Ethical considerations at IAP

The ethics team at IAP, led by Dr. Stephen Boulter, has identified three major areas of ethical concern that we want to have at the forefront of our thinking.

The societal consequences of the widespread roll out of distributed ledger technology (DLT) across the global economy

Major technological innovations, of which Blockchain is a conspicuous example, typically have disruptive consequences as the economy adjusts to new ways of doing things. Making sure the global economy is able to secure the benefits of the new technology while mitigating the inevitable disruption is a challenge all responsible Blockchain based enterprises need to take seriously.

The challenges raised by an ever-increasing reliance upon artificial intelligence (AI)

The importance of thinking through the ethical and legal implications of relying on AI is now clear to all. But thinking on this topic, beyond the identification of the hot issues to be addressed, is still in its infancy. We need to be ahead of the technology, not lagging behind it, guiding rather than reacting to developments after the fact.

The challenges of corporate governance

Ever since the crash in 2008, issues of corporate governance have taken on the prominence that they deserve. Corporations and companies are as significant to the life of a community as the government. Making sure that companies behave responsibly is as important as ensuring the integrity of the political sector.

Corporate governance challenges are compelling in their own right. However, to be appreciated they need to be seen in the wider context of the two other major areas of ethical concern.

What is corporate governance?

Every company must have members who are responsible for running its affairs. Usually these members make up a Board of Directors (BoD). The board makes the decisions that are then implemented by the management team. For now, we will set aside management issues to focus on the role of the BoD.

In a general sense, the board of directors have three core responsibilities:

  • Preserve the value of the company for the owners and shareholders
  • Increase the value of the company for the owners and shareholders
  • Manage risks facing the company’s medium to long-term ability to increase in value

These are the goals the BoD must think about on their way to work on a Monday morning. There are four main domains of the company’s activities that the board will always have at the forefront of its thinking:

  • Providing accountability to external regulatory bodies. The BoD is responsible for showing that the company has been and continues to be compliant with all its legal and regulatory responsibilities.
  • Monitoring and supervising its management team. The BoD must ensure its management team has been and continues to be compliant with all of the company’s legal and regulatory responsibilities.
  • Strategy development. The BoD is responsible for identifying risks stemming from changes to its competitive environment.
  • Policy development. Once the BoD has identified the risks facing the company, it has to develop suitable policy for the management of these risks.

Why is corporate governance problematic: The agency problem

The BoD is responsible for running the company. The board members may be, but frequently are not, shareholders or the owners of the company they run. This means that the BoD is usually running the business on behalf of the owners. As Adam Smith observed long ago; one cannot expect people to be as diligent with the money of other people as they are with their own. Risk assessment is bound to be affected by the fact that it is other people’s money the board is playing with.

For the owners, the challenge is to make sure that the BoD manages their interests responsibly when the interests of the BoD itself may not align with theirs. Corporate governance is first about the owners of a company keeping tabs on the BoD to make sure they act in the interests of the owners and shareholders. This is a fact of corporate life that all governance regimes are designed to address.

Philosophies of corporate governance

There are two main schools of thought in corporate governance. The first maintains that the owners of a company cannot and should not trust the BoD because they will always prioritize their own interests rather than that of the owners. If that is your starting point, then you are going to prefer strict governance regimes.

The other school is less cynical. The idea is that the owners can and should trust the BoD to act in good faith in the absence of evidence to the contrary. If this is your leading assumption, then you are likely to take a less heavy hand in governance matters. You might issue guidelines with a ‘comply or explain’ rider, rather than take a ‘comply or face jail’ approach.

This more relaxed attitude made some sense in the days when the BoD knew the owners and shareholders personally. This attitude is harder to uphold today now that the relationship between shareholders and companies’ is less direct and personal.

The situation is further complicated by the fact that today we expect companies to be run not just for the sake of the owners and shareholders, but for all ‘stakeholders’, i.e., the broader community that is affected by the activities of the company, including the employees, but also the wider community in which the company is based. Today, the issue of trust is not just between the owners and the board, but of all stakeholders trusting the board to run the business responsibly.

Polycentric governance

It is against this backdrop that the IAP Network wishes to make an impact. Decentralisation, and the values associated with decentralisation, are at the heart of all blockchain enterprises. It is not surprising that the IAP, in looking to develop its own governance regime, has placed a form of decentralisation, polycentric governance, at the forefront of its plans.

Realising this intention is anything but straightforward. Once we begin to think about decentralised decision making in the context of governance, a myriad of issues develop. Very few “off-chain” enterprises or government departments have adopted an approach to their own governance challenges.

Thinking about polycentric governance outside of the context of natural resource management (Ostrom) is still in its infancy, and frequently focuses on technological solutions that overlook ethical considerations.

There are no ready-made answers that can be quickly adopted. It is our responsibility to navigate this space.

Our leading questions include:

  • How can the ideals associated with decentralisation be translated into a working, legally and ethically viable, governance regime?
  • Is a polycentric governance regime viable in the context of IAP?

Developing answers that deal with the ethical complexities of these issues is our goal.