Blockchain Economy –

Corporate Governance and the Law as Code

Charles K. Whitehead

Agency Costs

Principal Agent

Asy

mm

etric

Info

rmatio

n

Self Interest Self Interest

Hires

Performs

An organization is a nexus of contracts,

explicit and implicit

The design of an organization addresses

the same common problems

Different incentives and uncertainty –

what will each party do?

Information and its distribution

Agency costs

Agency Costs

Shareholders vs. managers

Risk capital

Invested by shareholders who manage through

diversification, the purchase and sale of shares

Managed by the board and senior managers, who

can fall back on a “catch all” cushion to offset

losses

Agency costs

Diversified

Shareholders

Managers

Costs

Agency Costs

Shareholders vs. managers

Risk capital

Invested by shareholders who manage through

diversification, the purchase and sale of shares

Managed by the board and senior managers, who

can fall back on a “catch all” cushion to offset

losses

Agency costs

• Area Rug $87,784

• Mahogany Pedestal Table $25,713

• 19th Century Credenza $68,179

• Pendant Light Furniture $19,751

• 4 Pairs of Curtains $28,091

• Pair of Guest Chairs $87,784

• George IV Chair $18,468

• 6 Wall Sconces $2,741

• Parchment Waste Can $1,405

• Roman Shade Fabric $10,967

• Roman Shades $7,315

• Coffee Table $5,852

• Commode on Legs $35,115

Agency Costs

Majority vs. minority shareholder(s)

Benefits of control – to what extent can a

majority shareholder disproportionately benefit?

Agency costs

Majority

Shareholder(s)

Managers

Costs

Minority

Shareholder(s)

Shareholders/managers vs. creditors

Capital invested by creditors who (increasingly)

manage through diversification

Managed by the board and senior managers

Agency costs

Diversified

Shareholders

Managers

Costs

Creditors

Agency Costs

• Much of corporate law/corporate governance aims to reduce agency costs, e.g.:

• Voting rights and fiduciary duties

• Disclosure requirements (federal and state)

• Covenants and monitoring (for creditors)

Agency Costs

Mind the Gap

• Companies that transact on a blockchain can, at relatively low cost, bridge the informational gap between

directors/managers and shareholders, enhancing monitoring by shareholders and creditors.

Transparent real-time disclosure of transactions (but limiting access to competitive information); and real-time

income statement and balance sheet data.

Mind the Gap

• Companies that transact on a blockchain can, at relatively low cost, bridge the informational gap between

directors/managers and shareholders, enhancing monitoring by shareholders and creditors.

Transparent real-time disclosure of transactions (but limiting access to competitive information); and real-time

income statement and balance sheet data.

Mind the Gap

• Companies that transact on a blockchain can, at relatively low cost, bridge the informational gap between

directors/managers and shareholders, enhancing monitoring by shareholders and creditors.

Transparent real-time disclosure of transactions (but limiting access to competitive information); and real-time

income statement and balance sheet data.

Mind the Gap

• Companies that transact on a blockchain can, at relatively low cost, bridge the informational gap between

directors/managers and shareholders, enhancing monitoring by shareholders and creditors.

Transparent real-time disclosure of transactions (but limiting access to competitive information); and real-time

income statement and balance sheet data.

Diversified

Shareholders

Managers

Costs

– Weather

– F/X

– Oil Prices

Risk

Counterparties

Smart

Contracts

Pre-agreed arrangement to transfer risks to third parties who are

better able to manage those risks at lower cost.

Pricing and limits to be determined based on Risk Counterparties’

risk pricing systems.

Company can assess which Risk Counterparty will provide the

lowest cost before assuming or transferring new risk.

Smart

Contracts

“Rock the Vote”

• Permit companies to better identify their shareholders – for purposes of, e.g., voting and dividends.

The Depository Trust & Clearing Corporation

Custodian Custodian

Issuer

Broker

Owner

Broker

Owner

“Rock the Vote”

• Permit companies to better identify their shareholders – for purposes of, e.g., voting and dividends.

Issuer

Owner Owner

• Permit companies to better identify their shareholders – for purposes of, e.g., voting and dividends.

DGCL § 224 Form of records.

Any records administered by or on behalf of the corporation in the

regular course of its business, including its stock ledger, books of

account, and minute books, may be kept on, or by means of, or be

in the form of, any information storage device, method, or 1 or

more electronic networks or databases (including 1 or more

distributed electronic networks or databases), . . .

“Rock the Vote”

• Much of corporate law/corporate governance aims to reduce agency costs, e.g.:

• Voting rights and fiduciary duties

• Disclosure requirements (federal and state)

• Covenants and monitoring (for creditors)

Agency Costs

• Much of corporate law/corporate governance aims to reduce agency costs, e.g.:

• Voting rights and fiduciary duties

• Disclosure requirements (federal and state)

• Covenants and monitoring (for creditors)

Agency Costs

• Much of corporate law/corporate governance aims to reduce agency costs, e.g.:

• Voting rights and fiduciary duties

• Disclosure requirements (federal and state)

• Covenants and monitoring (for creditors)

Agency Costs

Blockchain Economy –

Corporate Governance and the Law as Code

Charles K. Whitehead