Academics who profess expertise in corporate governance sometimes find themselves on very strange turf.  That has been my status for the last two years, serving as an adviser to the U.S. Commerce Department in connection with the Obama Administration’s efforts to “privatize” the Internet Corporation for Assigned Names and Numbers (“ICANN”).  ICANN is the non-profit entity that essentially manages the Internet’s domain name functions and oversees much of its internal plumbing.[1]  This privatization effort has now been challenged in Congress by Senator Ted Cruz and others, and political fireworks are likely.  But let’s start at the beginning.  In March 2014, the National Telecommunications and Information Administration of the United States Department of Commerce (“NTIA”) announced its willingness to turn over the “stewardship” of the domain name functions of ICANN to a “global multistakeholder community”—at least if a transition plan could be agreed upon that satisfied four basic criteria.[2]  NTIA and Commerce appointed a panel of three law professors to advise them on this last issue, and this column will recount my thoughts as one of those three.

The proposed transition in ICANN’s status raises three basic questions: (1) Why? If ICANN isn’t broke, why fix it?; (2) What was this “stewardship” function in the first place?; and (3) Who is this “global multistakeholder community” that is to inherit control of ICANN?  As to the first “Why?” question, the answer is that much of the world was dissatisfied and growing steadily more grumpy about the seeming American hegemony over the Internet.  In particular, NTIA’s “stewardship” over ICANN, a California non-profit corporation, symbolized this dominance to them.  Although ICANN was nominally supervised by NTIA, in fact this supervision was modest and the reins were very loose.[3]  ICANN had long been largely self-regulating.  In truth, the Internet had just grown up underneath it, with ICANN taking over for earlier volunteer efforts that academics and a local California state university had improvised when the Internet was in its infancy.  No one planned this American dominance.  Like Topsy, ICANN’s domain name functions and related architecture just grew.  Still, pressure was developing within the international community to shift control of ICANN (and potentially the Internet) to the United Nations.  From the U.S. perspective, this raised a real prospect of the politicization of the Internet and the stifling of its openness.  Although no one at Commerce has phrased it to me this bluntly, turning ICANN’s control over to a “global multistakeholder community” seemed the decidedly safer alternative to turning control over to the U.N. (which is a body where power politics is understood and practiced relentlessly).

But who is this “global multistakeholder community?”  Ultimately, it is a strange collection of supporting organizations and advisory committees, populated by dreamers, cultists, ideologues, geeks and the Internet’s largest commercial users (e.g., Microsoft, Amazon, Apple, etc.).  In 2014, ICANN established several broad working groups to develop plans for a transition to a new era in which ICANN would be responsible to its stakeholders.  One such body  — the Cross-Community Working Group on Accountability (“CCWG”) — spent nearly a year developing proposals to enhance ICANN’s accountability.[4]  A number of obvious mechanisms could have been used that would have given various stakeholders seats on the board or specified voting or nominating rights.  Symptomatically, however, the CCWG spurned these, believing instead in “bottom up” direct democracy — and in unlimited dosages.  Apparently, among the truest believers in the Internet, the shared perception seems to be that even the most controversial and problematic issues can be decided at a global community meeting.  Accordingly, the CCWG’s proposals made virtually any board decision appealable to such a community resolution.  In contrast, those of us who have served in academia know that faculty meetings are so frustrating and interminable because nothing can be decided until everything has been said — and said by everyone.  ICANN faces this future, although for the reasons discussed below it will be rare that a board decision is actually overturned.

The CCWG proposals largely dispensed with the business judgment rule and made everything appealable to a broad community of stakeholders.  The key CCWG “reform” was the creation of a new body, literally called the “Empowered Community,” which will be a California unincorporated association that will serve as ICANN’s “sole designator,” making it effectively the equivalent of a sole shareholder.  ICANN itself will remain a California non-profit corporation.  The Empowered Community, whose name sounds as if activists out of the 1960s designed it (think Saul Alinsky, Mark Rudd and Mario Savio), will have real powers under ICANN’s new charter.  These powers will enable the Empowered Community’s stakeholders to take any of seven significant acts, including rejecting ICANN’s budget, removing individual ICANN board members, removing the entire ICANN board, revising ICANN’s bylaws, or initiating binding arbitration to compel actions consistent with ICANN’s mission.  But each of these actions will have to be preceded by a variety of preliminary global community meetings and supermajority votes that will be difficult to achieve and may take interminable amounts of time.

Nothing in this structure strikes this author as optimal, and the efficiency loss for ICANN could be considerable.  But that is not the question that I and my colleagues were asked by NTIA and Commerce.  Rather, our panel, which consisted of myself, Dana Brakman Reiser, a professor at the Brooklyn Law School and a specialist on nonprofit organizations, and The Berkman Center for Internet & Society at Harvard University (which was chiefly represented by Professor Urs Gasser, the Center’s Executive Director), was asked to evaluate whether the proposed transition could satisfy four basic criteria on which the Commerce Department had conditioned its approval.  Specifically, these criteria were:

• Could the proposal support and enhance the multistakeholder model;
• Could it maintain the security, stability and resilience of the Internet domain name system;
• Could it meet the needs and expectations of the global customers and partners of the IANA services; and
• Could it maintain the openness of the Internet?

In addition, Commerce and NTIA also advised us that it would not accept a proposal that replaced the NTIA with a government-led alternative.

These are relatively open-ended and even ineffable questions that probably are better assessed by persons who know much more about the Internet and the IANA functions than this humble commentator does.  But now the story at last gets interesting.  In 2016, politics reared its ugly head — not so surprising in an election year!  First, in March 2016, Gordon Crovitz, a shrewd, but predictably ideological, former editor/officer at the Wall Street Journal, published a column in the Journal, claiming that the Obama Administration was attempting an Internet “giveaway,” probably to China.[5]  Why?  Well, conspiracy theorists never really have to answer those questions.  Not long after, even as he contested the American presidential race with Donald Trump, Senator Ted Cruz of Texas joined in Crovitz’s crusade, sending a series of angry letters to the chief executive officer of ICANN, which alleged, more or less, that he and any others favoring the proposed transition were the pawns of China.[6]  Following these accusations, Senator Cruz introduced his “Protecting Internet Freedom Act” on June 8, 2016.[7]  Co-sponsored by Senators Mike Lee (R-Utah) and James Lankford (R-Ohio) and with a parallel bill in the House introduced by Rep. Sean Duffy (R-Wisc), this legislation would require the Commerce Department to maintain its current oversight role over ICANN and the domain name system, unless Congress passed legislation that “expressly grants” permission for such a transfer.  The Obama Administration, he announced, was “months away” from ceasing to protect the Internet “from authoritarian regimes that view the Internet as a way to increase their influence and suppress freedom of speech.”[8]  The likelihood of this legislation’s passing is uncertain (in part because Congress no longer passes much legislation these days, particularly in election years), but the Commerce Department’s plans could well be stalled if a sizeable Republican bloc unites behind Senator Cruz.

At last, we have framed the question for this column: Is a “takeover” or other control change at ICANN likely, or even feasible, as a result of the proposed restructuring of ICANN?  Can China, a private entrepreneur or anyone else “steal” control of ICANN?  Back in April, 2016, well before Senator Cruz raised it, this was an issue that our panel addressed in our report to Commerce, with this author principally drafting the “takeover” section of our report.

Is a Hostile Takeover of ICANN Possible?

Hostile takeovers of non-profit corporations are as common as confirmed unicorn sightings.  Although ICANN has no shareholders, its board of directors is not self-perpetuating and could be replaced (including by the new Empowered Community voting to remove them).  That might represent the most obvious means by which insurgents could “takeover” ICANN.  An alternative means would be to capture control of ICANN’s Nominating Committee (“NomCom” in ICANN’s language).  This committee is not a committee of ICANN’s board, but a separate, free-standing body that nominates eight of ICANN’s 16 directors.  This latter route would be slower, but if the insurgent already had a presence on the board, it could install a new majority by this means.  A third (and possibly the most realistic) route is old-fashioned corruption.  Some entity — a nation or private corporation or some political faction — could simply bribe key officials to elect their nominees to ICANN’s board or to take specific policy steps.  Lest one thinks this scenario is too cynical, we should recall that corrupt practices involving bribes and aimed at specific policy steps have been recently witnessed in the field of international soccer.  Although directorships were not sold, the location of soccer’s World Cup appears to have repeatedly been put up for secret auction.  The non-profit body administering soccer was arguably taken over (and certainly corrupted).

Still, before one concludes that these techniques are viable and ICANN is vulnerable, one has to recognize two key facts about ICANN.  First, it has stakeholders, not shareholders, and their preferences are likely to be very diverse.  By definition, shareholders have homogeneous preferences: basically, they want to maximize share value.  If a bidder offers them a premium over the company’s current share value, shareholders are likely to accept this offer (unless they think an even higher bid may be forthcoming).  In contrast, the preferences of stakeholders are heterogeneous.  The Empowered Community will have five “Decisional Participants” — each a different constituency.  Together, these five Decisional Participants can replace the ICANN board, but their self-interests and likely preferences differ, and a supermajority of four is necessary to remove the full board.  Some Decisional Participants are basically comprised of private commercial users of the Internet, while others represent Internet associations, consumers or geographical areas.  A policy that maximizes value for one constituency may minimize value for other constituencies.  Second, the motivation of any one country to take over ICANN also seems modest.  Countries that wish to stifle free speech have already done so within their jurisdiction by creating firewalls that keep an open Internet out of their country (China being the key example).  Hence, they have less motivation to seek control, and they probably understand that ICANN, while important, is not the critical link in the Internet.  It is but one of many players.

Ousting the ICANN Board

The Empowered Community will have the legal right and power to remove the entire ICANN board, but this power requires a number of time-consuming procedural steps to be taken along a gradual continuum of escalation.  Ultimately, four out of the five Decisional Participants must favor the replacement of the board.  Not only is that an 80 percent supermajority, but the five Decisional Participants have very diverse interests.  One Decisional Participant is the Generic Names Supporting Organizations (“GNSO”), whose members include the major business users of the Internet (for example, AT&T, Microsoft, Facebook, Pfizer and Verizon), major customers and intellectual property advocacy groups.  Such a body has economic incentives to protect the Internet from monopolistic control and is unlikely to support domination of the Internet by any single country or user.  Another Decisional Participant (the Address Names Supporting Organization or “ASO”) consists of the five regional Internet registries, each dominating a different continent or region.  By definition, ASO has a geographically diverse and dispersed constituency that is unlikely to favor a shift of control to a single country or a small faction of countries.  Still another Decisional Participant is the Government Advisory Committee, which has 110 governments as members plus 35 observers.  The prospect of a single country dominating it is about as likely as a single country dominating the United Nations.  The final Decisional Participant is the At-Large Advisory Committee (“ALAC”), which represents Internet users, and its members include academics and consumer advocates.  It is the body least likely to support any takeover.

To sum up, power within the Empowered Community is highly fragmented, and the prospect seems remote that any country or private interest group (or a coalition of them) could capture four out of these five Decisional Participants.

Capturing the Nominating Committee

Even if the ICANN board cannot be easily ousted, it could be gradually replaced if insurgents gain control of ICANN’s Nominating Committee, which is a separate body and not a committee of ICANN’s board.  But again, this route is also complicated, because the Nominating Committee only selects eight of ICANN’s sixteen directors.  Seven directors are selected by four of the Decisional Participants, which each has the right to select one or two directors (and ICANN’s CEO is the 16^th director).  Because these Decisional Participants have diverse interests, their nominees are also likely to have correspondingly different perspectives.

In effect then, ICANN has a “staggered board,” with the Nominating Committee only selecting a few directors each year.  Further, ICANN also has a classified board, with four Decisional Participants selecting seven directors, while the Nominating Committee selects eight on a staggered basis.  It has long been recognized that a staggered board is an effective deterrent to a takeover,[9] and ICANN has an even more unusual board, both staggered and classified with four Decisional Participants and the Nominating Committee selecting its members.  Finally, even if some group did capture the Nominating Committee and began to staff the ICANN board with “captured” nominees, the Empowered Community would have the right to remove these directors by a supermajority vote of its Decisional Participants.

Capture Through Corruption

If one wanted to capture ICANN on a single issue, or a group of interrelated issues, the most practical tactic might be bribery.  Certainly, a variety of international sports organizations are under the shadow of corruption investigations, and the Department of Justice has indicted a host of senior international soccer officials.  But if the goal is to capture ICANN for purposes of a single decision, the recent reforms reduce that prospect.  That is, the Empowered Community could vote to remove a single ICANN director by a simple majority vote, or it could initiate a binding arbitration procedure to reverse the board’s decision.  A simple majority vote of the Decisional Participants is all that is required to initiate the binding arbitration procedure.  Finally, if the Department of Justice can indict international soccer officials, including some who stayed out of the U.S., it could certainly indict directors of a California non-profit corporation (i.e., ICANN).[10]

Conclusion

If the question were whether ICANN’s proposed multistakeholder governance structure is the best way to run a railroad, I would have grave doubts.  But that was not the question.  Even if the restructuring of ICANN and the replacement of the Department of Commerce by the Empowered Community may result in a loss of efficiency and frequent lengthy delays, it does increase accountability to stakeholders.  Ironically, the one prospect that does seem unlikely under this new structure is ICANN’s capture by a single government or a narrow interest group. ICANN has been given so many checks and balances that it is difficult to imagine a hostile takeover.  Nonetheless, symptomatic of the dysfunction in our political process, it is this least likely scenario that Congress may choose to debate.

Although I cannot endorse the wisdom or efficiency of the new organizational structure for ICANN, I do recognize that consenting adults can make their own decisions.  The gears at ICANN may turn more slowly in future years, and internal debates may consume time needlessly, but it will be a fascinating test of “bottom up” corporate governance.  More importantly, Commerce was probably correct in its key judgment: The proposed structure seems superior to United Nations control—and real hardball politics.

Finally, in a time when even free trade is now disfavored and politically unpopular, any action ceding U.S. control of anything seems likely to arouse the Republican right.  But the irony here is that privatization was once a Republican priority.  Consistency is not Senator Cruz’s hobgoblin.

ENDNOTES

[1] The so-called “IANA” functions are a collection of interdependent technical functions that enable the efficient operation of the Internet, including (1) the coordination of the assignment of technical Internet protocol parameters; (2) the administration of some aspects of “root zone” management; (3) the allocation of Internet numbering resources; and (4) services related to the management of the ARPA and INT top-level domains.

[2] The four basic criteria are whether the transition plan:

• Supports and enhances the multistakeholder model;
• Maintains the security, stability and resiliency of the Internet domain name system;
• Meets the needs and expectations of the global customers and partners of the IANA services;
• Maintains the openness of the Internet.

In addition, NTIA has insisted that it would not accept a proposal that would replace NTIA with a government-led system.

[3] For many years, ICANN has performed its functions under a contract with NTIA. This contract at least gave the impression to the world that NTIA occupied a blocking position that could prevent others from seizing control.

[4] The CCWG made 12 detailed recommendations to enhance accountability at ICANN and establish in its favorite phrase “bottom up” democracy.

[5] See L. Gordon Crovitz, “Stop Obama’s Internet Giveaway,” The Wall Street Journal, March 20, 2016.

[6] Senators Cruz, Lankford and Lee sent questioning and accusatory letters to Fadi Chehade, ICANN’s CEO, on February 4, 2016, and to Stephen Crocker, ICANN’s Chairman, on March 3 and April 4, 2016. Among the accusations were that Mr. Chehade was too close to China and was jointly sponsoring conferences with the Chinese. No views are here expressed on the accuracy of these charges or ICANN’s failure to respond fully. The senators called on Chehade to recuse himself from the ICANN transition.

[7] For an overview of this legislation, see Kate Tummarello and Alex Byers, “Cruz’s ICANN bill, House companion set to drop today,” Politico, Morning Tech, June 8, 2016. Some 16 conservative groups also publicly backed the bill

[8] Id.

[9] See, e.g., Lucian Bebchuk, et. al., The Powerful Antitakeover Force of a Staggered Board: Theory, Evidence, & Policy, 54 Stan. L. Rev. 887 (2002).

[10] For those who do not read the sports page, the Justice Department filed charges in May 2015, alleging corruption in global soccer, naming fourteen officials at FIFA and its regional confederations. A later indictment in December named 27 officials. Many read the Supreme Court’s latest decision on the extraterritorial scope of RICO as encouraging such prosecutions. See Peter Henning, “RJR Nabisco Ruling Bolsters Justice Dept’s Pursuit of FIFA,” N.Y. Times, June 28, 2016 at B-1; see RJR Nabisco, Inc. v. European Community, 195 L. Ed. 2d 476 (2016).

This post comes to us from John C. Coffee, Jr., the Adolf A. Berle Professor of Law at Columbia University Law School and Director of its Center on Corporate Governance.