The most interesting debate in corporate governance is not happening in the boardroom or between activist owners and boards. Rather, it’s happening all across a field of public (aka “permissionless”) blockchains, as communities mostly made up of strangers rapidly realize they are stakeholders in multi-billion-dollar ecosystems. Acknowledged or not, these ecosystems are simultaneously experimenting with models to effect successful political, economic, and technological governance. Watching this play out is one of the most fascinating things I’ve seen in my career and it’s only just garnering mainstream attention.
Governance is about creating the framework within which goals and objectives can be pursued most effectively — building trust and fostering innovation, while acknowledging that it is not possible to maximize the latter without solidly establishing the former. Governance is also about allowing complex adaptive systems to evolve, but not allowing networks of connected people and technologies to become so dense that they invite what is known as complexity collapse.[i]
The current debate in the blockchain space is one of decentralized networks versus concentrated or centralized controls. This is not unlike the economic debate of many decades ago about which system is the most efficient at allocating scarce resources, markets or hierarchies. Economic theory used to argue that this choice was discreet. But, fortunately, some very bright minds identified this as a false dichotomy. If one made the choice of markets – favoring full individual liberty and decentralization — aspects of some systems would fail because they became too dense and trust levels were low. Garret Hardin’s famous Tragedy of the Commons noted how, without centralized control, common pool resources could/would be destroyed by selfish actors all seeking to maximize their personal benefit by consuming the resource before others beat them to it. But resolution of Hardin’s presumption begets the alternative of full centralized control. History, however, abounds with examples where centralized political systems and other failed experiments at over-reaching intervention led to the destruction of the growth in wealth and value they were intended to foster or protect.
Elinor Ostrom, Vincent Ostrom, Óliver Williamson, and many others, have conducted research supportive of the idea that when certain conditions are in place, polycentric models of control that blend markets and hierarchies are far more efficient than centralized controls, and far less subject to complexity collapse or commons destruction than uncontrolled networks.[ii]
In 2012, John Wiley & Sons published my book, Governance Reimagined. This book was about rethinking the approach to core governance models using ideas from network theory, systems theory, complexity science, psychology, and successful commons management, with the end goal of creating more value at all kinds of organizations as well as in spontaneously formed systems. Experimentation with concepts from these disparate areas is playing out and impacting stakeholders across many of the large public blockchains. But their integration is required for sustainable innovation and ultimately for blockchains to realize their full potential.
Evolution has played a big role in how the system of life on this planet has survived tumultuous times and how certain species have thrived during periods of relative stasis. But biological changes have taken place over millions of years. The evolution of corporate governance, particularly in the realm of publicly traded companies, seemed to be on a similar course up until 1992, when shareholder activist Bob Monks famously placed a full-page ad in The Wall Street Journal naming the directors of Sears, Roebuck & Co. and calling them "Non-Performing Assets.” He advocated for a change in governance including a separation of chairman and CEO roles, requiring directors to own shares in the companies they governed, and examining better uses of scarce and expensive capital.[iii] If recent headlines are any indication, more than 25 years after Monks made his daring proclamation, survival-of-the-fittest evolution is having its say about Sears’ future participation in the global economy.
Evolution in blockchain governance is happening at an almost immeasurable pace – far faster than the near-linear rate of change in corporate governance practices. It’s not taking place over millions of years, let alone decades. In some cases, successes and failures occur in a matter of weeks or even days.
An ever-expanding number of wildly divergent experiments in governance are taking place at public blockchains, ranging across the spectrum from full decentralization (markets) to hierarchies of more centralized control. And the best results will arise from governance of public blockchains that find the right blend between markets and hierarchies – those that foster trust, and distribute both authority and accountability. They will be the ones encouraging the best innovation and bringing blockchain closer to the mainstream success it will inevitably reach.
This evolutionary process is happening fast. It’s one of — if not the most — interesting and competitive debates in corporate governance that I have ever witnessed. Its outcome has the potential to generate more value, across divergent systems, than most people realize. It’s time for everyone to pay attention.
Article By David R. Koenig, Founding Principal, (b)right governance, Author, Governance Reimagined
David R. Koenig is the Founding Principal of (b)right governance, an advisory firm to boards and c-level executives around the world. He is the author of Governance Reimagined: Organizational Design, Risk, and Value Creation (John Wiley & Sons, 2012), is a Research Fellow and member of the Executive Advisory Board of the Center for Corporate Performance at the IIT Stuart School of Business in Chicago, an editorial board member and special editor at the Journal of Risk Management in Financial Institutions, as well as the Founding Principal of analytics firm The Governance Fund. He has decades of experience helping organizations to take risk better. He serves as a Governance Advisor to GoChain, a blockchain technology company.
[i] See, for example, May, R.M 1972. Will a Large Complex System be Stable? Nature, Volume 238, Issue 5364: 413-414 and Gardner, M. R., and Ashby, W. R., Connectance of large dynamic (cybernetic) systems: critical values for stability, Nature, Volume 228, 784
[ii] See Ostrom, Elinor, Beyond Markets and States: Polycentric Governance of Complex Economic Systems, Nobel Prize Lecture, December 8, 2009, Ostrom, Vincent, Tiebout, Charles and Warren, Robert, The Organization of Government in Metropolitan Areas: A Theoretical Inquiry, American Political Science Review, 55(4), 1961 and Williamson, Óliver. (2005). The Economics of Governance. American Economic Review. 95. 1-18, as examples.
[iii] Source: Robert A. G. Monks website. http://archives.ragm.com/Bob-Monks-Fact-Sheet.htm