Governance is everywhere

Governance is everywhere around us. Whether it is within a family unit, football team, a multinational corporation, or a local market, every group uses governance in some form for its operations. Coordination at scale requires governance and transparent processes.

Most teams that are formed have informal or undocumented governance structures. For example, a youth football club has a manager and 15 players. The manager, in this example, is the decision-maker and he must govern the team. He decides that practice must be attended for players to be eligible to play in the weekend’s games. So here we have a governance rule for the football squad: All individuals know that to play in Saturday’s match, each player must be present at practice. This is a simple governance rule, but important nonetheless as it sets guidance on how an organization is to function. Governance sets parameters on the system and helps a team coordinate.

The most common organizational structure for companies at scale has been a hierarchical approach (see diagram below). This has many benefits as decision-making centralizes at specific nodes for efficiency. However, a common criticism is that it can lead to a lack of transparency and incomplete information in decision-making. This drawback can be extremely detrimental to a group’s or company’s success as relevant stakeholders are not consulted for a particular decision.

Cryptographic tools and new governance interfaces have the opportunity to help DAOs and teams construct new team voting structures that allow for broader participation of relevant parties while maintaining focus on company or project timelines. Further DAO tooling and DAO examples can be researched at Aragon, Syndicate DAO, Orca Protocol, and MolochDAO.

Governance in Action

Governance spans all parts of an organization: business processes, hiring decisions, and project charters. Governance gives structure to how people, teams, or organizations interact and move forward with decisions. If there was no governance or guidelines, organizations run into issues where people are making decisions without regard to other relevant parties or groups. Without governance, inefficiencies become exacerbated when organizations look to scale because teams or people begin working in different ways, which might not be aligned with the overall mission of the DAO or organization. Templates and standardized processes with a clear governing team will contribute greatly to a team’s ability to scale processes beyond the original team or cohort.

All that said, governance is a living organism. Governance models ought to be structured so they can change as the environment around them changes. It’s important that processes are not so ridge that they become ossified, but not too flexible that they are changed too quickly. Governance changes ought to have a documented change process. Governance is somewhat recursive. Just as democratic governments have numerous checks and balances, so must DAOs and working groups.

DAOs can evaluate governance as a full-time business process operation. Proper governance oversight typically requires a full-time person or team maintaining, documenting, and administering governance standards to ensure consistent quality and organization within the DAO or organization. This will help maintain consistency and help people understand who is accountable, especially as the organization scales. DAOs’ governance teams are the referees for the DAO. This group might blow the whistle when they see teams or groups breaching the guidance of the DAOs governance (those parts that are not automated by smart contracts). Having governance KPIs or metrics that track the performance of a process is critical to judging efficiency and being a data-driven organization.

Governance does slow down innovation because it can require checks and balances along the way that require approval. This is necessary in big organizations or DAOs when changes could impact multiple stakeholders or cross-functional teams. Considering the processes by which teams come to a consensus on changes is important to align as early as possible. And placing the proper level of governance on people and teams is also a delicate balance, too much governance and it stifles innovation, too little governance, and it leads to disorganization.

Thankfully on the Ethereum blockchain, smart contracts automate many operational business processes; however, human consensus and voting is still needed for other decisions. Therefore, decision-making processes need to be constructed and engineered to include all relevant stakeholders while optimizing for time efficiency. As web3 becomes more specialized, using tools that allow organizations and contributors to delegate voting power to relevant teams or centralized working groups will be necessary. Inevitably, everyone will be stretched too thin if they need to participate in all decision-making forums.

Thus, decision processes need to be designed to allow for decisions to be made without the need of all stakeholders all the time. There needs to be a governance system in place that allows all parties to know that the rules are being adhered to while giving the relevant parties a voice to influence or give their input asynchronously. For each decision-making point or user entry point, it is important for there to be transparency on who is the decision-maker or decision-process. And depending on the process or decision, there might be on-chain voting or decision-making.

DAO contributors need to understand that every single team or unit within the DAO is going to need structure and a governance process. As stated earlier, governance can span every single aspect of an organization or team. However, it is up to the individual team to determine the business usefulness of documenting their governance processes.

Some governance processes are intuitive and do not necessitate being written down. However, complex processes that include numerous decision-making bodies or cross-functional teams should consider documenting their governance processes or their SLAs (service level agreements) so there is transparency in who is accountable for what and how the business system is architecture.

Imagine a working team of 3-5 people. There’s one team lead and 3 to 4 supporting members. Everyone recognizes the lead as the decision-maker and all others as inputters or recommenders. In small teams, the undocumented governance model works because all parties can communicate and share information easily with each other. As soon as DAOs or teams begin to scale and all parties are unable to collaborate, communicate, or share information on a regular basis, there is a critical need to document processes and standards as DAO contributors will be looking for guidance on how to contribute, produce consistent results, or vote in decision-making proposals.

Moreover, DAO governance is not a copy-paste type of situation. There is not a governance model that will be a one-size fits all. However, there are governance principles that all DAOs will be able to consider in their models when building out their DAO’s governance.

The RAD Governance Model

The RAD governance model for decision-making is good place for DAO teams to begin when setting up important business processes or working groups. RAD stands for: Recommender, Approver, and Decision-maker.

1. Who are the Recommenders?
   1. These are the DAO contributors that most likely have boots on the ground and are doing the day-to-day work. They see the issues in real-time or are confronted with the next event that needs addressing first. Most of all DAO contributors will fall into this category. They have experience in their industry or working team, and they provide valuable feedback to the Approver on their perspectives, insights.
2. Who is the Approver?
   1. This is the individual(s) that signs off before it goes to the decision-maker.
      1. The approver is going to be someone close to the daily operations, such as a team lead or a manager of a working group. The approver is able to provide operational or daily feedback, without slowing down operations.
   2. The approver can likewise be group consensus or an individual. Each DAO or team will need to decide how they come to consensus at each decision-making point, with trade-offs between decision efficiency and group consensus.
3. Who is the Decision-maker?
   1. Establishing the decision-maker: is it a group, an individual, or voting consensus?
   2. Finding the “right” level for the decision-maker is critical.
      1. Too high up the hierarchy, and you burden decision-making all on one person; too low in the org hierarchy, and you might be slowing down critical decision-making processes.

The RAD governance and business decision-making model can help identify teams or individuals that will be accountable for either off-chain or on-chain decision-making. As DAOs scale it will be harder and harder for all contributors to participate in all relevant decisions, which is why continuing to be flexible in governance models is paramount.

Off-chain and On-chain Governance

Off-chain governance relates to decisions and votes that occur off-chain and are not recorded on a blockchain with a signed address. Off-chain governance is essential for speed and quick execution on daily operational tasks that do not require community consensus or a full DAO vote. The pro of off-chain governance voting is the speed of operations execution and decision-making. The obvious drawback is there is little to no transparency into how people voted, why a decision was made, or if the DAO’s governance process was followed.

Snapshot.org is one of the most widely used off-chain governance sites.

On-chain governance relates to decisions and votes that are signed and confirmed with a recorded signature on-chain. The pro of on-chain governance is that it is transparent and allows community members to participate and verifiably sign their opinion. The drawback is that these on-chain governance models can slow down decision-making due to more time needed for communication and coordination amongst all parties to submit votes. This can be overcome by having clear requirements for on-chain and off-chain voting (which is where the new lawyers come in).

The most meaningful on-chain governance protocols is withTally.com. WithTally provides DAOs the toolset to conduct on-chain governance through voting and delegation. WithTally is building a full product tool suite for DAOs. Aragon Network could be viewed a competitor.

Summary

DAOs must evaluate the business processes and governance models that best suit the organization. DAOs will be required to select or construct the governance process that fits best for that team and situation too. subDAOs incentive models can be different than the rest of the DAO based on the specific need or skillset. With tokenization, there becomes the ability to reward ultra-specific expert knowledge with organizations. The more governance processes can be streamlined and replicated, the easier it will be for the DAO to scale and grow the number of contributors. Governance processes ought to be open to changes and edits as the DAO or contributors grow and change.

DAOs are still in the early days of best-known methods for human coordination and governance. There will be many A/B testing of code and governance standards. Products like withTally will help teams and DAO contributors be able to delegate or vote on important proposals that influence the direction of the DAO.