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“Corporations are legal entities that own themselves.”
-Lynn Stout
The idea of companies being run for the benefit of shareholders is relatively new.
For most of the twentieth century, American corporations operated instead on principle Managerial capitalism: “A form of capital accumulation and organizational control in which managers are the central agents of power.”
This was the era of the “organization man,” when control of the company was separated from ownership, and professional administrators saw themselves as stewards of an enduring enterprise, responsible for balancing the interests of a wide range of stakeholders rather than serving shareholders alone.
Often, the most favored stakeholders were the executives themselves.
in Barbarians at the gatethe trend toward corporate self-dealing was clearly illustrated by the “RJR Air Force”—a fleet of private jets that CEO RJ Reynolds used for weekend golf outings and personal trips to his vacation home.
In one memorable case, the only passenger on a corporate flight was the CEO’s German shepherd (who had been sent home early from a weekend trip to avoid the consequences of biting someone).
The excesses of managerial capitalism are also depicted in the film Wall Streetwhen Gordon Gekko tells Teldar Paper shareholders that they are being exploited by the company’s management: “You’ve all been exploited by these bureaucrats, with their steak lunches, their hunting and fishing trips, their company planes, and their golden parachutes.”
Gecko’s message to Teldar shareholders – it they owned by the company, and therefore its executives must work for it – this was rooted in the thinking of Milton Friedman, who argued in the 1970s New York Times Editorial “As an executive of the company, the director is the agent of the individuals who own the company.”
Friedman added: “In the system of free enterprise and private ownership, the CEO of a company is an employee of the owners of the company. He has a direct responsibility towards his employers. This responsibility is to manage the business in accordance with their desires.”
He opined that in the case of publicly traded companies, the shareholders own the company, and therefore the executives work for them.
As counterintuitive as it may seem, it’s all wrong: “Corporations own themselves,” says legal scholar Lynn Stout He argues“Human beings also possess themselves.”
It shows that what shareholders actually own is, well, shares: “A type of contract between a shareholder and a legal entity that gives shareholders limited legal rights.”
Nowhere in this contract does it state that the executives act for the benefit of the shareholders. Or that they should favor investors over any other stakeholders, whether they are employees, customers, suppliers, society as a whole or the environment.
“The idea that companies are run to maximize shareholder value is based on false claims about the law,” says Stout.
Yet this is exactly the way corporate America has been run, almost universally, for the past three or four decades (since Gordon Gekko, basically).
Stout laments the short-termism she believes this has led to, arguing that the cult of “shareholder primacy” has led companies to target near-term profits at the expense of long-term investment.
(However, I argue that the current boom in investment in AI may refute this.)
Stout calls instead for a return to the kind of managerial capitalism that, she says, has successfully built infrastructure like railways and canals with less attention to the profits they produce and more attention to how useful they are.
“Investors in these early companies were usually customers as well,” she said. “They organize their companies to ensure that the company will provide good service at a reasonable price – not to maximize returns on investment.”
Is this how cryptographic protocols should be structured as well?
The current debate surrounding cryptocurrencies revolves around how to grant token holders the kind of rights that shareholders have He thinks They have it in traditional finance.
But if Stout is right, this may be the wrong target.
Without formal property rights, cryptocurrencies may attract investors less like Gordon Gekko and more like the 19th-century shareholders who eagerly financed socially beneficial railways and canals.
After all, railways and canals were networks, networks that might never have been created if nineteenth-century companies had been run strictly to maximize profits for their shareholders.
Protocols are networks too.
Even if these protocols are often run like corporations, Stout’s work shows that there is more than one way to think about what kind of rights investors should have.
If encryption protocols exist only In terms of maximizing returns for investors, yes, token holders should be granted rights that officially make them owners like Gordon Gekko.
But if cryptocurrency finance is meant to be a new type of participatory capital, it might be better to give token holders less rights.
Or maybe even nothing at all.
Rather than offering the kind of legal protection that is more likely to attract investors seeking to maximize profit, protocols can instead rely on legal protections. Users To finance their development.
This may allow them to evolve into something radically different from profit-maximizing companies.
It is conceivable that this will be the most beneficial security for token holders as well: investors who are also users may be treated better than owner-only investors.
When customer and capitalist are one, this is the only way to maximize value both of them Investors and users are building something that actually works.
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