Getting practical with DLT: Daml and the future of proxy voting
As distributed ledger technology (DLT) matures, the benefits become clearer on a broader range of use cases. Many of these applications are lower-profile than trading and can seem, frankly, sort of boring. But the value DLT provides in these settings is compelling.
Take standard corporate actions, such as dividends and coupon payments, stock splits, and stockholder rights management. In most cases, these processes are non-standardized, involving lots of manual processing and rework and unnecessary expense. For all of these practical applications, a smoother and more transparent DLT-based process delivers increased speed, efficiency, and accuracy. It also reduces counterparty risk for all stakeholders by clarifying exactly what happens when (e.g., transfer of coupon ownership, execution of stock splits). Costs go down and capital is freed up because there’s less need to set aside collateral.
In the past, large corporations paid little attention to the upside of streamlining these processes. They didn’t seem worth the trouble. But today, with a brighter spotlight being shone on corporate governance, it’s more important than ever to get these actions right.
Proxy voting is another high-impact use case for DLT. This process enables shareholders to influence corporate governance. Because corporations and their shareholders typically do not have a direct relationship, the proxy voting chain is complex, and communication is expensive, fragmented, and error-prone.
The problems are getting worse, as proxy vote volumes increase dramatically, thanks largely to increased interest in environmental, social, and governance (ESG) initiatives. Broadridge estimates that the number of ESG proposals up for proxy voting grew 25% since 2021, with support for such proposals up by a factor of eight.
As retail investors in particular are becoming more engaged with company annual meetings, there’s reason to expect that engagement to continue to grow given the rise in virtual shareholder meetings that was a product of the Covid-19 pandemic. Use of technology that encourages shareholder participation is only likely to expand—today, many retail investors who receive traditional ballots take no action, but technologies that remove barriers to participation will encourage broader voting.
Investors and other stakeholders (including brokers and custodians, beneficial owners, and auditors and regulators) want to know the results of such votes quickly and have confidence in the legitimacy of the results. Their expectations for transparency and anonymity are also on the rise, meaning the decades-old, legacy messaging-based systems that many companies use for proxy voting no longer suffice.
Specifically, these existing systems typically lack automated capabilities and harmonized data. That can lead to erroneous results, slow processing missed or repeated instruction sets. As issuers, investors and other stakeholders try to solve these problems, they duplicate work and use resources inefficiently. And issuers do not have any transparency about the identities of ultimate beneficial owners.
A better way forward
Digital Asset’s proxy voting solution is based on Daml, a smart contract language that simplifies multi-party workflows and addresses many common challenges in current processes. For instance, workflow automation and synchronization reduce the need for duplicative processes and manual checks. They also enable ongoing modeling, expert review, and updates in the event of changes.
Voters can be verified and votes processed quickly, accurately, and securely. A transparent process has built-in privacy, with information shared only on a need-to-know basis. A common set of reference data streamlines processes and improves transparency. Lastly, voting can be independently verified by regulators and other independent parties. All of these capabilities reduce the time from issuer funding to customer receipt, while time-stamped, end-to-end instruction sets from issuers to investors reduce the risks of missed or incorrect executions.
As with so many tech-driven processes, the devil is in the details. Technology leaders will have questions about the viability of shifting proxy voting and other corporate actions to DLT. The good news is that no disruptive and time-intensive “rip-and-replace” implementations are required. Digital Asset’s Daml coexists with existing environments and enhances current finance infrastructure, with business logic that sits on top of existing systems to serve as a virtual shared system of record. Further, the time to value is short, with ROI cycles measured in a few months rather than a couple of years.
Again, proxy voting and other corporate actions may not capture the headlines in terms of innovative uses of DLT, but on closer look, the benefits are eye-opening.