The Latent Power of Governance Tokens

There is no such thing as a valueless governance token, only a governance token whose value is yet to be utilized.

The term, “valueless governance token” is frequently thrown around in crypto, mostly at protocols issuing tokens within a grey regulatory environment. Other times, the term is used to describe tokens that don’t extract fees or distribute fees to token holders. These are valid arguments and there are also valid counterarguments to why tokens shouldn’t distribute fees at the early growth stage. That’s a discussion for another time. Instead, I wanted to discuss the value of governance in particular, how governance – and these tokens – grows valuable in the future.

Love The Smell of Proxy Wars in The Morning

Governance has meaningful value in the traditional financial markets. Stock shareholders are able to vote on executive compensation, board seats, and company resolutions. These events are meaningful and have the ability to either impact the company or the individuals who manage the firm.

Perhaps the most entertaining story on governance this year comes from your neighborhood gas station, Exxon Mobil. Exxon Mobil – one of the largest oil producers in the world with a market capitalization of $270 billion – has recently entered the proxy fight of its (corporate) life. For those who don’t follow the stonk market, let me provide a quick recap of the Exxon Mobil situation.

Activist fund, Engine No. 1 purchased 917,400 shares (0.02%) of Exxon Mobil in mid-November 2020 with the intent of pressuring Exxon to adopt a greater ESG (environment, social, governance) focus and invest in renewable energy as part of the global energy transition. The argument persists that Exxon’s unwillingness to divest from oil and gas has resulted in the underperformance of the company, which is the management’s (the board’s) fault.

As part of its strategy to persuade Exxon to shift its global business strategy, Engine No. 1 filed a proxy statement – a proposal requiring the vote of shareholders – requesting shareholders cast their vote for new board members that have a history of sustainable value creation in clean energy. Because the oil and gas conglomerate clearly didn’t want to replace its pro oil and gas board members with less pro oil and gas members, a proxy war ensued where each side had to compete for votes in order to ensure their candidates got elected onto the board.