The proxy process is dominated by middlemen, from solicitors to banks to tabulators. Tracking votes is like playing a game of “Telephone,” where one party hopes a message can be transmitted accurately through a series of disconnected intermediaries. Clearly, it’s not working.
Blockchain, the technology behind bitcoin, could be a solution.
It was invented to replace middlemen such as banks with software. A blockchain is a ledger whose data are copied on the computers of all of the participants, giving them confidence that their information hasn’t been manipulated along the way. The replicated data and advanced cryptography make blockchain software preferable to most other internet-based voting systems. Though it’s most associated with bitcoin, blockchain has been embraced by card-carrying members of the financial and legal establishment.
The technology “can provide better accuracy, greater transparency, and superior efficiency for settling securities trades and voting in corporate elections,” said J. Travis Laster, vice chancellor of the Delaware Court of Chancery, in a 2016 speech titled, “The Block Chain Plunger: Using Technology to Clean Up Proxy Plumbing and Take Back the Vote.”
The private sector—and particularly companies already involved in proxy voting—has taken up the call.
Broadridge is investing aggressively to figure out how to use blockchain for proxy voting and other applications. The company has spent about $150 million on it, according to its CEO, Rich Daly. In March, Broadridge used its blockchain software to allow investors to vote at Banco Santander’s (SAN) annual meeting, partnering with custodian banks Northern Trust and JPMorgan. Broadridge won a patent on its blockchain software in May.
“Blockchain can provide a greater level of transparency because everyone gets to look at the same record, and no one gets to change the record,” Daly tells Barron’s. “From a security point of view, from a transparency point of view, and from an efficiency point of view, it’s terrific.”
The Santander vote was a test run, a “shadow” vote taken alongside the official one. About a fifth of Santander’s shareholders used the blockchain system, and the company considered it a “true success,” says Sergio Gámez, Santander’s global head of shareholder and investor relations. It solves some of the cumbersome aspects of traditional voting, from auditing to reconciliation, he adds in a statement to Barron’s. And participants can learn the results much faster.
Broadridge isn’t the only company working on the issue. Nasdaq has been building and testing blockchain applications for proxy voting since 2015.
In 2017, a Nasdaq-owned exchange in Estonia let investors vote using a blockchain system. Estonia proved to be a convenient test case because residents there have established digital identities, so Nasdaq didn’t have to verify them. Last year, Nasdaq announced that it’s partnering with South Africa’s central securities depository to offer its blockchain software to companies there. “We’re now moving to the commercial stage,” says Andreas Lundell, a product manager overseeing eVoting and other products at Nasdaq.
Issuers and institutional investors must agree to use the new technology. There are other significant hurdles, too.“Candidly, blockchain today does not scale as well as it needs to,” Daly cautions. He expects the scaling issues to dissipate as the technology matures, similarly to how products like cellphones advanced.
In addition, blockchain will gain wide acceptance only if all of the participants can work together.
“We anticipate that the transition to blockchain will take some time, as market participants agree with the standards, and it will be critical to have a network effect,” Gámez observes.