Separation of powers is a core tenet of our constitutional democracy. The Legislature, Judiciary, and Executive Government each operate (at least theoretically) in complete independence.
As with most things, this separation is based on incentives. You can't have judges writing rules into legislation and then sentencing people based upon them. Similarly, the party in power can't have free reign to enforce rules and regulations as they see fit.
The practical and functional benefits of this system are relatively uncontested. It just makes sense. Interestingly, corporations, which in many cases now have spending power and influence equal to, or greater than, governments themselves, don't operate on the same model.
Most corporations have a single board of directors who take decisions in the best interests of their shareholders. Traditionally, this has been in pursuit of profit maximisation. It is now multi-faceted, including environmental, social, and governance objectives, creating shared value, and contributing to innovation and regulation.
As companies have grown into increasingly complex bodies with varying objectives, I question whether shareholder value can truly be maximised without more thoughtful governance.
A Slight Oversight
This post was inspired by a conversation between Tim Ferriss and Noah Feldman on The Tim Ferriss Show. For those of you who haven't heard of him, Noah Feldman is 'a Harvard professor, ethical philosopher and advisor, public intellectual, religious scholar and historian, and author of 10 books, including his latest, The Broken Constitution: Lincoln, Slavery, and the Refounding of America.'
During the conversation, the pair discussed Feldman's involvement in establishing Facebook's 'Oversight Board', a body whose purpose is 'to promote free expression by making principled, independent decisions regarding content on Facebook and Instagram and by issuing recommendations on the relevant Facebook Company Content Policy.' Essentially, prevent Facebook from doing stupid shit.
Despite his extraordinary success in growing and evolving Facebook (or should I say Meta), it's no secret that Zuckerberg has made his fair share of questionable decisions. In early 2018, he faced questioning by the US Senate with respect to data privacy concerns on Facebook and was heavily criticised for the role of Facebook in the 2016 election.
It is clear that corporate boards incentivised by profit maximisation do not make the most ethical and moral decisions. However, as companies play an increasingly important role in guiding social change, corporate governance needs to keep up.
Here is a quote from Michael McConnell, a member of the Facebook Oversight Board.
Michael McConnell, who is director of Constitutional Law Center at Stanford Law School, said he agreed to join the board because it recently dawned on him that “the real decisions about what people can say and how they can say it in our world are no longer based on Supreme Court decisions,” but by companies like Facebook instead. McConnell, who used to be federal judge, felt that joining this board was like joining a judiciary committee for modern times.
A constitutional lawyer has opted to join a private-sector board because he truly believes that social change is in the hands of corporations rather than the judiciary.
Shortly after a meeting with Feldman in late 2018, Zuckerberg approved the formation of the Oversight Board, announcing the founding members in May 2020. From October 2020, the board officially began its work.
This is one of the first, or at least most public, attempts to incorporate governance mechanisms using a third-party independent body with different incentives to the board of directors. While it remains to be seen whether Facebook's Oversight Board will effectively temper the company's decision-making on complex issues, it is a fascinating experiment in the governance of corporations and, more specifically, online platforms.
A few weeks ago, I touched on the transformative potential of Decentralised Autonomous Organisations (DAOs). DAOs adopt a similarly experimental governance system using a bottom-up approach. Members of the community (think shareholders) use governance tokens to vote on decisions of the organisation; decisions ranging from rewards structures to the direction of the organisation as a whole.
Blockchain-based organisations can make fast, majority-based decisions empowering participation while simultaneously ensuring legitimacy and security (no double voting, fraudulent voting, impersonation etc.).
The core tenet of DAO governance is the presumption that 'the majority is most likely to make the highest quality decisions.' As a relatively optimistic person, I'd like to think that this format is effective. While some participants may not desire active involvement in the DAO, and other more malicious actors may attempt to sabotage its progress, most people are good actors. This is helpful for decision-making.
As Feldman raises in the podcast, there is considerable experimentation required to develop the DAO governance model. Especially in areas where reasonable minds can differ, or individuals view decision-making with different time frames in mind.
For example, X may promote a long-term proposal with a high upfront cost which takes the technology organisation in a direction prioritising environmental conservation and impact. Y, on the other hand, may prefer a short-term proposal leading to a shorter-term liquidity event and revenue generation for the DAO.
Reasonable minds can differ. I believe that we often made decisions with shorter-term horizons in mind. In some sense, the brilliance and innovative genius of company founders like Elon Musk, Jeff Bezos, Jack Dorsey etc. is that they had a long-term vision for the scale and success of their organisations. If the majority of DAO participants do not share this vision, DAOs may not become the future Teslas, Amazons, and Twitters of the world.
Having said that, corporate structures serve different purposes. The sole trader corporate structure wasn't invented for multinational organisations with trillion-dollar market capitalisations. It is possible that DAOs serve a different function in the broader corporate ecosystem.
I hope that lawmakers recognise and validate DAOs as a corporate structure sooner rather than later. In Australia, the recent Bragg Reportmade this very recommendation. Time will tell whether and how quickly it is adopted.
The decision-making and governance aspects of DAOs are fascinating. While traditional corporations rely on a centralised board of directors and shareholder voting at general meetings, DAO participants benefit from greater participation and influence, which drives engagement and investment in the DAO's future.
Facebook's experiment with an independent board is a fascinating step towards the separation of powers in corporate decision-making. As decentralised governance models continue to develop, it will be interesting to see how modern governance evolves and the two forms intersect.