Initiatives like One Click Orgs and Harvard University’s Virtual Corporations Project are paving the way for a new breed of virtual organisations whose legal underpinnings are wired up to electronic workflows. Such organisations open up intriguing new possibilities for collaboration, participation and value creation. But could virtual governance techniques also be harnessed by conventionally-structured corporations to speed up decision making and reduce bureaucratic overheads?
Numerous events occur in a company’s day to day operation which need to go through a formal governance procedure of some kind. When executives want to make a big purchase they may need written approval from the board of directors. If the board decides to issue new shares and raise investment they usually need formal approval from a majority of shareholders. Before the CEO of a venture capital backed startup can issue options to an executive they might need a special “class consent” from the investor.
These governance procedures provide checks and balances that ensure a business is run in the interests of all its stakeholders. They are defined by clauses scattered throughout the company’s articles, investment agreements and other documents. But there is a cost to these safeguards. Every time a governance process runs it creates a delay and absorbs clerical effort. The problem is well illustrated by looking at the process of securing shareholder approval through a written resolution.
The first challenge is working out what consent is needed from which shareholders. There might be multiple classes of shares with a variety of different powers. Once this has been established the written resolution is drafted along with any consents needed for specific share classes. The correct combination of documents is then sent as email attachments to each shareholder along with guidance on how to complete them.
Each shareholder prints the documents, ticks some boxes to indicate their votes, inserts the date and signs their name in the appropriate places. In some cases they might need to get a witness to sign and fill in their address and profession. When the documents are completed the shareholder scans all pages, attaches the resulting files to an email and sends it back to the company. Finally the shareholder puts the physical copy of the executed document in the post to be archived at the company’s offices.
As the executed documents arrive back at the company someone needs to check each one to make sure it’s been completed correctly. There are invariably mistakes, in which case the shareholder in question must be asked to repeat the process. Each shareholder’s choices are collated, including the consents from specific share classes. Eventually it becomes clear whether enough support has been received for the action can proceed.
This is exactly the kind of fiddly, labour-intensive process where virtualisation can make a big difference. One Click Orgs has designed a written resolution module that uses the internet to completely rethink how a written resolution works. The module’s designed to be used by established corporations with conventional articles. At its heart is a virtual model of the company’s corporate structure including all the different share classes, the thresholds for making decisions and the identities of shareholders, board members and senior executives. Issuing a written resolution using the One Click Orgs system starts with a duly authorised executive or board member entering the text on a web interface, adding form elements like check-boxes as required, then clicking a button to activate it.
At this point an email is automatically sent to all shareholders alerting them that a written resolution has been issued and linking them to a secure web page where they can read the text and respond. If any class consents are required they are automatically generated for the relevant shareholders. Once a shareholder has made their choices and digitally signed to execute the resolution the company receives an alert and a monitor tracking progress towards the approval threshold is automatically updated. Once the threshold is reached an email is automatically sent to everyone confirming that the decisions has been formally approved.
A virtualised written resolution of this kind could secure shareholder consent in a day compared to a week with the conventional approach. The effort for the company and the shareholder is greatly reduced. The scope for misunderstanding and error is almost completely obviated.
Previous technological advances have been used to speed up established governance processes without significantly changing their form. An eighteenth century shareholder would have received a written resolution from a courier who would have come by foot, horse-back, carriage or boat. The manner of the documents’ delivery has changed beyond recognition but the form of the document itself and the manual processes surrounding it are essentially the same today.
Combining virtual governance modules will eventually enable a company to automate complex transactions such as issuing new shares, including submitting electronic filings to the state regulator and updating the company’s books to reflect the new share capital. One Click Orgs’ project to virtualise the London Hackspace is the first practical experiment retrofitting elements of virtual governance onto a pre-existing corporate structure. I have a feeling it will not be the last.