessible to all authorized users and consequently be of vital interest for many stakeholders, eventually addressing their behaviors.
Even though the use of shared ledgers does not directly affect truthfulness and accuracy of shared information, it inevitably makes the ownership base more informed and acquainted with what the company is doing, what might be its trajectory of development and, lastly, with potential inside threats. On a more practical ground, these properties of distributed ledgers would enable the observer to track down the holders of individual shares and the counterparties of relevant transactions. For example, in case a manager sold shares of his own stock, people might identify who the selling manager is and act accordingly. In fact, although being promised as completely anonymous (which is what drove the interest of many early adopters to blockchains), law enforcement officials have proved many times the possibility to trace back the identity of the private key’s owner – particularly when they have to deal with private or permissioned blockchains. Even without refined governmental tools digital wallets could be linked to specific stockholders by observing consolidated transaction patterns, such as a company awarding a manager a specified number of restricted shares on a given date.
Clearly, it is not an appealing future for every possible stakeholder; corporate raiders or unfaithful managers themselves – among others - might seek to hide their stock movements to those interested in seeing them. This becomes an undisputedly harder when stock shares are registered on a distributed ledger, and even a shift to a private or permissioned blockchain system might ultimately undermine efforts to conceal illicit activities, as the existence of the register would offer much more up-to-date and accurate information about each firm's ownership than what is currently available in financial markets.
However, the registration of company shares on public ledgers is not free from drawbacks. In fact, while raising shareholder awareness, it may also weaken the effectiveness of stock-based compensation programs for the executives. Real-time visibility of trades could reduce their strategic value for managers, who might lose leverage in trading, forcing companies to increase the salary-based component of compensation to compensate for the reduced appeal of equity incentive. Furthermore, blockchain registration would allow shareholders to observe when company shares are used as collateral for loans or tied to derivative hedging activities. Although these managerial actions are often sound, inexperienced investors could misinterpret them as negative, potentially causing unwarranted market reactions. Hence, while blockchain registration can enhance shareholder involvement in governance, it might also hinder the board’s ability to execute strategic decisions efficiently.
Additionally, implementing blockchain for share registration could lead to increased costs for training, transitioning systems, and adapting accounting practices. It is also worth to mention the risks that increased transparency of the share ownership could pose for the data privacy of beneficial shareholders. In fact, blockchain typically functions in the context of a distributed network and operates by spreading relevant information over multiple nodes so that data can be shared among the authorized members of the network. Used in this way, blockchain applications present the risk of facilitating access to private data. Consequently, the violation of shareholders' privacy must be carefully considered, and regulations must be designed or amended as necessary to implement transparency of beneficial ownership while at the same time maintaining an appropriate level of privacy and data protection. However, these costs might be outweighed by the enhanced transparency blockchains ensure in the corporate governance environment, equally embracing owners and others stakeholder and driving the institution’s profitability.
Improved voting reliability
Due to the inefficiencies currently affecting its underpinning mechanisms, highlighted by Kahan and Rock’s inquiry, also corporate voting might also be severely impacted by the recourse to blockchain. Indeed, today’s voting systems face a number of issues that contribute to the deterioration of agency relationships: according to the authors, complex proxy systems, lack of intermediaries' accountability, obscure voting instructions, and disputes over outcomes are all factors that create an environment where the true intentions of shareholders may not be accurately represented, leading to a worse corporate governance environment and impairing the overall efficiency of decision-making within companies. Crucially, if it is true that classical proxy voting allows companies to reach quorums even when shareholders may be absent from the voting meeting, they also are affected by inexact voter lists, incomplete distribution of ballots, and problematic vote tabulation.
An impactful way to address these shortcomings may indeed be the adoption of blockchains, given their capacity to guarantee greater speed, transparency and accuracy of the voting. Companies would also benefit from higher reliability levels deriving from the availability of copies of ledgers to all shareholders. The shift towards a full blockchain voting system could happen by assigning shareholders eligible “vote coins” in a number that represents their voting power. Voters would then express their choice via blockchain, thus recording it on the ledger and having the tabulation of votes remarkably simplified. Under this regime, which could give voters equal opportunity to intervene and resolve opacities on the outcomes of close elections, shareholders might be more incentivised to directly engage in the governance of the company and participate to voting on a more frequent basis.
Also, Yermack underlines that empty-voting techniques could end up being more difficult to execute under a blockchain voting system. Empty voting consists of borrowing share or derivative securities in order to gain temporary voting rights, with the investor meanwhile concealing his identity and not being exposed to the economic risk of the operation.
Simply put, such a practice is devised to boost a shareholder’s voting power even though he lacks an economic interest in the company. Empty voting can occur in a number of different ways. It can be fashioned with the shareholder purchasing the shares and then “laying off” some or all of the risk by purchasing derivatives or by “borrowing” shares – and the vote associated to them - prior to a shareholders meeting. This phenomenon, recurrent in corporate governance discussions, has not yet been fully measured, due to the absence of a mechanism allowing to obtain information on an investor's financial transactions. A viable solution to this transparency-related issues involves the usage of blockchain technologies. In fact, if owners were required to disclose their stock participation in the company – along with the operations associated with it – via distributed ledger, these alterations of the voting outcomes would become economically inconvenient, and the results of the voting process would more accurately reflect the ownership's will.
Accounting
Blockchain’s unique features unleash the potential for users of this technology to increase significantly the reliability levels of contemporary accounting practices, by enhancing transparency, security, and traceability of financial transactions. Blockchain’s decentralized ledger system in fact makes available for all the concerned subjects a real-time, immutable record of transactions, and reduces information discrepancies among stakeholders meanwhile preventing tampering or fraudulent alterations of records. This ensures that all shareholders, auditors, and regulators have a consistent view of the financial data, minimizing the opportunities for accounting fraud and misreporting. For instance, a number illicit operations might end up being not feasible anymore: back-dating of transactions or the amortization of operation expenses over longer periods would become impossible, given the time-stamped nature of the transaction blocks. Also, the existence of a permanent record of transactions can largely simplify the auditing process, making it easier for boards and stakeholders to monitor financial health and compliance.
On the other hand, it is true that this revolution in financial reporting methods would come with some drawbacks – that is, primarily, making proprietary information available to outsiders. Thus, this system would thus require extended access to the ledger by certain institutional players, such as taxing agencies, raising the issue of who is entitled to access those records. Companies and their owners shall carefully review such possibility, though, given the phenomenal benefits it provides. If all stakeholders gained increased trust in the soundness of the corporation’s data, minimizing the likelihood of financially risky behaviors by management (which often lead to the company's downfall), at the same time corporate entities – by enabling agencies to directly access the ledger and examine transactions – would save large sums on costly auditors, who have also proven to be inadequate or corruptible in some major corporate scandals.
In sum, blockchain can address corporate governance issues also by ensuring accurate, transparent, and secure financial reporting, which is an unanimously inescapable element for guaranteeing accountable and effective decision-making.
Smart Contracts.
In recent years, smart contracts and Decentralized Autonomous Organizations (DAOs) have emerged as innovative tools with the potential to profoundly redesign corporate governance. While smart contracts are self-executing agreements coded on a blockchain that can automatically enforce terms and conditions of agreed by the parties, DAOs operate as decentralized organizations governed by blockchain-based rules, enhancing transparent decision-making and increased stakeholder participation. By leveraging these technologies, companies can create more resilient and trust-based governance frameworks that empower shareholders and streamline processes removing the need for intermediaries.
Szabo describes a smart contract as "a computerized protocol that executes the terms of a contract." The core idea behind a smart contract is to ensure that agreements are automatically fulfilled. When applied to blockchain technology, smart contracts enable the execution of agreements based on specific, verifiable events—ranging from simple time-based triggers to more complex conditions like financial outcomes. These contracts monitor the agreed-upon terms and automatically initiate payments or other actions when those conditions are met. In this way, smart contracts can be viewed as a set of coded instructions capable of creating, executing, and enforcing an agreement through blockchain. Because the contract terms are permanently encoded on the blockchain, it becomes nearly impossible for either party to alter or renegotiate them unilaterally, reducing the risk of non-performance.
Smart contracts can be variously applied in the realm of corporate finance: they can automate the exercise of options in derivatives, enable instant transfer of collateral in case of default, or even determine the share ownership or membership in an organization. They also show promise in minimizing agency costs: indeed, by committing to a smart contract, a firm demonstrates its intention to act in good faith, protecting creditors and other stakeholders from fraudulent strategies and illicit behaviors.
According to Yermack, smart contracts may also help mitigate those agency costs which are specifically linked to risk-shifting and strategic defaults, thus often leading to reduced adverse selection in credit markets and lower debt costs across the board. This is possible by predefining a set of rules and performance parameters managers are required to follow for a given operational choice and embedding it into the smart contract, so that actions adhere to predefined risk thresholds and operational guidelines.
A more radical approach could be linking, via smart contracts, executive compensation to risk-adjusted performance metrics. For example, they can conditionally release bonuses only if specific financial or risk-related benchmarks are met, minimizing the possibility of speculative decision-making and aligning incentives with shareholders' interests.
Additionally, smart contracts may even lessen corporations’ reliance on traditional credit rating agencies, paving the way for an unprecedented transformation of the credit market. In fact, by overcoming the need of trust requirements from financial institutions, smart contracts can become the custodians, escrow agents, and “clearing houses” of the new financial market. Specifically, with smart contracts completely automating the transaction, a party’s credit risk – being it determined to predefined parameters - decreases significantly and the associated debt costs for companies tend to plummet. In such a context, the automation of agreements alone would serve as a credible signal of a company’s creditworthiness.
Some studies show skepticism on the role smart contracts as corporate governance tools. Piazza argued that “while smart contracts may reduce agency costs associated with debt, they would impose on corporations, and thus on boards, tight boundaries for strategic actions”. In fact, however efficient they may be, a widespread use of smart contract in the corporate environment might be prevented by the unwillingness of companies to commit themselves to a inflexible and irreversible course of action. E. Kun brilliantly exposed this shortcoming, reflecting on the value parties give in the contractual practice to informal dialogue as a way to settle their disputes: “self-enforcement, as secured by smart contracts, deprives parties of recourse to informal dialogue or other ways to ensure a more efficient solution to their dispute(s). Even if informal dialogue does not end with an efficient compromise, traditional contract law would offer other ways to restore the relationship via remedies, which would be more effective than the self-execution of a contract after a change in circumstances”.
DAOs
Nonetheless, one of blockchains’ most striking developments in the improvement of corporate governance mechanisms encompasses the use of smart contracts. DAOs indeed stand out as the foundation of an unprecedented democratization of corporate governance, marking a sharp shift from conventional corporate structures to a new flat and decentralized model of company management.
Decentralized Autonomous Organizations, namely, are entities governed by smart contracts on a blockchain, where rules are coded and enforced automatically via blockchain. They feature four key elements, which allow for their full functioning: a blockchain, a smart contract, a token, token-holders, and, ideally, an interface allowing participants to vote. The smart contract governing a DAO is called a governance smart contract and it is asked to verify token-holders, to receive and enforce proposals, and to provide for a record of all of the transactions and the information contained in the DAO.
Crucially, the governance smart contract also encompasses the code which assigns each holder the token representing his own stake in the DAO (hence, these tokens are named governance token and are stored in digital wallets with exclusive access given to their owners). Thus, the token-holder is endowed with the right to vote on DAO proposals, not unlike a stockholder's rights. However, contrarily to a stock certificate, the token not only allows its holder to exercise the right but is also the means allowing for the technical execution of voting. Thus, tokens serve dual purposes: they represent a stake in the organization and enable participation in governance activities. By storing tokens in their digital wallets, significantly, when token holders want to add or vote on a proposal, they simply have to connect to a website that communicates with the governance smart contract. Whenever the DAO is endowed with a specific interface, users are able to directly connect their wallet to the interface and more easily propose changes to the DAO, execute voting choices and even change the DAO’s operating structure.
Contrarily to traditional corporate governance models, in which a clear separation exists between ownership and managerial control, in DAOs, participants are simultaneously stakeholders and decision makers, fostering a flat and integrated governance structure: collective decision-making is ensured by allowing any token holder to propose changes or projects for the organization. These proposals are then voted upon by the community of token-holders, with the outcomes determined by predefined rules encoded in smart contracts. Thus, DAOs can operate in a decentralized manner, with no single party having control over the organization's activities or funds. By employing blockchain technology, these organizations further ensure that all transactions are transparent and secure, thereby fostering trust among the participants.
Such trustless, open-source entities – where all actions on the network are recorded, transparent, and subject to change by members – can nonetheless be seen as operating similarly to corporations, in the sense that they also have their own foundational rules governing their operation, much like bylaws. However, with DAOs, the need for traditional boards of directors tends to fade, given that organizations directly empower shareholders to make decisions. Thus, shareholders can collectively contract executives, delegate assignments, and modify the governing smart contract through consensus, promoting a more democratic and decentralized vision of corporate governance aimed to replace classical corporate hierarchies with a direct and immediate shareholder involvement.
Conclusion
In conclusion, leveraging blockchain technology and smart contracts corporations may release an unparalleled transformative potential for the resolution of classical corporate agency-related issues. By embedding transparency and accountability into management processes, these technologies can address the longstanding problems of shareholders’ information asymmetry, management’s misalignment, and opaque decision-making within the top-level frameworks of public companies. Meanwhile, smart contracts introduce a new level of efficiency in the corporate realm, minimizing the recourse to executive, financial and auditing intermediaries while significantly lowering debt and operational costs, as well as risks. However, huge legal and regulatory challenges come hand in hand with these technologies, requiring a concerted action of policymakers, companies, and technologists in order to ethically realize their full potential.
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