There is no doubt that the actual structure of corporate governance contains many problems. The biggest one, in my opinion, is the inability of shareholders to express their power as owners of the company. In this post, I would like to introduce the philosophy behind DAOs, the decentralized autonomous organizations. This Idea is very interesting and could be a solution for the issues in our actual corporations.
The decisions of a firm
Basically, a firm has to make 3 decisions:
- Investment decision: choosing which project to invest in. A company must have a multitude of projects going on and start other ones to keep growing.
- Financing decision: figuring out how to finance this new project. The project can be funded by issuing equity or by borrowing money from banks or from the market through issuing corporate bonds.
- Dividend decision: choosing how to return money to shareholders. The money must be returned to the shareholders if no profitable use for it has been found. this can be done by paying out dividends or buying back shares.
Usually, the managers make these decisions. For some big projects, the approval of the board of directors might be required. But there is no way to prevent the agency cost when there is no alignment of the interests of the shareholders and the managers.
What are DAOs
The Idea of a DAO (Decentralized Autonomous Organizations) is extremely powerful. The investors, those who own DAO tokens, can directly vote for every single decision within the company. The DAO tokens might represent the shares in the company. The funds are held in smart contracts on the blockchain and the DAOholders can vote and decide how to allocate the company’s resources.
One can argue that this can be too much work for the investors. Usually, the investors just want to invest in a company and delegate the decision making to more competent persons. But one should understand that the involvement is not mandatory. Even if I believe that every investor should involve himself and spend the time to understand the company he invests in. This new Idea of DAO just opens up the possibility of involvement. The possibility that you, as a shareholder, have the possibility to influence the decision of the firm if you choose to do so. This is a major shift in a world where shareholders must fight for the right to manage their own properties.
I think in the future, we will see more and more companies adopting the DAO structure. We are starting to see more activist investing. Investors are more involved and want to know more about the companies they are investing in. And I believe the future investors will require companies to be DAOs. They will require having more control over the allocation of the company’s resources.