How DAOs Can Use Votermedia

 

Today I released a 7-page white paper How DAOs Can Use Votermedia – summary below:

 

Designers of future DAOs (Decentralized Autonomous Organizations) may find some useful ideas at votermedia.org/publications, especially in the paper Global Software Users’ Co-op.

A decentralized voter information system called votermedia, originally designed for corporate shareowners, has been developed and tested for several years in a large university student union – see Experiments in Voter Funded Media. Evolution of these ideas has generated several innovations, including:

• A continuous-time voting system for allocating flows of funding among teams who compete to serve the interests of a voting community – see pages 7-9 of Global Software Users’ Co-op.
• A design for liquid democracy – see Proxy Voting Brand Competition, proxydemocracy.org and page 2 of my 2010-09-29 comment letter to the SEC.

Any new DAO could adapt these ideas to create a competitive market for providing its token holders multiple benefits:

• voter information, analysis, insight, voting advice;
• software infrastructure, bug checking;
• contractors monitoring and critiquing each other;
• investment allocation, accounting, auditing;
• DAO governance oversight, critique, amendments.

Implementing these governance innovations in DAOs can stimulate similar reforms in conventional organizations, including corporations, co-ops and governments.

See white paper: How DAOs Can Use Votermedia

Introduction to DAOs (Distributed Autonomous Organizations)

To prepare for my next post “How DAOs Can Use Votermedia”, here is some background for those unfamiliar with Distributed Autonomous Organizations:

DAOs are a new design for an online organization, which requires little or no centralized controlling power (like a CEO, board of directors, or even a legal regulatory environment). Instead, DAOs are based on software code that distributes control widely among many participants, who may play roles similar to (but more powerful than) shareholders in a for-profit corporation or members in a co-op. Most of the software code is recorded in a blockchain, which also serves as a ledger of cryptocurrency transactions.

Existing corporations and co-ops, by contrast, tend to concentrate power centrally (e.g. in a board of directors), especially as they grow large. Boards may claim to be accountable to all those who can vote to elect them, but existing governance designs seem to let boards concentrate power in themselves through various techniques (explored throughout the votermedia project).

The first DAO to be created, known as “TheDAO”, raised an eye-popping $150 million worth of Ether (a Bitcoin competitor) from investors in its May 2016 initial offering. It was designed like a venture capital fund that would invest in projects approved by majority vote of investors. However, it attracted the attention of expert hackers who soon found a bug in TheDAO’s code, and siphoned off about $50 million on June 17.

Fortunately the code prevented the hacked funds from being traded during an interim period, which gave the Ether community enough time to design and execute a “hard fork” in their blockchain, reversing the hack’s transactions and refunding all investments in TheDAO back into Ether. So TheDAO no longer exists, but many observers and participants are anticipating and planning “new, improved” DAOs.

From my perspective working on governance reform, DAOs are an exciting innovation. They open a big door to experimenting with many possible governance reforms. In my next post I will reach out to share ideas with designers of new DAOs.

Background Reading:

• wikipedia.org/wiki/Blockchain_(database)
• 2016-04-14 zdnet.com/article/why-ripples-from-this-estonian-blockchain-experiment-may-be-felt-around-the-world
• wikipedia.org/wiki/Bitcoin
• 2016-06-29 nytimes.com/2016/07/03/business/dealbook/bitcoin-china.html
• wikipedia.org/wiki/Decentralized_autonomous_organization
• 2016-08-24 History of the DAO and Lessons Learned

 

Why I’m voting WITHHOLD on Fission Uranium (FCU)

“Using the internet for shareowner proxy voting … will awaken the sleeping giant of corporate governance – individual investors.” My optimism was premature when I wrote that in 1999. But finally the giant has awakened and is starting to stir.

Retail shareowners of Fission Uranium Corp (FCU) have joined forces via internet media, including their Stockhouse.com discussion forum, to challenge the incumbent board’s control of the company. It’s significant that retail investors own a majority of Fission’s shares, in contrast to the institutional investor dominance typical of larger firms.

#Cisco Proxy Advisor Proposal #corpgov

Cisco Systems’ ($CSCO) proxy statement in October will include a Proxy Advisor Competition proposal submitted by shareowner James McRitchie, editor of the leading Corporate Governance blog. Jim just published this post explaining it. [2013-11-05 PS: Jim has published another post, responding to Cisco management’s objections.]

Jim and I have worked together for years developing improved versions of this proposal (which is part of the broader votermedia project). It would increase competition in the market for proxy advice, and make professional advice available to all Cisco shareowners, not just the large institutions who now subscribe to advisory services. It helps solve the voters’ free-rider problem by paying for advice with their collectively owned corporate funds.

Proxy Advisor Competition Proposal

I am pleased to be working with James McRitchie again on a shareowner proposal for improving corporate governance. In 1999 we drafted, and Jim submitted, the first in a series of proposals for shareowners to vote corporate funds to pay competing proxy advisors. We have recently drafted the latest in this series, which Jim plans to submit to Costco soon. Compared to our earlier proposals, this new version would support four advisors instead of just one; it would take two years to implement instead of three years; and shareowners would vote after seeing the proxy advice instead of before. These changes are based on successful test implementations at the University of British Columbia — see “Experiments in Voter Funded Media” at votermedia.org/publications.

Here is our new proposal draft:

PROXY ADVISOR COMPETITION

WHEREAS many shareowners lack the time and expertise to make the best voting decisions, yet prefer not to always follow directors’ recommendations;

WHEREAS shareowners could benefit from greater competition in the market for professional proxy voting advice;

THEREFORE BE IT RESOLVED that Costco (Wholesale Corporation) shareowners request the Board of Directors, consistent with their fiduciary duties and state law, to hold a competition for giving public advice on the voting items in the proxy filing for the Costco 2014 annual general meeting, with the following features:

• The competition will be announced and open for entries no later than six months after the Costco 2013 annual general meeting. To insulate advisor selection from influence by Costco’s management, any person or organization can enter by paying an entry fee of $2,000, and providing their name and website address. Each entry will be announced publicly, promptly after it is received. Entries’ names and website addresses (linked) will be shown promptly on a publicly accessible Costco website page, in chronological order of entry. Entry deadline will be a reasonably brief time before Costco begins to print and send its 2014 proxy materials.
• The competition will offer a first prize of $20,000, a second prize of $15,000, a third prize of $10,000, and a fourth prize of $5,000.
• Winners will be determined by shareowner vote on the Costco 2014 proxy. The proxy will show this question: “Which of the following proxy advisors do you think deserve cash awards for how they have been informing Costco shareowners? (You may vote for as many advisors as you like. See each advisor’s website for their information for Costco shareowners.)” Then the name and website address of each advisor entered will be listed in chronological order of entry, with a check-box next to each. The advisor receiving the most votes will get first prize, and so on.
• It is expected that each proxy advisor will publish advice on its website regarding the Costco 2014 proxy, but there will be no formal requirement to do so. The incentive to win shareowner voting support and to maintain the advisor’s reputation will be considered sufficient motivation for giving quality advice.
• The Costco filing that reports the final 2014 proxy voting results will show the total number of shares voted for each proxy advisor.
• The competition will continue annually with the same terms, except that competitors who renew their entries for a subsequent year, by paying the entry fee within 30 days after the Costco filing of voting results, will have their names listed on the website page and on the subsequent proxy in the order of their voted ranking in the most recent year. New competitors can enter at any time before the entry deadline, and will be listed after renewed entries, in chronological order of entry.

(Further information on proxy advisor competitions: “Proxy Voting Brand Competition,” Journal of Investment Management, First Quarter 2007; free download at http://votermedia.org/publications.)

===================

The idea is that we shareowners can use our voting power to hold boards accountable more effectively if we have high quality professional voting advice. Although many institutional investors pay for proxy advice from the two major U.S. advisors, ISS and Glass Lewis, there is not enough economic incentive to pay for more than a minimal amount of proxy research, as explained on page 82 of “Proxy Voting Brand Competition“. The result: complaints about lack of insight, and insufficient competition.

From the March 2011 Altman Group Report on Proxy Advisory Firms:

“… one of the primary complaints from corporate issuers is that proxy advisory firms rely heavily on a ‘cookie cutter’ or ‘one-size-fits-all’ approach, and may base recommendations on inaccurate and unreliable information in particular cases.” [page 9]

“The investment manager for one of the world’s largest sovereign wealth funds indicated that it would like to see measures taken to promote competition among proxy advisory firms.” [page 31]

The above Proxy Advisor Competition Proposal would increase competition among proxy advisors, and pay them enough to provide higher quality advice, tailored to the specific corporation. The proposal organizes a corporation’s shareowners as a group, pays for proxy advice once, and shares the advice with the whole group. This “advice consumers’ union” approach may well get better analysis for lower cost than the current system of paying for advice one (institutional) investor at a time. It would also make the advice available to all Costco shareowners, including retail investors who typically do not get professional voting advice now. This proposal is designed as a template to improve the governance of any publicly traded corporation.

We welcome your comments. How can we improve this proposal? If it is implemented, what results would you expect?

Sad News: @MoxyVote is Closing #corpgov

Since 2009, MoxyVote.com has been a great pioneer in building a Client Directed Voting (CDV) system to empower individual investors to vote shares intelligently, by linking their votes with advice from respected sources. Unfortunately, the regulatory changes needed to make CDV financially sustainable have not yet been forthcoming. From Moxy’s closing blog post today:

It seems appropriate at this time to explain our rationale for closing. The simple answer is that we were unable to make any tangible progress on several key barriers to our success. These obstacles have been known for some time. In fact, we documented them very clearly nearly two years ago in our response to the Securities and Exchange Commission’s request for public comment on its publication entitled Concept Release on the U.S. Proxy System. For those that are interested, our comments can be read here.

In summary, our efforts thus far lead us to conclude that there are two primary obstacles that will prevent any individual investor-focused proxy voting websites from being successful. They are the following:

1. Individual shareholders have no legal grounds to compel their brokers to deliver ballots electronically to internet voting platforms. And, unfortunately, many brokerage firms have stated clearly to us that they will send them only when required to do so by regulators.
2. Proxy distribution/collection agents are presently charging significant fees to internet voting platforms for vote collection – a fee that should be paid by public companies and one that proves substantially more burdensome to individual voters than institutional voters.

The Moxy Vote team did a great job against tough odds. I hope they will come back to life at some point. But either way, their substantial contributions to showing what is possible in proxy voting reform will stand, and others will build on that foundation. Thank you Moxy Vote!

Petition for Disclosure of Corporate Political Spending

“A group of ten very prominent corporate and securities law experts submitted a formal rulemaking petition to the SEC last week urging the Commission to develop rules requiring public companies to disclose the use of corporate resources for political activities to shareowners…”
— Read more at CorpGov.net

You can support this petition by submitting a comment to the SEC by email following their How to Submit instructions — send to rule-comments@sec.gov and include “File Number 4-637” in your Subject.

You can read the comments submitted so far, including mine.

I blogged about this issue last year after the U.S. Supreme Court decision on Citizens United.

Rating the Raters

I applaud CalPERS for proposing that credit rating agencies (CRAs) should be hired by investors instead of by corporate management. This proposal was in CalPERS’ October 4, 2010 comment letter to the SEC:

“Current legislation through the Dodd-Frank Act … appoints the Comptroller General through Section 939D, to study an alternative means to compensate the CRAs in order to create incentives for them to provide more accurate credit ratings, including statutory changes that would be required to facilitate the use of alternative means of compensation.

CalPERS believes an alternative payment model should include the following:

• Issuers still pay for services rendered to obtain a CRA ratings. CRA revenues should be pooled and allocated to CRAs based on periodic voting process by “customers” – investor constituents.
• The voting process will be administered through a “proxy like” process and paid by CRAs.
• We believe this model should be transitioned over a 4-5 year period with increasing amounts of revenue at risk.
• Revenue at risk to CRAs will:
  – Create a market based results oriented feedback loop to CRAs;
  – Motivate CRAs to improve and maintain ratings process as opposed to relying on regulator edicts and audits;
  – Motivate CRAs to be more conservative in ratings new financial instruments or companies professing new business models;
  – Align the interests of CRAs with investors, who are true customers or user of information as opposed to issuers.
• Investors will utilize information gained from increased transparency and their customer experience to assess CRA relative skills, abilities and performance.”

This is similar to proposals I have made for investors to allocate corporate funds to competing proxy advisors. In my 2007 article “Proxy Voting Brand Competition” (available at votermedia.org/publications), I suggested that organizations hired by investors in this way could also provide other services such as compensation consulting, finding potential candidates for board seats, and auditing financial statements. Like these services, the determination of credit ratings would be more trustworthy and effective if performed by organizations loyal to investors rather than to corporate management.

If the competition for investor-allocated corporate funds is open to all types of service providers, then investors can choose which services and providers are most valuable, thus maximizing the benefit of this system.

At VoterMedia.org, we have developed, tested and implemented methods for allocating funds by vote among competing service providers. There are many possible ways of designing such a system, and some work much better than others. The paper “Global Voter Media Platform” (at votermedia.org/publications) explains the factors that determine success, and describes our test implementations.

As we have seen in our shareowner proposal campaign, CEOs and boards generally oppose such reforms. This is not surprising, since the proposals would increase accountability of CEOs and boards, thus reducing their power. These reforms will need more support from investors, whether via proposals in corporate proxies or via proposals to regulators.

We welcome CalPERS’ powerful voice in the push for corporate accountability by aligning the incentives of “infomediaries,” such as credit rating agencies, with the investors they are supposed to serve!

This is also published as a guest post at the CorpGov.net blog.

My comments on the SEC Proxy Concept Release

My comments (dated September 29) are now available on the SEC website page for comments on their proxy concept release.

Mainly I recommended the development of an open Client Directed Voting system. I’m pleased to see a growing consensus advocating CDV, including these diverse voices:

• John Endean, President, American Business Conference
• Thomas Quaadman, Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce
• James McRitchie, Editor, CorpGov.net
• John Wilcox, Chairman, Sodali

I won’t be on the new SEC IAC

I’ve had a great year or so representing individual investors on the SEC Investor Advisory Committee (IAC). (Here are links to its member list and SEC web page.) I’ve learned a lot from my colleagues on the committee and from SEC staff. I hope I have made a worthy contribution serving retail investors and the broad public interest.

The Dodd-Frank Act redefines the IAC, so the committee is now being reconstituted to conform with the Act. I’ve decided not put my name forward as a candidate for the new (Statutory) IAC. I tend to specialize in just a few areas of the SEC’s broad regulatory mandate, and once I have submitted my personal comments on their recent proxy concept release, I will have contributed the bulk of what I have to offer. I’ll blog about and link to my comments after I submit them later this month.

There is still plenty of work for the new IAC to do on proxy voting, but I am confident that there are more suitable candidates than I to help with that. I’m still engaged on these issues, and expect to stay involved one way or another. My main work continues on VoterMedia.org, pursuing governance reform for democracies and corporations.