The NetForum: Year in Review: Governance Crisis Fuels General Discontent and Rise of Blockchain

Dear Friends & Colleagues,

I wish you and your loved ones a very Happy New Year.

During 2017, The NetForum held meetings to discuss many of the pivotal issues of the day, from Ethical Scandals in Startups to The Blockchain Revolution to the Algorithm Takeover of our Lives.  Over 250 of you joined the discussions in person, and several thousand read the Key Learnings that synthesized each discussion.

My New Year’s blog usually draws heavily upon the NetForum discussions and attempts to reveal the big themes that will follow us from the past year to the next.  It was easy to do this year, as the mega-trend is so obvious: there is a revolution under way against poor governance.  It is aimed at the heart of the Liberal Democratic Order and Capitalism.

Let’s start from micro acts of poor governance and expand to more macro issues.  It’s all related.

Directors are Not Doing their Job, Workers Don’t Like It and Speaking Up. 

Most working people work for corporations of one type or another. Under Corporate law, the Board – a group of people unto which all powers are delegated by the shareholders – is charged with managing a corporation.  The Board is responsible for making sure that a company provides an environment that is safe, fair and intelligently managed.  People have pilloried CEOs and HR directors, and they are right, but it’s the Board that calls the shots and therefore has failed the employees.

One of the conclusions of the NetForum on Ethical Failings of Startups was that the sexual harassment scandals and other pervasive unethical or unlawful exploits we have been reading about were entirely predictable due to the feeble managerial infrastructures of startups and the nature of the individuals who get into the startup game in the first place.  Fixing a predictable problem after it happened is really poor governance (understatement of the year…).  There is no need for new laws as sexual harassment and most forms of discrimination in the workplace are already illegal and they are not recent inventions.  So, if it’s happening on a grand scale in your company, it’s because someone is not doing their job – the Board.  People with power not exercising it responsibly on a systematic basis — how can that not cause anger and resentment, and a loss of faith in corporations as self-managed organizations? The “System” failed the employees who trusted that those in charge would act as they are supposed to.

Prediction: check your D&O coverage.

Investors Should Heed the Call by Consumers to Be Responsible Owners. 

It used to be called “good corporate citizenship,” the acknowledgment of the symbiotic relationship between businesses and the communities they operate in, as employers and purveyors of goods and services.  During the NetForum on Social Responsibility of Venture Capital Investors, we asked whether investors had the right/option to avoid considering the impact of their investments on “Society.”

VCs place a high premium on “disruptive” companies.  Yet, “disruption” produces what economist call “externalities” borne by society at large.  It is not hard to imagine that an extremely “innovative economy,” with a rapid rate of disruption, will produce legions of unemployed and underemployed people as we have not yet invented a way to redeploy human capital, especially so called “blue collar” labor.  “Disruptive” companies have also ventured into social disruption, destroying societal structures and institutions that people have relied upon for long.  (See discussion of Facebook below.)

Tech folks (which most VCs are) pride themselves on being “data driven.”  Yet by refusing to measure and acknowledge the impact of the disruption they are funding, they are driving a wedge between them and the rest of society, who can clearly see and feel that impact first hand.  That’s the root cause of the “Tech Backlash” that we are going through.

Why don’t VCs learn from “Impact Investors”?  Impact Investors choose to invest in companies whose mission include the generation of an identifiable and measurable positive social impact.  They have started to develop a panoply of tools to measure the “Impact” produced by their portfolio companies along a number of vectors they deem important.  Why aren’t all VCs using these tools or developing similar tools to at least understand the “Impact” of their own companies?  Then use the data, or not.  People are losing faith in the Tech Elite because it won’t open its eyes and see what everyone else is seeing.

Prediction: “Impact Blindness” will create real costs to the Tech industry.  First, Regulators will hit hard in response to citizens’ fury.  Second, Millennial Consumers are value-driven consumers and seek brands which values they share – ignoring that will become a major pocket book issue.  Third, “As more and more founders of the biggest tech companies are acknowledging today, the days of just throwing technology out there and washing your hands of the potential impact are over.”  Third, witness Jana Partners, an activist fund, taking a jab at Apple no less and issuing this statement: “As more and more founders of the biggest tech companies are acknowledging today, the days of just throwing technology out there and washing your hands of the potential impact are over.” (Was Jana secretly attending the NetForum?).  This could become a trend…

Digital Companies’ Unaccountable and Opaque Business Processes are Tolerable No Longer. 

At the NetForum on Digital Transformation, we discussed how legacy companies were reinventing themselves with the help of new technologies to put listening to the consumer at the center of their value chains.  This won’t diminish the importance of humans in the value chain; to the contrary, it will put them where emotional intelligence and human touch are essential job requirements.  These old, supposedly antiquated, corporations are using technology to make business more human, not less…

By contrast, at the NetForum on Regulation of Algorithms, we discussed how the Digitally Native Hegemons, notably Facebook and Twitter, had achieved market dominance by automating business processes to remove human judgment and involvement.  In the course of their ascent, they gave us opaque algorithms that control what we read, whom we interact with, what we can say, and determine our privacy rights.  (A couple of years ago, I used to joke that Facebook’s Terms of Service had more relevance to our lives than the U.S. Constitution.  How much of an exaggeration is it?)

As people came to realize this situation, they became uneasy but they were not alarmed because they did not clearly see the relationship between what happened online and what happened off-line.  (Professional think tanks were raising the red flag for a while but they were not a mass movement.)  Then the alleged hacking of Social Networks by foreign agents led to the gaming of their News publishing systems and allowed them to exert undue influence on elections in Liberal Democracies, possibly, some believe, to cause the election of a US President that the majority of voters did not vote for.  Now, people on the left and the right are paying attention to the fact that people have experienced a measurable, visible and unacceptable loss of control to opaque and unaccountable black boxes owned by a small group of techno gurus (most of the big tech companies allow their founders to continue to control them post-IPO due to dual class structures).

Most NetForum participants agreed that Algorithms are neither good or bad, they just do what the humans programmed them to do.  Yet, the humans who programmed algorithms for Social Networks and most other tech platforms don’t have the education, knowhow or experience to understand the consequences of their algorithms.  See the spectacle of early Facebook employees now professing embarrassment and regret over their “harmful” creation, followed by Mark Zuckerberg’s 2018 Personal Resolution to “fix Facebook.”  To be fair, it is really hard to measure the social impact of an algorithm in a large social network or on a society.  Consulting firms and experts are now springing up to offer to help do that, staffed by humanists and technologists.  European laws are being proposed to require companies to divulge how their algorithms work so that they could be audited.

It seems that societies all over the world are fighting the Social Networks as foreign invaders destroying their way of life and wanting to control their deployment in their territories (as they did with genetically engineered crops).  Repressive regimes are probably gloating that they were justified in wanting to control their citizens’ access to the Internet… But even in “good regimes,” it’s not hard to understand the pushback when the societies affected by algorithms don’t share the value systems of the algorithms’ writers (usually young men in Silicon Valley).

Either way, ill-intentioned or uninformed, the damage done by the Algorithm Masters is done and trust in the System eroded.

Prediction: New Networks are coming, and the existing large Social Networks will be regulated as “public utilities” or a similar status, at least in foreign jurisdictions.

Blockchain Networks are a Response to an Unaccountable Economic and Political System.

The Blockchain revolution is also an attempt to solve our Governance crisis.

At the heart of the Blockchain ethos is a verdict that the System has failed.  Blockchain political theorists, I call them Decentralists, posit that the current Web (“Web 2.0”) has become co-opted by monopolists and that Corporations and Nation States are incapable of harnessing new 21st Century technologies to address 21st Century social and economic issues.  In their view, Web 2.0 gave us Facebook – a centralized network whose inner workings are determined by a group of people wholly not accountable to the community they purport to serve.  Further, the current Liberal Democratic Order gave us Crony Capitalism, epitomized by the collusion between governments and corporate interests to bail out irresponsible financial intermediaries and never hold them accountable.  Note that these views are also shared by Trump and Sanders voters, and many people all over the world.  But the Decentralists believe that shifting economic and eventually political power to Networks operating on the Blockchain is the best next steps for society.

The contour of the Blockchain Economic Order is coming into view.  Decentralized Autonomous Organizations will take the place of corporations and operate without a central command structure.  DAOs are loose networks of people working for a common goal, subject to contractual rules embodied in Smart Contracts embedded in a Blockchain, and transacting with each other and other DAOs on various Blockchains via the programmatic execution of Smart Contracts.

This economic schema has many advantages, including Transparency and Finality.  Since all transactions are recorded on a Blockchain visible to all and all Smart Contracts are visible and thus generally auditable, radical transparency is achieved. And since Smart Contracts auto-execute when their conditions are met, and cannot be reversed, certainty of outcomes is achieved.  All the rules of the game are programmed on the Blockchain, and can only be changed by the consensus of stakeholders in the Blockchain, in a manner intended to prevent usurpation of power.  In the Decentralist System, there is no corruption, people are fully accountable for their mistakes and are rewarded based on their efforts in a clear, predetermined manner, and the cost of dispute resolution is nil.

Critically, these Networks can now finance their creation and operation by a) issuing Tokens representing what are essentially membership rights in the Networks and reflecting the inherent value of the “product” of the Network, and b) facilitating the secondary trading of Tokens to give them liquidity and a “trading value.”  As everyone knows by now, the number of Blockchain Networks in existence has exploded in the last year, and the market value of the crypto-currency (Tokens) that they have minted has catapulted to $500 Billion in the same period.  The CEO of one of the Blockchain Networks was briefly last week the 5th Richest Person in the World.  So, this is not fantasy.  Some of the smartest people around are working on the Decentralist Project.

It is too early to say if this energy or money is well spent.  At the NetForum on ICO Regulation, there were some serious questions raised by some pretty smart people about the value of this endeavor (“are you solving real problems people really care about?”).  Leading voices in the VC community have acknowledged that much of the money invested in Blockchain will go up in smoke but that it was the normal course of affairs and out of the ruins will emerge a better Web 3.0, just as happened with Web 2.0.

So, are we witnessing a paradigmic shift in economic and political Governance?  Or will the Decentralists political goals fail and but leave behind a technology foundation that will force change in the current System without breaking it?  I surely don’t know but it is important to put the Blockchain revolution in historical context in order to understand what is fueling it and why it’s happening now.

History is replete with Governance experiments, looking for the proper balance between centralized power and devolution of power to the edges (ie to regional and local government).  Brexit in the face of the European project, and Catalonia vs Spain, Quebec vs Canada, and others, are all reflections of this struggle.  The US Constitution is an attempt at decentralized and consensus-based government with its dispersion of power among as many power centers as the Founders could fathom.  But for Decentralists, there is no need for counterbalancing power centers, the Network holds the power and acts as one.  It is important to note that at the very same time that Decentralists are promoting Decentralization, people are flocking to strong leaders.  Obama’s “Yes, We Can” has been replaced with Trump’s “Yes, I can, and only I can.”

To replace centralized, hierarchical power structures and usher humanity into a new era of transparent, programmatic governance, as opposed to creating islands of Decentralization, there is still a lot of work to do.  Not only does the technology still need to be created but society’s values and social customs need to evolve, and that takes a very long time, probably decades.

Let’s not forget that consensus by algorithm cannot happen without human intervention, at least at the outset.  Someone needs to set the initial basic rules, and these will usually prove to be hard to change.  Already we are seeing concentration of ownership of certain Networks, and accordingly of decision making power and control over rule making.  Clearly, the experience with Facebook has people revolting against algorithmic decision making – it is not clear that making Smart Contracts transparent (to technically trained eyes) will make their ruthless efficiency and non-appealibility more acceptable to the people they are intended to serve.  If anything, the emerging consensus seems to be that people are not interested in having their lives run by algorithms, whether they are transparent or not.

Further, there is a lot of “friction” to manage with the current System.  As we discussed in the NetForum on ICO Regulation, and as has been made evident by US regulatory bodies in the first few days of 2018, joining many foreign regulatory bodies, the current funding mechanism for Blockchain Networks, ICOs, violates US Securities Laws.  So, the Revolution will likely have to be funded the old-fashioned way, by the gatekeepers on Sand Hill Road… And so far, they are more than willing.

Prediction: Decentralism will push the world in the right direction but how it ends up looking, no one knows, and it will take a very long time.  So, less Messianic pronouncements and just let’s get down to doing the hard work, including building bridges to many actors in the current System.

I would love to hear from you and see you at future NetForum events.

Best,

Laurent

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