Fiduciary Arbitrage

Building a company is a coordination game.  A founder needs to develop a coherent enough vision and purpose to entice others to join into the enterprise.  

The crisper the communication, the easier it is for potential investors, employees and customers to add resources and capabilities to the collective.  Company velocity improves from an individual's potential output to the combined force of a diverse set of actors all providing value.

Companies must seek an informational advantage as quickly as possible. This is the edge that is communicated out to potential allies:  a great culture, a talented team, strong traction, product-market fit.  All these terms are reputational advantages that make it easier to accelerate critical momentum in the early days of an uncertain business.  

Traditionally, the dominant language for coordination on vision and purpose was the long term profit potential of the business.  Investors and early employees in particular sought assurance it was a 'good' company in the sense that it had the potential to make money in the future.  This view is consistent with the doctrine of shareholder primacy - the only legitimate purpose of a company is to maximize long term profit for shareholders.  Alignment between various stakeholders was assumed, as long as the precondition was 'making as much money as we legally can.'  

We no longer live in that world.  Companies express a purpose - reducing carbon in the atmosphere, reducing housing shortages, or improving K12 education - that is separate and distinct from making money.  These companies start with a compelling information advantage, as potential investors, employees and customers are inclined to listen more intently if the company promises to help some important cause through their growth.

This is progress. It is a better world to have a full continuum of firms from 'just make money, within the laws' to non-profit, rather than having discrete buckets of organizations.

The broader diversity of organizational goals fits within 'the world getting weirder' thesis from Tyler Cowen.  Cowen argues we will all experience more variance in our lives as information technology amplifies new voices and business models.  This is a manifestation of Chris Anderson's original long tail thesis.  Gatekeepers are losing the ability to pre-determine a limited set of viable choices on behalf of consumers, allowing the market to support a more diverse set of outcomes.  

Consider:  

• Entertainment moving from big three networks to millions of YouTube channels
• Media moving from professionally edited mastheads to Twitter and Substack
• Transportation moving from city oligopolies of a few cab companies and public transit to ride-sharing apps where anyone can be a driver
• Travel moving from a limited set of corporate owned hotels to staying in one of millions of residential homes.

In all these areas, the variance of the user experience is dramatically increased - from a standard yellow cab to a ride in someone's Corolla or a fancy town car. Network executives would never have predicted a child playing with toys would get over 1 billion views on Youtube.

At CircleUp, we articulated this trend as the 'personalization' of the consumer. Billions of dollars of sales are shifting from large incumbent brands to smaller, niche brands which better match individual preferences.  Consider what the beverage aisle looked like twenty years ago (limited set of sugary carbonated drinks) to today (hundreds of distinct offerings from Kombucha to cold brew).

Adam Davidson's The Passion Economy identifies another implication of the same trend: the ability for entrepreneurs to create 'lifestyle' small businesses that better align with their career ambition than a traditional corporate role.

I believe this trend will continue to shape the modern world, due primarily to the driving force of technology lowering the transmission and coordination costs for new ideas to launch. Disparate communities can connect, and ideas can spread more easily than ever before.  Small communities can now support new ideas, either viable as niche businesses (ala Davidson's Passion Economy), or through the initial fragile testing/iteration period before growing to more mainstream scale.  

The implications of this trend are still underappreciated in corporate governance. Benefit Corporations and Stakeholder capitalism are just the early manifestation of the coming 'weirdness.'  We are already starting to see the cracks in the current 'ESG' framework - as Tesla gets removed from S&P's ESG Index, and investors aren't sure whether supporting oil and gas production in Europe is a net good (less reliance on Russia, better for democracy and human rights) or bad (more carbon).

The ESG framework will evolve into a system of increasingly rigid diversity in corporate purpose.  We will have more forms of corporate ownership as employees, investors and customers are able to align around new models for balancing shareholder profits with the interests of other constituencies with increased ease.

This is my interest in crypto, as tokeneconomics can reduce the cost of experimentation.  I don't believe all organizations will become DAOs. I don't believe all companies need to exist on a blockchain.  But I do believe token centered organizations can provide clear commitments to stakeholder economics and governance in a way not easily done before.  

Fiduciary arbitrage is the economic opportunity created by the improved transparency of organizational pre-commitment devices.  Once widely adopted, the increased diversity of organizational models will allow for more efficient allocation of capital, talent and customers.   Investors, employees and customers will not have to evaluate how managers' will balance multiple competing priorities.  The clear, irrevocable commitments enshrined in governance tokens for how the profit pool will be shared in the future reduce the risk of uncertainty for all stakeholders.  When risk is reduced, there is an cost-free gain for all.

The coming fiduciary arbitrage is positive for all.  It will take time to sort preferences for investors, employees and customers, but in the end everyone will be able to spend their time and capital more efficiently as a result.