Implementing a Capital Contract Framework for Silent Shareholders: The Role of Blockchain-Enabled Smart Contracts

Abstract

ABSTRACT This paper proposes a solution for the issue of silent shareholders lacking influence over company decisions and not receiving adequate compensation. Thus, we adopt Palmon, Kleinman, and Medinets’s (2022) “capital contract” framework and extend it by integrating smart contract functionality. This study then introduces a prototype to demonstrate how this enhanced framework can be implemented through blockchain-based smart contracts. By linking silent shareholders’ dividends to executive compensation, these smart contracts enhance the trustworthiness and transparency of the compensation processes for executives and shareholders. What is more, blockchain-based smart contracts automate the contract terms, potentially reducing the need for intermediaries to monitor managerial actions. Also, smart contracts are flexible to meet diverse reporting requirements and adapt to the unique characteristics of a particular company. Data Availability: All data used in this study are available in the manuscript. JEL Classifications: M40; O33.