Category Archives: Corporate Governance

The Social License to Operate

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The “social license to operate” is best described as follows: companies only get to do business so long as they retain the trust of their customers, employees and other community stakeholders.

The current debate about de-banking reminds us that financial institutions are among the largest beneficiaries of that social license, especially in Australia where the so-called 4 Pillar banks operate under a protected oligopoly. If you want to be cushioned against external and internal competition, then you need to demonstrate why you deserve to retain that privilege.

Apart from arbitrarily shutting customer accounts, banks are also closing local branches and/or reducing their opening hours. They are scaling back on the services available at some branches, even though their archaic processes still require existing customers to attend in person for things like ID verification and to apply wet signatures on hard copy documents. Seriously, you can’t have it both ways – reducing customer access while at the same time forcing customers to get to a branch to sign papers. (In a recent case, I ended up dealing with three separate branches, as well as an inter-state department, just to process some standard forms.)

The Banking Royal Commission dealt our major financial institutions several reputational blows – but rather than forcing them to improve their ways, foster innovation, increase efficiency, embrace technology and lift the overall customer experience, it seems that the banks have hunkered down in defence. They use the findings of that very same Royal Commission to justify why they now need to employ more and more layers of bureaucracy, form-filling and pen-pushing, in an attempt to cover their backsides and to mitigate against the public backlash.

And it’s not just the banks that are under increased community scrutiny – supermarkets, utilities, professional service firms, property developers, telcos, builders, insurers, landlords and tech companies are all facing various criticisms, for things like price gouging, squeezing suppliers, corruption, monopolistic and anti-competitive behaviours, poor quality products and service, financial irregularities, atrocious consumer data protection, environmental damage, unconscionable contractual terms and unreasonable policies. Unfortunately, our regulators don’t seem capable of holding these parties to account, so it will largely depend on consumers and the community to stand up for their own interests.

Next week: More on Music Streaming

 

 

 

“The Digital Director”

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Last year, the Australian Institute of Company Directors (AICD) ran a series of 10 webinars under the umbrella of “The Digital Director”. Despite the title, there was very little exploration of “digital” technology itself, but a great deal of discussion on how to manage IT within the traditional corporate structure – as between the board of directors, the management, and the workforce.

There was a great deal of debate on things like “digital mindset”, “digital adaption and adoption”, and “digital innovation and evolution”. During one webinar, the audience were encouraged to avoid using the term “digital transformation” (instead, think “digital economy”) – yet 2 of the 10 sessions had “digital transformation” in the title.

Specific technical topics were mainly confined to AI, data privacy, data governance and cyber security. It was acknowledged that while corporate Australia has widely adopted SaaS solutions, it lacks depth in digital skills; and the percentage of the ASX market capitalisation attributable to IP assets shows we are “30 years behind the USA”. There was specific mention of blockchain technology, but the two examples given are already obsolete (the ASX’s abandoned project to replace the CHESS system, and CBA’s indefinitely deferred roll-out of crypto assets on their mobile banking app).

Often, the discussion was more about change management, and dealing with the demands of “modern work” from a workforce whose expectations have changed greatly in recent years, thanks to the pandemic, remote working, and access to new technology. Yet, these are themes that have been with us ever since the first office productivity tools, the arrival of the internet, and the proliferation of mobile devices that blur the boundary between “work” and “personal”.

The series missed an opportunity to explore the impact of new technology on boards themselves, especially their decision-making processes. We have seen how the ICO (initial coin offering) phase of cryptocurrency markets in 2017-19 presented a wholly new dimension to the funding of start-up ventures; and how blockchain technology and smart contracts heralded a new form of corporate entity, the DAO (decentralised autonomous organisation).

Together, these innovations mean the formation and governance of companies will no longer rely on the traditional structure of shareholders, directors and executives – and as a consequence, board decision-making will also take a different format. Imagine being able to use AI tools to support strategic planning, or proof-of-stake to vote on board resolutions, and consensus mechanisms to determine AGMs.

As of now, “Digital Directors” need to understand how these emerging technologies will disrupt the boardroom itself, as well as the very corporate structures and governance frameworks that have been in place for over 400 years.

Next week: Back in the USA

 

 

 

Smart Contracts… or Dumb Software

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The role of smart contracts in blockchain technology is creating an emerging area of jurisprudence which largely overlaps with computer programming. However, one of the first comments I heard about smart contracts when I started working in the blockchain and crypto industry was that they are “neither smart, nor legal”. What does this paradox mean in practice?

First, smart contracts are not “smart”, because they still largely rely on human coders. While self-replicating and self-executing software programs exist, a smart contact contains human-defined parameters or conditions that will trigger the performance of the contract terms once those conditions have been met. The simplest example might be coded as a type of  “if this, then that” function. For example, I could create a smart contract so that every time the temperature drops below 15 degrees, the heating comes on in my house, provided that there is sufficient credit in the digital wallet connected to my utilities billing account.

Second, smart contracts are not “legal”, unless they comprise the necessary elements that form a legally binding agreement: intent, offer, acceptance, consideration, capacity, certainty and legality. They must be capable of being enforceable in the event that one party defaults, but they must not be contrary to public policy, and parties must not have been placed under any form of duress to enter into a contract. Furthermore, there must be an agreed governing law, especially if the parties are in different jurisdictions, and the parties must agree to be subject to a legal venue capable of enforcing or adjudicating the contract in the event of a breach or dispute.

Some legal contacts still need to be in a prescribed form, or in hard copy with a wet signature. A few may need to be under seal or attract stamp duty. Most consumer contracts (and many commercial contracts) are governed by rules relating to unfair contract terms and unconscionable conduct. But assuming a smart contract is capable of being created, notarised and executed entirely on the blockchain, what other legal principles may need to be considered when it comes to capacity and enforcement?

We are all familiar with the process of clicking “Agree” buttons every time we sign up for a social media account, download software or subscribe to digital content. Let’s assume that even with a “free” social media account, there is consideration (i.e., there’s something in it for the consumer in return for providing some personal details), and both parties have the capacity (e.g., they are old enough) and the intent to enter into a contract, the agreement is usually no more than a non-transferable and non-exclusive license granted to the consumer. The license may be revoked at any time, and may even attract penalties in the event of a breach by the end user. There is rarely a transfer of title or ownership to the consumer (if anything, social media platforms effectively acquire the rights to the users’ content), and there is nothing to say that the license will continue into perpetuity. But think how many of these on-line agreements we enter into each day, every time we log into a service or run a piece of software. Soon, those “Agree” buttons could represent individual smart contracts.

When we interact with on-line content, we are generally dealing with a recognised brand or service provider, which represents a known legal entity (a company or corporation). In turn, that entity is capable of entering into a contract, and is also capable of suing/being sued. Legal entities still need to be directed by natural persons (humans) in the form of owners, directors, officers, employees, authorised agents and appointed representatives, who act and perform tasks on behalf of the entity. Where a service provider comprises a highly centralised entity, identifying the responsible party is relatively easy, even if it may require a detailed company search in the case of complex ownership structures and subsidiaries. So what would be the outcome if you entered into a contract with what you thought was an actual person or real company, but it turned out to be an autonmous bot or an instance of disembodied AI – who or what is the counter-party to be held liable in the event something goes awry?

Until DAOs (Decentralised Autonomous Organisations) are given formal legal recognition (including the ability to be sued), it is a grey area as to who may or may not be responsible for the actions of a DAO-based project, and which may be the counter-party to a smart contract. More importantly, who will be responsible for the consequences of the DAO’s actions, once the project is in the community and functioning according to its decentralised rules of self-governance? Some jurisdictions are already drafting laws that will recognise certain DAOs as formal legal entities, which could take the form of a limited liability partnership model or perhaps a particular type of special purpose vehicle. Establishing authority, responsibility and liability will focus on the DAO governance structure: who controls the consensus mechanism, and how do they exercise that control? Is voting to amend the DAO constitution based on proof of stake?

Despite these emerging uncertainties, and the limitations inherent in smart contracts, it’s clear that these programs, where code is increasingly the law, will govern more and more areas of our lives. I see huge potential for smart contracts to be deployed in long-dated agreements such as life insurance policies, home mortgages, pension plans, trusts, wills and estates. These types of legal documents should be capable of evolving dynamically (and programmatically) as our personal circumstances, financial needs and living arrangements also change over time. Hopefully, these smart contracts will also bring greater certainty, clarity and efficiency in the drafting, performance, execution and modification of their terms and conditions.

Next week: Free speech up for sale

 

Making Creeping Assumptions

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Even if the recent Board of Inquiry into Victorian Hotel Quarantine Program does not reveal who actually made the now fatal decision to engage private security companies, it will have at least added a new phrase to the lexicon of public discourse – the notion of “creeping assumptions”.

To recap, based on the evidence presented during the public hearings, we have been led to believe that no single person, department or government agency made the all-important decision. Instead, we are left to conclude that this was a decision made by default, based on a series of “creeping assumptions”.

What this suggests is that rather than a conscious or affirmative decision, the parties relied on their own interpretation of unfolding events and information flows to conclude that someone else had made the call to outsource hotel security, and as a consequence everyone involved simply went along with it. As I have pointed out before, the decision to engage private contractors is not the issue. But it does beggar belief that even if nobody could recall who made the decision, they could not point to the information that informed their assumptions, nor could they specify who instructed the drawing up of the commercial contracts. As a result, the Victorian Government has spent $6m to find out who signed off on $30m of expenditure.

Anyway, one of the consequences of these so-called creeping assumptions is that the decision-making was deeply flawed because it lacked process, scrutiny and accountability:

  • Process was clearly missing (unless the Inquiry finds otherwise), because of the absence of documented minutes or formal note-taking.
  • There was no scrutiny of the “decision”, to confirm the various dependencies and delegated authorities that initiated the contracts issued to private contractors.
  • And the fact that no-one can be identified as being responsible for the decision, could mean that no-one can be held accountable.

If nothing else, this will become a case study for students of politics, public administration, and corporate governance.

Next week: Bread & Circuses