My law school Corporations professor explained corporations to us a little bit like this (in a nutshell, of course; trust me -- you don’t want the 1000-page version that our textbook goes through):
- People have money that they want to invest into projects in order to make more money, but they are busy and don’t have the time to sit and choose exactly what projects will be profitable
- Businesses need this money for projects
- Our solution: the Board of Directors
- Corporations appoint a Board of Directors to make big business decisions for the company. They are a group of trusted individuals who do things like hiring the CEO, deciding when a company should merge with another company, and vote on other big important decisions
- Now, a person can simply put their money into a company and trust that the Board of Directors will make decisions and choose how their money will be most profitable. People can worry about other things in their life while the Board of Directors chooses how to invest their money into the business
As you can see, this model requires trust in the Board of Directors. We get this trust in the current US system by two things: proxy voting and shareholder primacy.
- Proxy voting: you get to elect who sits on the Board of Directors, and you get to elect who makes the big business decisions for you (assigning a ‘proxy’ to make your decisions instead of voting on them yourself)
- Shareholder Primacy: a law that tells the people making the big decisions for the company that their number one goal is to make money for the shareholders (remember when you left your money with them to invest - this law says that growing your money you put in should be their number one goal)
This is a super crude explanation of how a corporation works. We give our money to elected people who make decisions on how to grow that pot of money.
Trust is not an ample resource right now. This is breaking down our current model of how corporations are run. Let’s look at Benefit Corporations as an example. Remember a few lines ago, we had that bulleted definition of shareholder primacy? Well, some people decided that making the big business people have a top goal of growing the money pot was not the best idea. They realized that maximizing profit sometimes led to things we don’t want, like destroying the earth or environmental pollution or treating people badly. So a few states decided to allow something called a Benefit Corporation, which says “your corporation can focus on growing the money pot, but you can also focus on other things like the environment and social good. You just have to tell people what you’re focusing on so they know what their money is going towards.”
If Benefit Corporations challenge the idea of shareholder primacy, then DAOs are a basic challenge to the idea of proxy voting and the Board of Directors. People are starting to question whether they trust the Board of Directors to make the decisions. Will the Board of Directors really follow the rules of the company? Are they making smart decisions? Is proxy voting the smartest way to make decisions?
In the simplest explanation, a DAO is a business that makes its members the Board of Directors. They decide not to elect a few people to make decisions for the whole company but to let everyone in the business have a vote on big business decisions. The laws are programmed into code called smart contracts, and the votes and decisions are tracked and carried out through these contracts on the blockchain. Instead of meeting notes being transcribed and decisions being released through filing forms and proxy statements, DAOs have the blockchain storing and sharing the information. Instead of meetings with a selected group of board members, DAOs have a chatbox function where everyone can weigh in on the decisions.
Our society is changing the way we want decisions made as our notion of trust and autonomy is changing. We want to have more of a say about where our money is going and who makes the big decisions tied to it. Law and business are working to address these issues in new and creative ways, like DAOs and Benefit Corporations. States like Wyoming have already proposed legislation so that companies can incorporate as a DAO under their LLC statute. It’s an exciting time to be alive as we see where these changes take us.