Corporate (Crypto) Governance: The Need To Coin A Term
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This is not about regulation, so I urge you to set aside your fears of another open-ended article on regulating crypto currencies. I am no expert on the overarching governance of blockchain and ethereum based digital transactions, however, after over a decade in financial advisory and a focus on corporate governance, I contend that we are facing the single largest challenge to corporate governance in the last five centuries.
The origins of corporate governance
The origins of corporate governance can be found in the first companies that were formed sometime around the 1600s, namely companies trading with India [East India Company et al]. As a complex, multi-party organization, they implemented the first trifecta of corporate governance layers -the three main levels of authority- which included:
1. The Participants- individuals that funded the building of a ship in the company. They would be compensated by the returns made on a trade voyage. These are your modern day shareholders.
2. The Governors- a group of individuals chosen by the participants in the company to represent their interests and ensure profitable trade when they arrived at their destination. We can also call them the board of directors.
3. The Captain- he or she who steers the ship, who manages a crew and gets the ship [insert: company] from A to B. This is your CEO.
I argue that the fundamentals of corporate governance, which I define as the role, authority and timing of key business decisions between the shareholders, board of directors and CEO have remained largely unchanged until recently. Five hundred years of business structure is facing a paradigm shift brought on by Initial Coin Offerings [ICOs].
ICOs and a new layer of governance actors
Why do ICOs keep me up at night? Because at the time of writing this article, ICOs have raised over US$ 6 billion for firms that have issued some form of “coin”. Despite its widely accepted form of fundraising, thus far, I have not been able to have an honest conversation with any cryptoexpert on its implications on corporate governance. I feel obliged to reiterate that I am not concerned with the regulatory framework of governments trying to make sense of a self-regulated ledger, but rather what this implies for governance within a firm- if you allow me to call it “the micro economic governance” of the firm.
A CEO reports to his board of directors, who are in turn accountable to the shareholders of the firm. This is the basic premise of corporate governance and has remained that way since its establishment in the first companies of the world. I appreciate that regulation is a newer topic that emerged in later decades [predominantly during the great depression], but the fundamental trifecta of corporate governance layers remained in tact.
Enter the 'coinholder' like a shareholder, only not
A coin holder is neither a client nor a shareholder. Coinholders are speculative investors into a currency whose value is still yet undetermined. Adding this layer into the trifecta of corporate governance is no simple task. In not owning any economic interest in the company, one begins to question how is the interest of the coinholder reflected, or considered? Should they be allowed to vote on certain company matters? If the company issuing the coin is privately-held, then what corporate governance framework will coinholders feel comfortable with? These questions keep me up at night and perhaps my classical approach to business, or my generation’s naivety to the era of crypto presents more questions than answers.
Issuing an ICO? Transparency is key
What we know is that complex corporate structures and opaque corporate governance has led to headline-grabbing scandals [think Enron] in our recent history of business. The key for a business looking to start raising through an ICO is to ensure that transparency remains a core tenet of governing their relationship with their coinholders. Failure to do so will lose trust in this new relationship between shareholders, the board, the coinholders and the CEO, and the wider crypto space. At AQ&P, we have been working on the idea of Corporate Crypto Governance Code for businesses in this space. Setting out a transparent playbook around the disclosure and authority of coin-specific decisions will create effective guidance for management. It may be not the only solution, but detailing the relationship between your stakeholders may save your ship before you set sail.