Future business structures
Digital technologies are expanding the boundaries and potential of economic activity. This can be seen in the platforms business’s use, the goods and services they purvey, the means by which they are financed and the mechanisms by which they are governed. Certain areas of law have been reformed as a consequence but in terms of business structures, enterprises have largely retro-fitted conventional, existing forms. The fragmented, transnational operation of such enterprises, involving new sets of actors (e.g. ‘the crowd’), create novel agency costs and raise questions about who is liable for business failures or conflicts of interest, as well as how they should be held accountable.
This sub-theme will consider the impact technological advances are having on the operations, governance and financing of businesses and as a corollary, explore whether they merit a re-imagining of conventional business structures (e.g. virtual enterprises; platform cooperatives) and liability regimes.
One of the most significant applications of blockchain technology has been the creation of ‘smart contracts’. They are paradigm-shifting for the formation, enforcement and execution of contracts. This is because their clauses are written in code on a blockchain that is immutable and less susceptible to ambiguity, they are recorded across globally-distributed network nodes rather than being concentrated in a single server or a document and they dispense with trusted third parties (e.g. courts) by enabling transactions (e.g. transfer of money, opening a door) to be automatically self-executed if certain conditions or obligations are met. It is also revolutionary in its expansion of potential counter-parties, from mediating the interaction between human beings to including machine-to-machine and human-to-machine transactions. However, the potential of smart contracts is not limited to washing machines automatically ordering detergent when running low or hotel doors locking and unlocking depending on whether its inhabitant has paid the daily room-rate. Smart contracts can be programmed to execute a series of complex transactions upon the fulfillment of certain conditions or the occurrence of certain events, thereby emulating the functioning of organizations. (Wright and De Filippi 2015: 15, Swan 2015: 53).
While still in its formative years, the decentralized business organizations that have appeared till date share some common features. Firstly, as with many start-ups, they identify a problem or a gap that needs to be addressed and posit a ‘solution’ that utilizes blockchain technology and applications built on top of it to coordinate concerned stakeholders and execute transactions. Decentralized investment vehicles like The DAO and Solar DAO were formed to provide a crypto alternative to conventional venture financing and to bypass the high commissions of crowdfunding platforms. Others, like the developers of Colony, seek to create workplaces that embody and operationalize non-hierarchical management by using smart contracts to distribute business ownership according to individual contributions (Rea, Fischer and du Rose 2017: 1) rather than solely prioritize capital contributions. Secondly, to accumulate capital and meet the initial capital and labor costs when financing options are limited, many decentralized organizations issue ‘tokens’ to contributors of work and cryptocurrency that variously confer governance rights and, once the token gains wider acceptance, financial rights in the organization. (They, however, differ in the consensus protocols used to determine allocation of said rights.) Thirdly, they often blur the boundaries between the stakeholder groups of a corporation, with an individual filling the role of an investor, worker and manager, either simultaneously or over the course of the organization’s lifetime. While management functions can be widely distributed in such organizations, it is conceivable that as artificial intelligence become increasingly sophisticated, several of these functions can be taken over by algorithms, thereby allowing the entity to be truly autonomous (Wright and De Filippi 2015: 17).
For corporate lawyers and economists, the evolution of businesses on the blockchain raises fundamental questions as to the legal form that attaches to them by default and the congruence of such forms with the business’s objectives. With this in mind, what legal forms should be adopted by decentralized organizations? Conversely, should the law amend or provide new legal forms to optimally arrange the rights and obligations of decentralized (autonomous) organizations? These are the overarching research questions of this project. Given the exploratory nature of this research, these questions will be approached through a combination of literature reviews, legislative analysis and the close study of a purposive sample of decentralized autonomous organizations.
Legal entity forms are at the precipice of disruption in today’s economy. Recognition of the value created by, and mobility of, stakeholders of a business, assails the neoclassical notions that investor-owned corporations should predominate and that shareholders should primarily enjoy control rights. This raises questions of whether - and how - heterogeneous stakeholder groups can be valued, allocated control rights and managed within a firm.
We hypothesize that blockchain technology can be a potential mechanism to value and coordinate the heterogeneous stakeholders in a firm and stimulate the creation of legal entity forms other than the investor-owned corporation. The first generation of blockchain was known for currency transactions involving Bitcoin, but blockchains such as Ethereum have enabled the creation of more sophisticated financial and (quasi)equity instruments. This project will be a foray into blockchain as a valuation and coordination mechanism for multi-stakeholder firms and contribute to the nascent research on the impact of this technology on corporate governance.
This project will have four pillars. The first pillar will concern the normative question of why stakeholders other than shareholders should be able to receive control rights. The second pillar will involve exploring how the contributions of each stakeholder group can be valued, especially through the use of blockchain technology, and how consequently control rights can be allocated. The third pillar will address one of the central issues faced by the conferral of control rights to multiple stakeholders: collective decision-making problems. The project will involve combining literature reviews with qualitative research on multi-stakeholder recognition and governance, in both the analog world (e.g. commons) and on the blockchain. This will allow us, as part of the final pillar, to draw conclusions as to the potential and limitations of blockchain as a mechanism for assessing stakeholder value creation and resolving coordination challenges, so as to further the creation of alternate business structures.