Blockchain and Transparency Term Paper
Corruption is viewed as a major factor in the protracted development and high poverty levels in various parts of the world. Fighting corruption is at the core of Sustainable Development Goals (SDGs) and is also considered key in achieving World Bank’s project of Financing for Development. Reports and empirical studies show that it is the poor who are affected the most with corruption. In Paraguay, for example, the poor have to pay close to 13% of their income in the form of bribes compared to the wealthy who loose just 6% of their income through this vice. In Africa, the mean comparable numbers for all states are 14% and 3.7% respectively (World Bank. Org, 2018). Each amount that is stolen from poor people denies them the chance to enjoy equal opportunities in life and also makes it difficult for governments to invest in their human capital. One of the main causes of widespread corruption across the globe is poor transparency (World Bank. Org, 2018). There is a lack of openness in business practices, government policies and overall market and economic systems. Blockchain is among the recent technological development that promises to offer this much-needed openness. The significance and potential of blockchain technology make it suitable for enhancing transparency across the globe.
The Issue of Transparency
Greater openness is currently a major objective for many state authorities as a more focus is being directed towards addressing economic and market crises. Governments that previously restricted access to their economic data are now willing to release it on a regular basis (Alton, 2017). This has been promoted by the need to make policy-making across countries more open. This shift has been caused by the need to respond to past experiences where lack of transparency has affected the smooth functioning of various economies and financial markets across the globe. It is also a reflection of how concerned the international community is with preventing future crises that are rooted in issues related to lack of openness.
The International Monetary Fund is among the main agencies that are heavily involved with promoting transparency across the globe (Alton, 2017). The organization has developed a strategy to promote openness that focuses on detecting a country’s vulnerability as early as possible. The plan also includes ways of considering various corrective policies that may be needed in order to regularly survey the economic policies of a country and how effective they are at contributing towards more transparent practices.
Scandals Related to Lack of Transparency
The need to promote transparency across the globe comes at a time when faith in the international system is waning. The lack of openness, in countries such as the US, has made majority of the public to believe that there is a plot to ensure the country’s economic system favors powerful interests. Most Americans believe that the lack of polices that can effectively implement practices that are based on openness has given corporations in the country great power to control its resources.
Using the US as a representative sample, 62% of Americans believe that the country is failing to promote transparency in its political and economic aspects. The result is that those who wield the most power can be exploitative without any repercussions.
Data from the Corruption Perceptions Index (CPI) 2018 reveals that lack of openness continues to be a major issue in a lot of countries (Transparency. Org, 2019). This has made it possible for powerful organizations and individuals to use public resources for their own public gain. In the year 2018, Denmark had the highest CPI. In recent events, the country’s efforts towards fighting corruption by promoting transparency were dealt a major blow when the Danske Bank was found to be involved in a major money-laundering scandal. Reports show that lack of transparent practices resulted in over $230 billion being laundered through the bank (Transparency. Org, 2019). According to the Organized Crime and Corruption Reporting Project (OCCRP), the transactions were linked to Laundromat schemes in various countries in Europe, notably Russia and Azerbaijani.
The OCCR has recently managed to reveal high major corruption cases that are related to lack of transparency across various countries in Europe. Among them include the following:
⦁ In the year 2017, Sweden-based Telia paid $300 million to the daughter of Uzbekistan’s president in order to receive lucrative contracts related to telecommunication deals in the country (Transparency. Org, 2019).
⦁ In Switzerland, Addax Petroleum, an oil and gas extractor that is based in Geneva, made several payments in Nigeria worth hundreds of millions that were not accounted for. The company admitted that it had shortcomings in its leadership and management which were caused by lack of policies to govern openness within the organization. According to OCCR, the payments made in Nigeria also highlight how serious the issue of transparency is in global economies and markets (Transparency. Org, 2019).
Influence of Information Transparency on Firms and the Society
Transparency in business operations requires firms to be open and informative concerning their goals, performance and operations. A study done shows that 94% of the consumer surveyed indicated that they would prefer to offer their loyalty to brands that demonstrate loyalty. Moreover, close to 70% of the respondents claimed that they would be willing to pay more for products that offer them absolute transparency (Alton, 2017). The benefits of transparency to a firm are not only external but also internal.
Internal transparency involves promoting lines of communications among employees that are open and being honest to workers about the company’s performance and operations (Alton, 2017). These are among the factors that are considered to boost employee morale and retention. Transparency establishes trust within firms and it gives employees a sense of fulfilling by working for a company that is committed to upholding ethical standards.
Information transparency can increase the level of confidence that people have in their financial markets (Alton, 2017). This is because it will lead to more openness in reporting, improve conflict resolution by providing all relevant facts to authorities and regulate the activities of firms. Combining these factors can lead to a stable global financial market that can serve the interests of society.
Reports show that members of society in various financial markets across the globe would appreciate businesses that embrace transparent public reporting (Alton, 2017). This type of reporting is a strong indictor to stakeholders that companies are committed to conducting their businesses cleanly. A lack of transparency in reporting has created concerns among the public that a lot of firms are involved in illegal activities such as bribery. In survey done, it was found that 70% of the companies included in the research had put in place anti-bribery policies (Alton, 2017). Members of the society, however, are more concerned with how committed these firms are to actually implementing these policies. Organizations need to demonstrate how dedicated they are towards fighting vices such as corruption and bribery. The best way to achieve this is by embracing information transparency. Organizations should collaborate with governments to establish policies that will govern them effectively towards being completely open in their practices. Such transparency will manage to influence the society that their government and organizations operating within their community can be counted upon in all aspects of their operations.
Organizational Transparency and its Role in Good Corporate Governance
Numerous instances of corporate malfeasance are as a result of blockades in the corporate structure that hinder efficient and complete dissemination of important information between an organization’s stakeholders (Schnackenberg & Tomlinson 2016). This kind of unhindered transfer of information requires trust and a fundamental cross-organization value. It also requires that an organization’s stakeholders are willing to face the existent limitations and work towards fixing them (Yermack 2017, pp. 11). Good corporate governance often means that the stakeholders have the interests of the organization as the priority before any other agenda; personal or otherwise (Oxelheim 2019, pp. 192). Hence, the most required values in quest towards realization of the same are trust, disclosure, clarity and accuracy.
Disclosure entails in this context requires voluntary release of the required information to the relevant. While encouraging this particular course of action, the organization’s stakeholders often recognize the risk in doing so and have to make a conscious decision to proceed despite the presented risk scenarios. Clarity requires that the information being disseminated is done in a lucid and coherent manner that can be understood and used in relevant departments across the organization. The information also has to be accurate and reflective of condition, states, and actual figures where necessary (Iliev et al. 2015, pp. 2172). This is important as many decisions are often made based on this information. More importantly, the accuracy of the information presented is often an indicator of integrity levels within the organization.
The concept of transparency is very important within an organization, more so, in relation to achieving cross-organizational good corporate governance and the realization of its corporate social responsibility (CSR) goals. In this regard, the management of transparency is important as it ensures certain safeguards are made to protect the availed information from manipulation and tampering; actions that could very adversely impact the use of the said information (Schnackenberg & Tomlinson 2016). Hence, modern technology presently available an applicable in various fields can be implemented to streamline the transparency management process.
There is need for completely ubiquitous technology that enables transparency in the corporate framework. Moreover, this technology is expected to eliminate the risks associated with data manipulation. One of the most popular forms of this type of technology is blockchain (Martyn 2018). According to the research article, ‘Corporate governance and blockchains’, blockchain technology has proved capable of satisfying this need within the world of retail and manufacturing. This is an industry that requires high scrutiny of the actions of corporations and the origins of products (Yermack 2017, pp. 13). The implementation of block chain technology makes it possible for independent retailers as well as large corporations to give consumers peace of mind with regards to the manufacture and delivery of products.
What blockchain does most efficiently is essentially reducing the risk to the producers who can lay bare information that previously had to be withheld for fears of issues such as industrial espionage and sabotage (Montecchi et al. 2019). It also ensures that a major stakeholder in all commercial transactions, the consumer, can have the faith and trust reinforced by being made aware of this crucial information. If the consumer has a mechanism to ensure that their product originates where it was initially stated by producers and retailers, there is less likelihood of feeling scammed. Using the example of fine jewelry, consumers can utilize blockchain technology to ensure that their jewelry did not originate in an environment that practices unethical employment practices as well as its authenticity (Francisco & Swanson 2018). This covers many of the aspects of transparency that are becoming critical from a marketing and logistical standpoint for many corporations. While a company can advertise its commitment to integrity and sustainability, nothing can be more reassuring than a process that empowers consumers with verification of their expectations. The use of blockchain technology can be a pivotal tool from marketing standpoint as embracing blockchains provides the type of transparency that is less controlled by the manufacturer or retailer themselves (Francisco & Swanson 2018, pp. 2). This in effect challenges the notion of an ulterior motive with regards to CSR and sustainability practices. The motives become less critical and consumers can simply commit to brand loyalty out of the reassurance provided through embracing blockchain technology.
While blockchains remain a valuable option in the quest for transparency, the challenge remains that many manufacturers are not in a position where they can comfortably provide this information (Puthal et al. 2018, pp. 19). While transparency through the blockchain pipeline is quite revolutionary, disclosure has its drawbacks. Disclosure of a firm’s information about a firm’s operational data and governance strategies may attract more investors due to the clarity of the firm’s operations and hence result in increased assets in the capital markets (Armstrong et al. 2016, pp. 13). Conversely, it places organizations in a position of vulnerability and potential anti-trust actions from competitors who may collect the information via the transparent disclosure and use it against the said firm. Additionally, in low performing stretches of time, investors may have access to information painting the firm in negative light and thus may be led to make decisions reducing their investments or pulling out entirely (Falkheimer & Heide 2015, pp. 134). This quote speaks both to the proprietary nature of business as well as the financial concerns inherent in full transparency. This is the dilemma from both a marketing and fiscal standpoint that many firms are facing in this era of globalization. Companies that are in a favorable position to provide full transparency have an advantage; however they are also under increased scrutiny to uphold stringent standards (Falkheimer & Heide 2015, pp. 136). Other companies that do not offer full transparency may benefit from lack of disclosure in many respects, however they are likely to suffer in comparison to competitors who embrace a more transparent process (Montecchi et al. 2019).
Significance of Blockchain Technology
Blockchain technology was originally developed for Bitcoin. It is basically a distributed ledger that operates on a peer-to-peer network consisting of participants who are unaffiliated (Puthal, et al 2018, pp. 19). This technology has gone a long way in revolutionizing transactions by spreading control and significantly the level of transparency. This has eliminated the need to include centralized authorities that were traditionally involved in controlling and verifying transactions.
The use and significance of blockchain has grown in that it is no longer limited to Bitcoin. Blockchain is currently being considered in the transformation of government and business processes on a wide scale (Puthal et al. 2018, pp. 19). For instance, blockchain technology is being utilized in the recording and supervision of details or transactions pertaining assets ownership. Additionally, the development of automated contracts has been simplified by the advancement in technology.
Investment trends across the globe reflect the current perception of blockchain. Reports by Goldman Sachs show that venture capital firms spent over $1 billion on this technology between 2012 and 2013. In 2015, financial institutions spent $ 75 million on blockchain technology according to a report conducted by Aite group (Puthal et al. 2018, pp. 19). This was twice the amount spent in 2014.
Potential Global Impact of Blockchain
The adoption of blockchain will disrupt leading economies across the globe. The current global economic scenario has the US dollar in control of the world’s economy. Its fluctuations significantly affect political and economic activities across the globe as the US dollar has risen to the level of a global currency (Prentice 2018). This dominance, however, will be eliminated with the adoption of blockchain. The technology will create a suitable platform for operating crypto currency that is not easily affected by events happening across the world.
Some of the industries that are going to benefit directly from blockchain include
Healthcare. Patient data is going to be easily accessible if all of it is stored on a blockchain. Health care reports show the following:
⦁ Inefficient data storage systems contribute to nearly $250 billion that is spent to process close to 30 billion transactions related to healthcare in a single year (Prentice, 2018).
⦁ Close to 65% of physicians are not pleased with how timely information is accessed and transmitted (Prentice, 2018).
⦁ Over 85% of mistakes in healthcare are related to inefficient administrative systems and practices. Moreover, over 80% of serious medical errors result from issues related to miscommunication that occur while transferring patients to various care settings (Prentice, 2018).
⦁ Close to 25% of malpractice claims are related to diagnoses that are either missed or delayed due to problems that occur in patient hand-off processes (Prentice, 2018).
With blockchain, the complexity of handling multiple patient records in numerous entities is going to be significantly reduced. Currently, healthcare records and information is scattered across organizations. This is an issue that will be resolved by having a single ledger that is tamper-evident that cannot be changed. This is going to significantly reduce paperwork and increase the efficiency of healthcare services.
Banking. Blockchain will significantly reduce fraudulent activities as well as protect the privileges of customers. Blockchain technology functions on a network that is decentralized (Open Access Government, 2019). This makes it difficult to make changes once the entire network system is developed with its initial standards. For changes to be made, the entire system would have to be changed which is impossible. Moreover, there is no single central authority that monitors the data which significantly reduces the chances that the system will be breached by an individual or group.
Blockchain will also help banks to know their customers which will reduce identity threats. Attacks on banks and other financial institutions have increased in the last decade. Reports on the financial sector in the UK, for example, show that economic crime has resulted in losses worth 14 billion Pounds per annum between 2011 and 2018 (Open Access Government, 2019). Moreover, victims of identity threat lost a total of close to 35 million pounds between March and September of 2018. This represented a 25% increase from that of the previous seven month period. Blockchain will offer more transparency between bank users and the various parties involved (Open Access Government, 2019). This is going to improve the level of operative feasibility which improves the verification of transactions. Information will be scrutinized better to determine both viability and credibility before any transaction is executed. The result will be a significant drop in issues relate to identity threats faced by bank clients.
Dubai’s Ambition to Become the First Blockchain City by 2020
Dubai is among the major cities in the world that has recognized the potential that blockchain offers with regards to improving transparency and overall efficiency of operations (WBS, 2019). It plans to be the first city to embrace this technology extensively. Dubai’s aim is to access billions of Dirhams in the form of savings earned from the processing of documents and an atmosphere that promotes entrepreneurship and all types of business activities. To achieve this, the city will apply Blockchain to increase transparency and the security of digital payments. It also made an announcement in the year 2016 that by 2020, the goal is to have 100% of government documents stored on blockchain (WBS, 2019). This is in with making sure that government authorities lead by example in terms of improving efficiency.
Implication of its Adoption in Relation to Corporate Governance CSR and Transparency
Corporate governance refers to a system of rules and policies that are used to direct and regulate the processes of an organization (Puthal et. al 2018, pp. 19). This system is concerned with achieving a balance between the interest of various stakeholders of businesses such as customers, investors and the community. Researchers state that blockchain technology can greatly revolutionize corporate governance by making transactions to be both transparent and conflict-free especially among companies that are privately owned (Puthal, et al 2018, pp. 19). Such organizations that use blockchain, for example, are not going to be required to update their stock ledgers using manual methods or to pass information to shareholders every time there is stock sale or issue. The unprecedented transparency of blockchain will allow investors to determine their ownership positions.
A major impact of blockchain in corporate governance is the provision of secure proxy voting. This type of voting is a complicated affair for companies and can lead to flaws, wrong voter lists and problems with vote tabulation (Puthal, et al 2018, pp. 19). Blockchain presents the opportunity to solve some of these issues. Voters are going to be issues with tokens that reflect their voting power.
A summary of the benefits of using blockchain technology in corporate governance is as follows:
⦁ Decentralization. Blockchain will eliminate the need for third parties, creating a decentralized framework where rights are protected and power equally shared (Zheng et al. 2017, pp. 558).
⦁ Transparency. Blockchain will disintermediate transactions in order to make audit trails more effective and transparent.
Blockchain Issues that Need to be Addressed
Despite its great potential in improving transparency and the overall efficiency of global economic and market systems, there are concerns that blockchain technology has issues which could result in its failure (Bauerle, 2019). Foremost, system analysts state that the technology is merely a replication of a transaction that occurs in multiple devices. This means that for it to function efficiently, a lot of computation power is needed. The technology will, therefore, have substantial energy needs (Bauerle, 2019). Moreover, the technology is meant to store and to also verify the validity of every transaction. This is going to exert a lot of stress on hardware systems which can slow down the speed of various systems that use blockchain.
Additionally, some state that it is not realistic to believe that blockchain can be used as a substitute for trust in the real world. A lot of financial institutions have been reluctant in agreeing a deal to integrate blockchain (Bauerle, 2019). The reason for this is that the technology has refused to be under the authority of traditional regulations. Blockchain intends to eliminate intermediaries without considering the level of expertise possessed by those who bypass systems or conduct breaches intentionally.
The significance and potential of blockchain technology make it suitable for enhancing transparency across the globe. Blockchain technology has received a lot of hype but it is still in its infancy stage. It is, however, becoming increasingly clear that its possibilities are enormous. The significance of this technology cuts across various fields meaning that blockchain is likely to be very disruptive as its possibilities continue to be fully exploited.
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