August 07, 2024 | Read Online

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"I am not a destroyer of companies. I am a liberator of them!"

— Gordan Gekko

Blue Horseshoe loves Compound Finance

After berating the top management of Teldar Paper for squandering company funds on "their steak lunches, their hunting and fishing trips, their corporate jets and golden parachutes," Gordon Gekko turned to the crowd of long-suffering Teldar shareholders and implored them to take back control.

"You own the company," he told them. "You, the stockholder."

It was more than just a movie moment.

Gekko's statement of shareholder rights was one of the seminal statements in the history of finance — a popularization of Milton Friedman's assertion that "the social responsibility of business is to increase its profits."

It was also incorrect.

As investors, we do not own the corporations we hold shares in.

Instead, we own shares in corporations that own themselves.

If that sounds like a distinction without a difference, consider that buying a share of Apple, for example, does not entitle you to a key pass for the office in Cupertino.

Nor would buying 51% of all Apple shares — because even owning a majority of the shares of a company does not make you the owner of that company.

As investors, we hold shares that grant us the narrow rights set out in a corporation's articles of incorporation.

But whatever it says in those articles, the corporation owns itself.

That, at least, is the conclusion of business scholars like Lynn Stout, author of "The Shareholder Value Myth," and legal scholars like Martin Lipton.

Shareholders are "investors in the corporation and own the equity, and they are thus important constituents," Lipton wrote, "but they are not the owners of the corporation as a whole."

So Gekko's dramatic contention that "you own the company" might not stand up in a Delaware court of law.

Nonetheless, his idea that shareholders should consider themselves owners was a consequential one — both the dramatization and popularization of Milton Friedman's belief in the primacy of shareholders.

However much it's been disputed since, Gekko's "agency theory" — the idea that corporate managers are the agents of shareholders — was the idea that corporate America needed at the time.

Gordon Gekko was the villain of Wall Street, of course, for taking insider tips from Bud Fox ("Blue Horseshoe loves Anacott Steel") and increasing profits by firing union employees like Bud's dad.

But, to this day, he's a hero to the many investors who applaud his claim to be a liberator of mismanaged companies.

That may seem reactionary in this age of stakeholder value, but in the 1980s, a lot of companies needed to be liberated.

Managers at real-life Teldars like RJR Nabisco, Revlon, TWA and Unocal had been ignoring their fiduciary duties to shareholders for decades, to everyone's detriment but theirs.

It took corporate raiders like KKR, Carl Ichan and T. Boone Pickens to instill the fear of Gordon Gekko into C-suite managers across America — and the cult of shareholder value that subsequently caught on made publicly traded American corporations fairer, more profitable, more innovative and more job-creating.

We need the same in crypto.

Token holders don't own the protocols their tokens represent, but they should act like they do.

Barbarians at the DeFi gates

Crypto may have had a Gordon Gekko moment last week when Compound Finance suffered a "governance attack," in which a proposal to transfer $24 million worth of COMP tokens to an unaffiliated protocol (proposed by a token holder with the nom de guerre of "Humpy") snuck through Compound's approval process, thanks to the meager participation rate that is typical of DAO governance.

Two previous proposals by the same group had been rejected by wide margins. But a third passed, in part because so few token holders bothered to vote that Humpy was able to purchase enough COMP tokens on the open market to push his proposal over the top with just 8% of tokens in favor.

This has widely been considered a failure of Compound's governance, with its "management" (aka, token holders) accused of being asleep at the wheel — much like the management of Teldar Paper in Wall Street and the management of RJR Nabisco and others in real life.

If so, it may serve as a useful wake-up call for DAOs everywhere: If DAOs disregard the interests of token holders, they might find themselves similarly under attack.

In this case, the attack has been resolved peacefully, with Humpy agreeing to return the $24 million of COMP tokens in return for a proposal to have Compound Finance distribute a portion of its revenue to token holders.

I think this is a great result — a win for long-ignored token holders everywhere.

But not everyone agrees.

Many argue that because crypto is a nascent industry, protocols should be investing for growth, not returning scarce revenue to greed-is-good token holders.

But can we trust the DAOs of crypto to allocate those funds responsibly?

With such little voting participation, the minority interests that effectively control most protocols are unanswerable to token holders.

The result is that a lot of DAO spending seems no more productive than Teldar's steak lunches, hunting trips and corporate jets.

If so, any effort to force protocols to return revenue to token holders should be welcomed — not as an attack on a protocol, but as a liberation of misused funds.

Humpy, in my book, is a liberator of Compound Finance.

Many more protocols need liberating.

— Byron Gilliam

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