What Does The Future Hold For Tomorrow’s Organizations?

Decentralized Autonomous Organizations (DAOs) & the corporation of the future.

Decentralized Autonomous Organizations (DAOs) have intrigued corporate governance experts and directors around the world. Implementing corporate governance on a blockchain platform may seem like science fiction today, but it might become an organizational model for the corporations of the future.

The DAO was a decentralized autonomous organization, a first of its kind experiment, that operated as an investment fund in 2016. The DAO operated on the Ethereum network in a crowdfunding format, operated with a smart contracts system between investors, who comprise the shareholders of the company. As a virtual entity, it had no physical address, and no people serving in management positions. At the basis of its governance, the prevention of the accumulation of power by representatives, and the distribution of decision-making powers among all shareholders to guarantee shareholders’ interests and prevent the misuse of resources.

The token’s issuance raised 150 million USD, with the participation of 11,000 investors. The hundred “heaviest” investors held 46% of the company’s shares, the largest investor held less than 4% of the shares — meaning, the company has controlling shareholders, but their power is not as aggressive as it is in the business market. All investors have voting rights through digital tokens, and decisions are made by voting on proposals brought on the agenda by a “contractor” (a human subcontractor).

A group of human volunteers called “treasurers” examined the identity of the people behind the proposals, and before the vote on those proposals, made sure that the projects proposed were legally permissible. The profit from investments in such projects was intended to be transferred to the shareholders.

One of The DAO’s goals was to become an organization outside of any national jurisdiction, sort of exterritorial, to avoid violating the laws of any country and to guarantee its independence. The DAO implemented a form of governance allowing direct voting rights concerning each topic for each shareholder, not based on representative democracy, thus resolving the governance problem known in corporate governance as the “representative dilemma.”

The grand vision was to form a futuristic and groundbreaking model of a business organization guaranteeing the best interests of its investors and shareholders; a model for an organization simultaneously existing everywhere and nowhere, operated by unstoppable code.

This futuristic vision was lost due to a breach of the smart contract’s structure, which allowed a criminal investor to appropriate (to his version, in accordance with the organization’s rules) $50 million out of the company’s assets, without the ability to stop the breach even after it was discovered (the breach was defined as a failure of its planners’ programming logic). Freezing the finances, and returning some of the amounts taken, was only possible only by the Ethereum programmer community’s consent to perform a “soft fork,” and in actuality, approving the deletion of some of the financial transactions registered on the network.

The US Securities and Exchange Commission (SEC) reviewed The DAO following the breach and the theft of funds, which also included a review of the organization’s legal status and nature of the activity. Since no legal entity was registered, the SEC defined The DAO’s incorporation as a “general partnership,” and the investors as having unlimited liability. Thus, the investor in the DAO and the senior officers were defined as “treasurers.” The conclusions of the report, published in 2017, stated that “The DAO,” which sold securities to American investors, could not be released of its liability by operating without any legal entity, or by operating automatically on innovative technological platforms such as blockchain. It must be registered as required under the US Securities Act.

The DAO project may be dead, but DAOs live on

Various start-up companies around the world have been trying to implement the ideas on which the DAO was based, for the management of virtual communities and organizations, for social and business purposes. One of the companies (DAOstack) defines its vision as follows:

“Creating an operating system for collective intelligence and a new form of human association […] and creating a framework for decentralized blockchain governance[ …] will allow the interoperability of web companies, token economies, and consensus protocols that allow […] a new web of open collaboration, in which global networks can self-organize around shared goals and joint action […] that will impact every territory of life and will jumpstart the evolution of society toward a more cooperative and sustainable future”

DAOstack views itself as advancing the future of organizational structures, allowing for the reputation management of its community members, as well as rewarding them through a token economy, encouraging the involvement and contribution of community members.

The “Colony” platform. Another DAO solution, defines its vision as a platform for open organizations, promoting decentralized decision-making, work division, and management. The platform allows them to empower employees who are committed to the work, and who take part in open and transparent decision-making, providing opportunities for self-promotion, advancement of talent and abilities, and fair compensation. Companies such as “Argon” and “Wings” state their vision to develop an open and decentralized architecture for the empowerment and self-management of online communities.

Other platforms currently in the works, adapt existing corporate structures to decentralized systems. On the one hand, maintaining management and performance positions, as well as directors’ strategic positions, and on the other side, giving more freedom to the end users or community members, who can take a more significant part in decision-making and in performing the required work.

Governance systems cannot remain within the narrow framework of corporate governance

The companies referenced above, and other, are attempting to implement bespoke corporate governance principles with the intent of balancing between the needs of the investors, management, employees, and customers. Reality (Facebook, Google) shows that in actuality, the primary issues here are those examined on the state level.

The balance between freedom of speech and censorship, individual privacy versus public interest for open public information, funded campaigns versus free information, as well as ethical and moral principles — all of these are issues debated by states and societies. The public view of international mega-corporations as the “Facebook state” or the “Google state” is based in reason, which is why we must pay attention to governance or politics at the basis of their global activity of the broad social level.

Researchers warn that despite their commitment and faith in decentralization and democracy, blockchain governance models unwittingly preserve power at the hands of a technological elite making its own rules of activity and governance on platforms which, in the future, would be used by millions of users (Lundy-Bryan, 2019). It turns out that the power axes the blockchain presume to disperse, in fact, move on to new hands, without changing the power structure itself. The power apparatus, the concept of “fields” and the power struggles within them, have already been explored in Bourdieu’s philosophy and other theoreticians, decades ago, and they seem to be proven right even with regards to the organizations of the future and their supporting technology.

Those same super-users with their reputation, technological knowledge, leisure time to study the proposals on the voting agenda, actual participation in votes defining the rules of the game, concentrate power which their peers do not possess, and eventually, this system of governance functions the same as a representative democracy. These systems maintain the legislative branch (which creates the law), the judiciary branch (which interprets the law), and the executive branch (which executes the law). Alongside this, it appears that this new system of governance is better than the currently existing one.

Governance systems proposed by Decentralized Autonomous Organizations cannot remain within the narrow framework of corporate governance or the accountable and ethical management of business budgets. The central argument to be extracted from the design of governance values in the corporations of the future is that constructing corporate governance or financial systems are limited in light of the need for the management of such broad communities.

To allow democratic, participatory, and equitable conduct, systems must include a broader governance system which would use the state governance model. Meaning, a system to preserve “checks and balances” to prevent the concentration of power, along with the structure of corporate effectiveness, creating a “Web Constitution” to comprise a whole system of norms, morals, values, and inclusive governance.

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Dr. Millie Perry is BUG — Blockchain University Global, Chair and the Strategy, Policy, and Governance Director at the Hogeg Blockchain Research Institute at the Coller School of Management at Tel Aviv University.

* The future’s corporations are also defined as DAC — Decentralized Autonomous Corporates