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Future of Corporate Governance Through Blockchain-powered Smart Companies

January 14, 2020

Sitting in the same room of thousands of entrepreneurs and business owners across the world

over the past few days, one persisting topic that kept popping up is our ability to adapt to digital

disruption. In the era when everything seems to be ripe enough for disruption left and right,

existing businesses are righteously concerned about the never-ending quest for ‘what next?’ and

more importantly, ‘how?’

 

Robotics, AI, coming age of this and that. But one of the underlying aspects I rarely find

entrepreneurs discuss is the structure on how their businesses are built upon to make these

advancements happen. The foundational pillars on which your castle is built upon, the rules for

the game you’re playing and legal frame within which your teams makes the most complex

decisions in: corporate governance, none else.

 

Corporate Governance Today

Regardless of the size, industry and model of your business, corporate governance determines

your ability to move. It is the system comprising rules, policies and processes to direct and

control your organization. One of the most important roles it plays is aligning its stakeholders

such as shareholders, owners, financiers and the regulators, just to mention a few. Essentially,

corporate governance provides the framework for reaching company’s projections and

practically covers every sphere of company management.

 

Manual paperwork and bureaucracy, the infamous characteristics of corporate governance,

means your key decision making process is exactly that. Lengthy and heavy processes means

that’s where you, or your hired workforce, will spend their mindspace on. Intuitively, you’d think

there must be more innovation in the space - but there really isn’t that much. And so this is

where alternative solutions come in.

 

Blockchain in corporate governance

An established school of studies has been conducted over the past decade in an attempt to

understand board performance better. Research shows that the main reasons behind board

failures is ‘invisible barriers’ such as meeting infrequency, miscommunication and misalignment

and conflict of interests. Many of these are directly linked to misinterpretation and lack of trust.

Most of which can be directly solved through blockchain technology and specifically, Smart

Company model.

 

I will go more into detail about Smart Companies further down this text but to understand why

blockchain has tremendous potential in the space of corporate governance lies in its ability to

govern transactions without trust.

 

The ability to execute transfers automated through smart contracts may just be the key

component solving many longstanding problems related to misalignment of the board of

directors. Blockchain’s DNA features lowering the costs of operation, unlocking greater liquidity,

more accurate record-keeping and transparency of ownership are not to be undermined. As

Harvard Law argues, these characteristics “have the potential to change corporate governance

as much as any event since the 1933 and 1934 securities acts in the United States”.

 

Regulated Blockchain

It is no surprise that decision makers from jurisdictions to stock exchanges are exploring the

use of blockchains to apply to their own models. In this light, although blockchain has been

criticized for not being useful in any real-world implications yet, I must say in the world of

corporate governance it proves out to be different.

 

I had the privilege to listen to Pascal Finette from Singularity University talk about emerging

technologies the past weekend and couldn’t agree more with his view: a technology may meet

all the market conditions of being the perfect solution for solving xyz, but as long as there is no

regulation around it, nothing real will happen.

 

And so has been the case with blockchain. With no regulations, the bridge between the tech and

real-world applications are just that far away. Therefore, ventures looking to make practical use

of their emerging technology need to be mindful of this. And this brings me to Korporatio’s

Smart Company model, a legal blockchain-powered entity.

 

Smart Companies Paving The Way

In essence, Smart Company is an entirely new form of business type (LTD., IBC) except it rivals

all traditional models by being fully automated by blockchain.

 

And certainly, it makes just that big of a difference. When you have the ability to run your

business in a structure that is legally compliant yet all its transactions happen in real-time and

are verified directly on the blockchain, this changes the game.

 

What this means for business owners is that managerial ownership structures become more

transparent. Corporate voting is easier, more accurate and secret strategies such as ‘empty

voting’ become more difficult to execute. The ability to have corporate shares as ERC-20 tokens

modified for security laws offers the means to assert and transfer ownership and liabilities of

real-world assets with actual value. Just to give you a rough understanding of the magnitude of

this untapped potential, it has been estimated that the total value of illiquid assets, including

real estate, gold., is no less than $11 Trillion . Roughly the nominal GDP of China, the world’s

second largest economy today.

 

For shareholders, Smart Company model offers nearly free trading and transparency in

ownership records while simultaneously showing real-time transfers of shares from one owner

to another. Taking this further, if Smart Companies chose to keep their financial records on the

blockchain, this unprecedented transparency would allow investors to identify ownership

positions of debt and equity investors and maybe even overcome corruption on the part of

regulators and exchanges.

 

But what about smaller enterprises these implications may not apply to?

Regardless of the size, type or life cycle of the business, one of the more powerful aspects of

this model is that it allows stakeholders to access current and accurate information at any given

time. An example I’d like to draw attention to is the outdated Annual General Meeting (AMG) of

Shareholders. While it still plays an important theoretical role in the agency world, in practice

this meeting is often considered a rigid, mandatory ritual, which remained unchanged for

centuries.

 

Ethereum-powered Smart Companies have the ability to remove the ritual of AMGs by creating

trust and transparency through its technology. For instance, in Korporatio’s Dashboard version

2.0, Smart Companies can directly present proposals, and shareholders can exercise their

voting rights. As voting results become instantly available after the cut-off, the majority

requirement is determined automatically coded in the governing body of smart contracts. After

this, the result of the vote has immediate legal liability as soon as the blocks on the chain move.

 

Realizing what a complex set of processes this simple solution is able to stack up and

streamline in seconds brings this whole topic into a new level. And since all of this can be

virtually managed through a click of a button from a single laptop, Smart Companies are paving

their way into minimizing the noise of outdated corporate governance and drastically simplifying

the process of decision-making.

 

Smart Companies and Jurisdictions

A variety of governmental agencies and international bodies have shown interest in regulating

blockchain-related activities, but so far, there is no global consensus on governing this emerging

technology yet. Many countries are under negotiations and starting to pilot more relaxed

regulations for blockchain-based companies. Against this backdrop, Korporatio’s journey to

open and successfully deploy jurisdictions on its own has been nothing short of

groundbreaking.

 

Speaking from a technical aspect, Korporatio already has the tech architecture designed to be

automated on the blockchain and therefore the model is fully scalable. Although it is notable to

mention that each new jurisdiction would require minor changes in the technology to be

deployed and therefore the Smart Company model may slightly differ per country in order to fit

the legal framework.

 

Notably, the first Smart Company model started from the Seychelles. In just one short year,

we’ve expanded to five more jurisdictions, with the latest being Wyoming, United States and

Singapore.

 

In for the Long Play

Thinking a bit further down the road, blockchain as technology will fade into the background as

user experience will lead the way into mass market adoption. With decentralized web or ‘web

3.0’ in the eyes of blockchain enthusiasts today, it is not hard to connect the dots in an economy

where digital entities are controlled directly by their owner via blockchain in the so-called

non-state-backed formality.

 

Not so far in the future, all business executions have the potential to run on codes. With

automated dividends, stock options, bonuses and self-executive accounting, corporate

governance will be converted into a digital ecosystem where transparency, immutability,

accuracy and security will be defined as basic currency.

 

Creation of new processes will be streamlined through shared Application Programming

Interfaces (API’s) across sectors and transactions sent out in digital currencies will be

automatically converted into fiat currencies. Reaching decentralized consensus, conventional

ownership models will be shaken up radically, just like today’s corporate governance.

 

And this is where Korporatio visions itself in the long-term: pioneering as an enabler for the next

generation of entrepreneurs to create and innovate hassle-free, in a system that leverages every

aspect of the blockchain technology. Invented by entrepreneurs to entrepreneurs. So that you,

as an entrepreneur, can focus on what really matters.

 

Lu Ying is the Chief Operating Officer of Korporatio. Lu has a diverse background from business strategy to C-level execution and startups to Fortune 2000s and intergovernmental organizations. Wildly curious about human behavior, macro trends and future, Lu explores systems shifts in the space of circular economy and decentralized models through blockchain governance. Interdisciplinary and nonlinear, Lu is also a World Economic Forum Global Shaper and sits on the Board of Entrepreneurs Organization Shanghai.

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