There have been a number of scholarly paeans to blockchain as a corporate governance tool. It creates a permanent and irreversible chain of custody that can be used for shareholder record keeping and voting, insider trading, corporate disclosures, and trade execution.
My new article, Governance ≠ Leadership: What Blockchain and Artificial Intelligence Won’t Do for Corporate Lawyers, is hardly a criticism of the advances blockchain might bring to the monitoring function. That is one of the fundamental duties of a corporate board. Instead, the legal literature highlighted for me, a former public company chief legal officer, the extent to which legal and business conceptions of corporate governance are ships passing in the night. I suggest a dichotomy between the two approaches to governance that I concede is hyperbolic. Certainly, the reality is far more nuanced. But I don’t think the contrast is unfair, at least when discussing scholarly treatments.
The legal approach to governance, and therefore governance-related technology, tends to the quotidian oversight tasks of monitoring, discipline, and corporate compliance. That is not surprising. Scholarly approaches to monitoring take their cue from how modern corporate law scholarship has incorporated prevailing economic models of the firm: (1) the “principal-agent” conception that addresses agency cost issues, i.e. the divergence of interests between shareholder “principals” of the firm and its centralized manager-agents; (2) the “nexus of contracts,” under which the firm is an imaginary construct in which every relationship can be characterized as an explicit or implicit contract; and (3) the role of institutional structures in ameliorating management opportunism vis-à-vis the shareholders.
Hence, in the (somewhat hyperbolic) legal conception of corporate governance, the core concerns are for risk, liability, and opportunism as between shareholders and management, particularly when it comes to the directors’ fiduciary duty of care. Professor Stephen Bainbridge is typical in acknowledging that corporate boards may do other things, but that its monitoring function “reigns supreme.”
In contrast, the business approach tends to the affective aspect of governance – in a word, leadership. It focuses less on the directors’ role in oversight and far more on how the directors will contribute to the strategic and operational success of the organization. As a result, business governance is far less concerned with the tools that are amenable to digitization and far more concerned with human attributes that resist algorithmic reduction.
Several data points bear that out. One would think, if the board’s monitoring function reigns supreme, lawyers and auditors would dominate. The recruiting and management consulting firm, Spencer Stuart, publishes an annual Board Index that suggests otherwise. Lawyers and auditors make up only a miniscule percentage of first-time or continuing public company directors. Rather, the overwhelming majority of first-time, experienced, independent, lead, or presiding directors and nominating or governance committee chairs had strategic, operating, or financial backgrounds.
What do recruiters and those advising aspiring directors emphasize? Firms like Russell Reynolds and Korn Ferry are explicit in telling candidates that the job entails more than compliance oversight. Directors need to be strategic, operational, and capable of understanding culture. Those who counsel the candidates use words like passion, experience, time, attentiveness, toughness and collegiality. And academic business scholarship focuses on director attributes having far more to do with strategic and operational leadership than monitoring and discipline, for example, taking responsibility, communicating, and building relationships.
Having satisfied myself that the legal and business conceptions of corporate governance were different, I thought about why. My thesis is that legal thinking is inherently reductive and that the reduction manages to exclude or minimize precisely those leadership aspects of governance beyond mere monitoring.
Hence, as we think about the role of blockchain in corporate governance, it hardly surprises me that analogs to the logical or computational tools of lawyering are the focus. What blockchain or any other code is unlikely ever to acquire is the ability to perceive purpose and have the will to act. It is unlikely to evolve leadership, intuition, insight, creativity, and the subjective desire to change the objective world. But those qualities are as essential as the quotidian tools to effective corporate governance and corporate lawyering in the real world.
The culmination of the reduction is a recent proposal by two esteemed corporate law professors, Stephen Bainbridge and Todd Henderson, that the current system of shareholder elected directors be replaced by outsourced “board service providers.” The proposal turns on the conception that the board’s sole obligation is to monitor agency costs within the corporation to maximize shareholder wealth. Thus, in its attempt to weed out self-serving opportunism by managers, the legal proposal also dispenses with the leadership contributions that the business perspective values.
Blockchain and, indeed, even the most human-like digital artificial intelligence, have what the great computer scientist John McCarthy (the Turing Award winner who developed the AI LISP programming language) called “brittleness.” Computational substitutes for judgment don’t know their own limitations, and no amount of before-the-fact coding can anticipate all of the variants that the complexities of real life present. Great corporate lawyers like Ben Heineman, the former General Electric general counsel who largely conceived the modern in-house law department, have recognized the brittleness of mere “thinking like a lawyer” and the need for qualities of mind that allow for leadership.
What we do in the management suites and boardrooms of corporations, as officers, directors, and lawyers, is both science and art. Blockchain, as well as enterprise resource planning or decision-theory software or science fiction worthy tools not yet designed, are part of the science. Indeed, like legal doctrine itself – the code we use to achieve our ends – they are all instruments to be wielded by the artist. Law schools have long taught and nurtured litigation skills. Teaching transactional skills has come into vogue over the last 10 years or so. Perhaps the next step is to focus on leadership for aspiring business lawyers.
This post comes to us from Professor Jeffrey M. Lipshaw at Suffolk University Law School. It is based on his recent article, Governance ≠ Leadership: What Blockchain and AI Won’t Do for Corporate Lawyers,” available here. The article is a contribution to the Journal of Corporation Law’s 2020 symposium on blockchain technology and corporate governance, which is scheduled for October.