Council Post: Enhancing Traditional Corporate Governance With DAOs

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Rayne Steinberg is Chief Executive Officer at arcaan asset management firm investing and innovating in digital assets.

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Mathematician Andrew Wiles compared the process of doing mathematics to navigating a dark mansion, stating: “One stumbles around bumping into the furniture but gradually you learn where each piece of furniture is. Finally, after six months or so, you find the light switch, you turn it on, and suddenly it’s all illuminated. You can see exactly where you were.”

Much like Wiles’ account of doing mathematics, technology is full of promise and challenges. Blockchain technology, for example, expands far beyond cryptocurrencies and introduces connectivity and a framework that allows cooperation to be coordinated on a global scale without a centralized intermediary.

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A decentralized autonomous organization (DAO) is software running on a blockchain that is designed to replicate the company structure and achieve goals without hierarchical management. Whereas executives and boards govern traditional organizations, DAOs are owned and operated by their community; they rely on the rules programmed into smart contracts to execute governance decisions. These entities eliminate the necessity for human intervention and allow the coordination of processes that have historically related on a centralized authority. DAOs introduce a novel approach to corporate governance.

The corporate structure developed during the 17th-century advancement of trade interests by the East India Company and the Dutch East India Company. Monarchies offered shares to investors who would finance their charters, pooling risk and limiting their downside. The corporate form has remained relatively unchanged from the structures of those early joint-stock companies, and corporations have further reinforced centralized frameworks with management driven by top-down control. Conversely, the modern idea of ​​decentralizing governance is a considerable step-change characterized by tremendous possibilities and potential pitfalls in equal measure.

Centralization is a valuable paradigm for many business processes, including efficiency, resource allocation, speed and scaling. However, when control is centralized, so too is power. The principal-agent problem can arise when the decision-making of the few results in corruption or the misalignment of expectations of the majority.

For example, driven by the pursuit of economic prosperity, corporations have often placed a higher value on profit maximization and shareholder satisfaction than on their workforce. When a corporation’s culture and strategy fail to align with its employees’ needs, optimal performance is challenged by employee disillusionment and turnover, reduced quality or quantity of deliverables, decreased customer satisfaction, and poor public image.

The allure of DAOs is better alignment and symbiosis between stakeholders. While many DAOs are independent entities, a corporation could institute a DAO within its structure to enhance certain business areas or solve specific challenges. The transparent and heteroarchical nature of DAOs could elevate current practices to support democratized corporate collaboration and more collective governance dynamics.

Further, DAOs unlock the ownership economy, creating a structure whereby owners, stakeholders and contributors become the same. These entities energize projects that give people a greater sense of agency in their various communities. Members—instead of executives and boards—can create value and capture the upside. At the time of this writing, DAOs boast around $9.5 billion in AUM and millions of highly motivated people working to transform the way organizations, like companies, are architected, funded, organized and incentivized.

DAOs offer a promising look at how people can think about decentralized business models and the potential benefits to organizational governance, but we would be remiss to underestimate the complexity of transitioning from centralized to decentralized frameworks. Foremost, legal uncertainties abound related to operations, treasury management, taxation and liability. Regulators must be engaged to deliver new rules and regulations required for clarity and protection. Further, while decentralization is the principal tenet of DAOs, the lack of centralized control creates challenges in organizing complex operations. Additionally, certain decisions require specialization, and not all members are best suited to make them.

DAOs are certainly moving toward more efficient structures, but currently, many fall flat in coordination, efficiency, governance and scaling—not surprisingly. Change of this magnitude is difficult to institute quickly. The DAO dilemma considers this gray area between centralization and decentralization; instead of rushing development or hastily unseating existing frameworks, we can approach DAOs through the lens of progressive decentralization—methodically transitioning from centralized to decentralized governance.

Reshaping economic coordination is an enormous undertaking, and participants are figuring it out together as they go. As communities work to define DAO best practices, they would benefit from the insight of individuals with expertise in regulatory legal structures, financial services and capital markets. These thought leaders can question which aspects of their organizations might be energized by a decentralized methodology and consider how their experience could bring operational excellence to DAOs.

Approaching the discovery, experimentation and adoption periods of DAOs responsibly and thoughtfully is essential to getting it right. Consider the trajectory of human development—we endure a long gestational period, and, once born, we experience longer infancy than most animals. Although we are helpless during that time, the protracted infancy ultimately makes us powerful and connected.

In the case of DAOs, it is crucial to take a measured approach to the evolution of this model, as it involves learning and unlearning. In developing DAOs, members should be mindful of and accountable for the ideas and processes introduced into their new collaborative dynamics. With great power comes great responsibility to develop this space with sustainability, diversity, equity and inclusion in mind. Otherwise, DAOs may only create value for an exclusive group of people and risk reverting to the same consequences of corporations that operate with concentrated wealth and power.

Corporate and governance structures have slowly evolved over time, and like many innovations before them, DAOs are taking incremental steps toward uncovering a blueprint for success. They can be an impactful tool for empowering individuals and inspiring collaboration, but certain processes are still in the stumbling-around-in-the-dark phase. Though DAOs have not fully realized the journey to decentralization, engaging in thoughtful consideration can further illuminate the path. Once we know the way and switch the light on, we’ll look around and marvel at how far we’ve come.


Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?


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