Impact of digitalisation on corporate governance

Work processes have been mostly digitalised with the aim of improving efficiency. The fourth industrial revolution is expected to connect these digital work processes and thus improve efficiency even further. There is no doubt that these changes will also affect, in one way or another, the corporate governance of the companies focusing primarily on digital operations.

From the recitals of Directive 2017/828 – SRD II, it could be established that the corporate governance in the European Union is not optimal since the monitoring of companies and the engagement of the owners is inadequate and focuses too much on short-term returns. The relationships between the owners and the company are becoming more and more complex, which obstructs the flow of information and accordingly efficient exercising of the owners’ rights. The European Commission has already announced a number of actions in the area of corporate governance, in particular to encourage long-term shareholder engagement and to enhance transparency of the operations of the companies and the institutional investors. More active engagement of the owners in corporate governance is one of the levers that can help improve the company’s performance.

In view of those findings, the SRD II was adopted. As a result of the implementation of the SRD II, the Companies Act is expected to be amended in 2019. Because of the ownership of the shares through complex chains of intermediaries, it is difficult for the shareholders to exercise their rights. For the purpose of direct communication with the shareholders and in order to facilitate the exercise of shareholder rights and shareholder engagement, the SRD II provides a new regulation of the companies’ rights to identify their shareholders. Identification is a prerequisite to direct communication between the shareholders and the company. The SRD II also regulates the duty to transmit information along the chain of intermediaries to facilitate the exercise of shareholder rights. Intermediaries will have to facilitate the exercising of shareholder rights, including the right to participate and vote in general meetings, either by enabling the shareholder to exercise their rights or by exercising such rights on the shareholder’s behalf. The shareholder shall be entitled to confirmation that the company validly recorded and counted their votes. It seems that the easiest way to solve the obligations imposed by the SRD II is with the help of digital solutions.

There is no doubt that the digitalisation of the relationships between the shareholders and the companies could eliminate many frictions that arise in this respect. In the European area, digital solutions have been used for certain types of communication for quite some time. The company and the shareholder communicate primarily in connection with the preparation of the general meeting, participating and voting in such meeting, as well as in relation to the exercising of shareholder rights outside the general meeting. E-mails, company websites or public portals for informing (e.g. SEOnet), as well as on-line business registers (e.g. AJPES) are most often used for such type of communications. Different systems of electronic voting and on-line live broadcasting of general meetings are being used to facilitate the implementation of general meetings. A lot of consideration has been given to the introduction of virtual general meetings and the use of blockchain technology. The purpose of the digital solutions is to accelerate, make less expensive and simplify the interactions between the company and the shareholders, making the relationships more efficient and safer. The study conducted for the European Commission by Ernst&Young concluded that the willingness of the legal environment to use digital tools in corporate governance is not in correlation with the actual use of such tools. This means that the use of digital tools mostly depends on broader social and cultural circumstances and not the legal restrictions.

In Slovenia, digital tools are used for the implementation of the basic corporate governance functions. The Slovenian Directors’ Association has set up an expert team with the aim of reviewing possible corporate governance development trends as a result of the impact of digitalisation of operations and new technologies. The team observed that the blockchain technology could have a certain impact on the corporate governance. For the time being, a broader use of such technology is somewhat limited by the existing regulatory restrictions. Nevertheless, we believe that the technology could be used for more efficient and direct impact of the economic owners in the structure of indirect ownership of shares. With certain legal adjustments, this technology could be used for supporting the basic functions of the general meeting. Above all, the use of technology could reduce the costs and accelerate the convocation of a general meeting, forwarding of material, communication with the shareholders, shareholder identification, granting of the voting rights, voting and vote verification. As the second step, Slovenia could follow some other countries (for example Delaware) and enable the use of blockchain technology for the issuing of securities.

It can be observed at the global level that the technological advancement and fierce competition force the companies (e.g. Amazon, Airbnb, Google, etc.) to introduce new organisation models that differ from the standard hierarchical organisational structure, called platforms. A theory was developed at Tilburg Law School that such organisational model uses the technological solutions to facilitate the economic exchange, transfer information and connect people. Such companies do not have a hierarchical corporate governance model but rather a more levelled structure which allows for a better method of cooperation between different stakeholders (e.g. employees, developers, users, partners, etc.). The basic feature of the platforms is that individual stakeholders are rewarded for creating contents or work for the platform, which generates value and accordingly profit for themselves and for the owners of the platform. All of this enables a faster response to market developments and quicker implementation of innovations. From this point of view, the possibility of using the potential of all stakeholders included in the platform and significantly contributing to the company’s long-term successful performance should be considered for the purpose of corporate governance, not merely the consideration and protection of the owners’ interests. In the era of platforms it seems that the hierarchical structure is unable to efficiently follow and adapt to the technological advancement and the needs of the users.

It can be observed that digitalisation will undoubtedly contribute to more efficient organisation of relationships within the corporate governance. It could happen that positive effects of digitalisation would require a change in the relationships within the corporate governance so that they can follow the trends and achieve long-term successful performance of companies.