DRAFTING GOVERNANCE PROPOSALS – PART ONE
Previously, we considered the important role that a constitution has in setting the groundwork for an effective DAO. Having concluded that good governance is anchored on the bedrock of a well-drafted constitution, how do we then ensure that ongoing governance decisions can be made by participating token holders and efficiently, effectively and accountably executed by the DAO’s executive team?
In this two-part article – we consider the art of drafting governance proposals.
The Function of Governance Proposals
As always, we begin with a seemingly obvious rhetorical question. What is the purpose of a governance proposal?
We posit that there are actually two main functions of governance proposal and a careful draftsman should cater towards both.
The first function – which is commonly understood – is that the governance proposal is meant to be a document which provides context and information about a proposed course of action relating to community assets (be it protocol changes, allocation of financial resources or operational decisions)such that the token holders can make an informed decision as to whether to vote for or against such proposal.
The second function is more often overlooked. Governance proposals when approved by the requisite majority of token holders are also an instruction to the executors of the proposal. It authorises and instructs the executor of the proposal (whether this is the DAO’s executive team or other persons) founder take the approved course of action and how such course of action should be pursue.
There is certainly some overlap between the two but broadly, the former deals with more ‘big picture’ issues while the latter addresses more operational issues.
In this first part – we deal with the first function of governance proposals as informational documents with the token holders as its primary audience.
Addressing Tokenholders
Governance proposals are often drafted by the sponsor of the proposal or in some cases, members of the executive team in consultation with other participants. This creates an inherent conflict of interest – given the fact that the draftsman is almost always in favour of the approval of the proposal yet for effective decision-making to take place, an unbiased cost-benefit analysis is necessary so that voting participants can properly weigh the pros and cons.
One approach is to simply not expect ‘full and frank disclosure’ from the draftsman, leaving token holders to raise these questions in governance forums in an almost adversarial process if they so desire – where the sponsoring team is cross-examined by the voter base who will vote in favour of the proposal if their concerns are adequately addressed.
The other – which we advocate for – is to place an obligation on the draftsman to provide a balanced assessment of the proposal, notwithstanding the fact that the draftsman may be partial to the passing of such proposal. This has the effect of streamlining the decision-making process by reducing the ‘cross-examination’ phase of discussions. By forcing the draftsman to consciously weigh the pros and cons of a particular proposal while drafting, it also increases the general quality of proposals which are put up for consideration.
The ingredients of an effective proposal
We posit that an effective proposal should, amongst others:
(a) Describe the proposal, its objectives and the case for why it should be approved;
(b) Specify the cost of undertaking the proposal (if any) and an approximate budget breakdown;
(c) Identify the person(s) responsible for executing the proposal;
(d) Provide timelines for implementation; and
(e) Disclose risk factors, potential pitfalls and actual or apparent conflicts of interests (and if applicable – how these will be managed).
Achieving all of the above should result in a proposal which at first instance provides token holders a balanced explanation of the proposed course of actions and sufficient information to form an educated view as to common interests.
This would result in reduced governance friction as fewer questions have to be asked and potentially uncomfortable issues such as risk disclosures and conflicts of interests are immediately addressed at first instance.
From our survey of DAOs with more sophisticated governance, we note that (a) – (c) is often adequately addressed in governance proposals although (d) and (e) are oftentimes lacking.
GVRN’s template framework
In order to provide a bit more structure to draftsmen of governance proposals, we at GVRN have put together the following template framework after researching and reviewing governance proposals across different protocols and forums at DAOs with varying objectives and sizes
Concluding Remarks
In this article – we focused on the drafting of effectivegovernance proposals for tokenholders as the intended audience. Well draftedproposals which are balanced in nature not only have the effect of allowingtokenholders to make informed and educated decisions but also reduce frictionin the decision-making process by focusing discussions and minimizingadversarial cross-examination.
In the second part of this article, we will look at thefunction of governance proposals as operational instructions in more detail andconsider how draftsmen should assemble proposals that not only facilitateeffective decision-making but also cover all bases from an operational point ofview.
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