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Analysis of the proposed structures for the new corporation (ICANN)

Tamar Frankel, tfrankel@bu.edu
October 30, 2020

ICANN is designed to be an operating corporation, managing a particular type of enterprise. ICANN is expected to be: (1) stable, (2) representative of stakeholders, (3) accountable for its actions and the actions of its board, (4) exercise its powers in an open and transparent manner, and (5) protected from capture.

Two models (and an adjustment to one model) have emerged from the White Paper, ICANN draft, NSI draft, Boston Working Group draft and ORSC draft and the IFWP consensus. The ICANN model is the only one modelled after a classic public benefit charitable or educational organization, which does not operate for profit. This model is somewhat adjusted because it provides for membership for the technical communities (but not for the rest of the stakeholders). The second model, adopted by all the rest of the sources is a membership corporation, which does not operate for profit. The third model is an adjusted model of the second model balancing power among the board of the corporation and councils.

A. Structural models

1. Public benefit corporation -- charitable and educational

The main structural feature of a public benefit, not for profit organization, is far more power vested in the board than in most organizational structures. The board is self perpetuating, electing its successors. That is because the benefits bestowed by the corporation inure to the general public and not to any identifiable entity, individual or group. Therefore, the board is accountable to the representative of the general public--the Attorney General of the state of incorporation. The sanctions of the Attorney General may lead to litigation, although that is very unlikely. Besides it is doubtful that the Attorney General's interference in the affairs of ICANN are desirable.

A second source of power for a board of a public benefit corporation is its ability to restructure the corporation unilaterally. If the bylaws of the corporation contain the basic structure of the corporation (as they do in the case of ICANN), the board can restructure the corporation, except for the provisions contained in the Articles of Association. In such a corporation most provisions are put in the bylaws because a change in the Articles of Association may require a court's approval. This requirement is again based on the absence of membership that usually has the power to approve such fundamental changes. In this structure there are no members who can amend the Articles of Association.

Thus, the basic documents of such a corporation are either bylaws: very flexible, representing the board's desires at a particular time, or Articles of Association: extremely rigid and virtually unchangeable. The board has far more power than it would had there been electing members who would exercise also amending powers of the basic constitutional documents.

By law board members are trustees and fiduciaries. Their powers must be exercised for the benefit of the charitable or educational purpose, and not for their own benefit or those of others. This rule applies to any board of directors of any corporation. In this type of corporation, however, the enforcement mechanisms of such fiduciary duties are extremely weak. A charitable or educational corporation and its board are accountable to the Internal Revenue Service and the Attorney General of the State of incorporation (California). The sanctions of the Internal Revenue Service are limited to imposing taxes on the corporation.

A public benefit organization does not ensure a balance of power among the different stakeholders. In fact, it negates the existence of stakeholders, and the need for a balance of power among them. For example, the board of trustees of a university is not required to recognize the students, their parents, alumni, faculty or staff as stakeholders. It is assumed that the board and the president of the university know what is good for all these groups and for the university as a whole. Further,the corporation by definition negates the need for protection against capture. Captured altruism and idealism is welcome.

In short, this type of organization vests in its board virtually unrestricted powers to manage, structure, and restructure the corporation. Whether the corporation will fulfill its declared and future mission depends on people, the members of the board (their good will and trustworthiness), not on the constitutional documents that vest the power in the board.

If the above analysis is correct, why are so many charitable, educational, research, museum, opera organizations, and institutions offering help to the poor, the and homeless allowed to function under these conditions, that is, virtually without accountability? The answers are: (1) these organizations value the tax exemption that they receive. Therefore, they avoid operations that are unrelated to their main missions; (2) these organizations are headed by people with prestige and reputation to protect, who contribute their own money and time to the missions of the organizations. Social pressures usually provide sufficient sanctions against abuse of the boards' unlimited powers.

These two sanctions are irrelevant to the new corporation. The corporation should be "non profit" but it is not a charity. The board members serve not because they are altruistic, but because they wish to ensure their economic and business professional or other vital personalinterests. In this respect ICANN and its board are very similar to a business corporation.

The White Paper and the IFWP consensus have developed an adjusted power structure for the technical decision making. These decisions are to be made in the councils and the board will have a veto power but no power to change the proposed technical decisions. In addition each of the two councils can nominate three directors to the board and the board in fact must rubber-stamp these nominees. The IFWP consensus also provided for a Names Council entitled to nominate three board members, whose powers relate not to technical but also to political, business, and economic factors.

The underlying motivation for this structure and the solution seem to stem from the very source of the problems with the existing IANA organization. So long as the Internet was not commercial and involved a relatively small group of actors (volunteers interested in the technical aspects of the Internet) IANA made technical decisions after involving the membership, and that was very successful. When these decisions began to have not only technical but economic, business and political implications, the technical people did not factor them into their decisions and could not evaluate the impact of their decisions accurately. That is when the problem arose. The new corporation is designed to resolve the problem by requiring an evaluation of economic, business and political factors together with the technical decisions. The relationship between the councils and the board, as proposed in the consensus creates a balance in which neither parties can co-opt the other. The board makes the final decision. The council make the proposal based on technical considerations. If the board is dissatisfied, it can send the proposal back to the council. That creates the need for negotiations. Technical solutions should be mediated taking into account their economic, business and political impact.

To some extent this process creates instability, and may increase the costs of Internet commercial enterprises. If the commercial enterprises can be assured of a better technical result, they may benefit from the advice of the councils, unless these commercial enterprises already have the technical facilities to develop the Internet.

It is not clear to what extent the councils will be representative. The consensus did arrive at some principles to assure representation of those members who share interests. Because of the sharing, it is more likely that the membership will be able to select or elect its representatives. The councils are likely to be accountable to their members but not to the whole Internet communities, as the board might be. The proceedings between the board and the councils can be easily made open and transparent. They create a balance of power in which neither technical interests nor the commercial interests can be easily captured.

2. Membership corporation that is not for profit

The second model that has emerged from the White Paper, Consensus and NSI document is a nonprofit membership-based organization managed and controlled by an elected board, representing various interest groups. This organization follows closely a business corporation but substitutes members for shareholders. The directors are fiduciaries, accountable to members, and subject to judicial sanctions. Such a corporation can be required to exercise its powers in an open and transparent manner. As compared to a self perpetuating board, membership can be structured to create a protection against capture.

3. Conclusion

The current ICANN model is entirely inappropriate. It is not legitimate. It flaunts the principles established in the White Paper, the open IFWP process and the subsequent proposed paper. function and makes a mockery of the trust people put in the process.

B. Choice of state of Incorporation

ICANN is incorporated under the a California Act regulating Public Benefit Corporations. The reason given for this choice was that the Dr. Postel's activities were conducted in California, and that California is likely to assert its jurisdiction over the new Corporation's internal affairs, even if the corporation will be incorporated elsewhere. This explanation is presumably based on a 1961 case in which the California Supreme Court held that California would impose its laws on a foreign corporation with contacts within the state. However, a few years later in another case, the Supreme Court of the United States invalidated an expansive application of state law to the internal affairs of a foreign corporation, unless the State has demonstrated substantial contacts with the foreign corporation.

Today the California statutes apply only to foreign corporations that have at least 50% of their assets and 50% of their shareholders in California ("pseudo foreign corporations"). Moreover, there are no specific provisions that apply this principle to not for profit corporations. There is one case in which the California Court applied California law to a not for profit charitable organization which conducted most of its operations in the state and raised most of its funding from California state residents.

It is inconceivable to me that California will impose its law to the internal affairs of ICANN had it incorporated in another state, even if ICANN's Information Officer and some of its research operations are stationed in California. We must note that the root is situated in Virginia, and most of the corporate activities and sources of funds are outside California. Therefore, it is not necessary to incorporate the new Corporation in California.

California, moreover, poses disadvantages. It's government and administrative agencies are traditionally act in monitoring and interfering in corporate matters. Its Attorney General and many judges are elected. It does not have a predictable body of law.

The state of incorporation of the new Corporation should be Delaware. It has one law, which is very developed. Not for profit and membership organizations are subject to the principles of the same law. That may be a disadvantage if a self perpetuating board with almost no accountability is desirable. It should not be a disadvantage for ICANN. Delaware corporate law is robust and flexible. It is well recognized around the globe. It is likely that the courts of the States of Delaware will recognize the unique nature of the Corporation and interpret the applicable law, the corporate Articles of Association and By Laws, in the context of the enterprise of the Corporation, its special history and its mission, taking into consideration the global nature and the interests of other governments in its operations.

The flaws of the current ICANN are not "technical" or legal. They are serious, political and affected the basic power structure of the corporation. In my opinion, the current ICANN is not legitimate nor trustworthy. Trusting those in power by those who are excluded from power can be earned by "bonding" that is, self limitations by power holders. The current ICANN is anything but a self limiting power structure. Trusting of those in power can be also earned by the way a group of people behave. The process that ICANN and its board and advisers have adopted negates such a possibility. It also renders the open processes that were a sham. Clearly, mistrust is mutual.Those in power do not trust those who are excluded either. Without some cooperation and trust I doubt that ICANN will go far. Perhaps it is too early for self governance.

The following is a comparison between the current various versions on topics in addition to membership, accountability and state of incorporation:

State of incorporation:

IANA: County of Los Angeles, State of California (bylaws)
BWG: County of Los Angeles, State of California (bylaws)
ORSC: County of New Castle, State of Delaware (bylaws)

The IANA draft states that California was chosen because it is a reasonably well defined nonprofit corporation jurisprudence that clearly allows the corporate structure set forth in the bylaws (and rejects Delaware’s non profit jurisprudence as less well developed and clear). BWG does not challenge IANA on this. ORSC has already formally incorporated in Delaware, with a single temporary board member.

Membership:

IANA: Article II of the Bylaws is "reserved for use should the Corporation elect to have members in the future". BWG: Article II of the Bylaws is "reserved to establish the membership objectives of Article 9 of the Articles of Incorporation." ORSC: Article II of the Bylaws contains a specific proposed structure for the membership. Members join specific membership groups (each member may only belong to one group), and must pay a fee (ranging from $10 to individual users to $1000 for most associations) in order to vote. Each membership group is entitled to elect a specific number of directors.

The IANA draft leaves membership entirely open, reserving an Article if the Interim Board chooses to implement a membership structure. BWG points out that both the White Paper and the IFWP process reached unequivocal consensus on the membership issue: the entity must have membership to guarantee fair representation. BWG charges the Initial Board with creating a membership structure, allows only minimal changes to the Articles until the membership is created, and transfers power to change the Articles to members once the membership is in place. ORSC goes one step further, explicitly defining the membership structure (BWG declined to resolve the membership structure since the issue was not entirely resolved during the IFWP process). ORSC based the membership article on discussions that occurred on the IFWP mailing list.

Initial Board:

IANA: Article V of Bylaws. The initial board shall consist of 9 at large members, the president, and directors nominated by SOs. Initial at large members are to serve until 9/30/99 (which can be extended by a 2/3 board vote to 9/30/2000). No initial at large member shall be eligible for additional service until 2 years after the term on the initial board ends. Not more than half the at large directors shall be residents of any one geographic region.

BWG: Article V of Bylaws. Eliminates the members elected by Supporting Organizations and the president as a member of the board. The initial board consists of 9 at large members.

ORSC: Article V of Bylaws. Initial Board shall consist of 14 members.

Conflicts of Interest:

IANA: Article V, section 7. The Board shall require an annual statement from each director setting forth all business and other affiliations, or any relationship that could cause the director to be an “interested person” within the meaning of section 5223 of the California Nonprofit Public Benefit Corporation Law. No director shall vote on an matter in which he or she has a material or direct interest.

BWG: (same section of bylaws). Adds that such disclosures shall (to the extent reasonable) be a matter of public record. Applies conflict of interest provisions to Officers and Employees as well.

ORSC: (same section of bylaws). Language is modified because the corporation is chartered under Delaware law. The comments state that the language is intended to reflect the CNPBCL. The BWG additions, requiring public disclosure when possible and applying conflict of interest provisions to Officers, are included as well.

The IANA draft only addresses conflicts of interest for members of the Board. BWG and ORSC add two important provisions: disclosures should be made public (subject to reasonable privacy limitations) and Officers and Employees of the corporation should be subject to conflict of interest provisions as well. BWG is especially concerned with the possibility of employees of the company also serving positions with IP registries or managing country domains. Other commenters are concerned that officers /employees of supporting organizations can serve on the corporation’s board.

Number of Officers and Role of President:

IANA: Article VIII of Bylaws. The officers will be a President (who will serve as CEO), a Secretary, a Treasurer/Chief Financial Officer, and a Chief Technology Officer, and additional officers that the board deems appropriate. Any person other than the president may hold more than one office, except that no board member other than the president shall simultaneously serve as an officer. (section 4) The President shall serve as a member of the Board.

BWG: (same section of bylaws) The minimum number of statutorily required officers should be used, with the power to increase this number as needed. Any person may hold more than one office, except that neither the Chairperson of the Board nor the President may serve concurrently as the Secretary or the Treasurer/CFO or Chief Technical Officer. (section 4) The President shall be entitled to attend any meeting of the Board.

ORSC: (same section of bylaws) Uses BWG language.

Earlier IANA drafts had contemplated a larger number of officers, and the 5th iteration reduced the list of specifically identified officers to the minimum required (apparently in response to comments). The IANA draft has the President also serving as a member of the Board. BWG encouraged the reduction in the number of officers, believing that the new corporation should be small (at least at the outset) with external organizations doing most of the work. BWG also opposes the President serving as a board member there should be a clear separation between the policy making of the Board and the execution of that policy (the President as CEO is in charge of this execution). BWG is concerned about “the self extending nature of allowing the board to designate a non Board member as President who thereby assumes a seat on the Board”. BWG would permit the President to attend board meetings, but not to be a board member or to have a vote. ORSC uses the BWG language.

Election of the Board:

IANA: (Article V, section 9) At large board members shall be elected by a process to be determined by a majority vote of all at large members of the initial board, following solicitation of input form all interested parties and consideration of all such suggestions. At a minimum, such process shall consist of nominations from Internet users, industry participants, and organizations. Unless a majority vote of the at large members of the initial board determines that it is not practically feasible to define a membership structure, such process shall call for election by one or more categories of members.

BWG: (same section of bylaws) At large board members shall be elected by a majority vote of all members in a process to be established by the initial board and which shall include solicitation of input from all interested parties.

ORSC: (Article II) The language in Article V simply says that directors will be elected at annual meetings. In Article 2, it is specified that membership groups may elect directors (up to the number of seats each group is entitled to). In the Articles of Incorporation, ORSC states that the Board shall be elected by the members of the corporation.

The IANA draft leaves the election process open, to be determined by the at large members of the initial board, although the 5th iteration did change some language to create a presumption in favor of some form of membership structure and the election of at large board members by that membership. BWG has amended the language in its draft to eliminate the ability of the board to evade the requirement of establishing a membership structure. ORSC explicitly spells out a membership structure and allocates a specified number of board seats (totalling 14) to different membership groups.

Role of Supporting Organizations:

IANA: (Article VI) The supporting organizations (SOs) are advisory bodies to the Board, and each SO is responsible for nominating directors for election to a specified number of board seats. The SOs have primary responsibility for developing and recommending substantive policies and procedures regarding matters within their scope. Additional SOs may be added by the Board by a 2/3 majority vote of all board members.

BWG: (same article of bylaws) SOs should be standing committees of the corporation without power to appoint directors. The SOs must be an integral part of the corporation (and bound to the same constraints).

ORSC: (same article of bylaws) Agrees with BWG language.

The IANA draft puts SOs in a dual role of both advisory bodies to the board and as the source of several of the board members. BWG is strongly opposed to this dual role, and believes that SOs should be confined to a role as policy advisory committees that originate proposals and provide expert advice to the board. BWG is concerned that the IANA version puts SOs in the position of providing a membership for the corporation, which creates a risk of politicizing the SOs and lessening the ability of the SOs to make objective technical and policy recommendations. Also, BWG would structure the SOs as an integral part of the new corporation, rather than as independent entities. If the SOs are independent, BWG is concerned that they might not comply with the corporation's policies, and especially the risk under the IANA proposal, stemming from independent entities that appoint board members. ORSC agrees with the BWG concerns (and notes as a highlight of its draft that the board is elected by members, not SOs).

The BWG draft (Article IV section 3 of bylaws) also expresses concern about the possibility of capture by special interests due to the limited membership provisions of the IANA draft. BWG would open membership in these SOs to all entities and individuals having a legitimate interest in the subject matter of the SO.

Voting:

IANA:

BWG: (Article 3 section 5 of bylaws) Every matter before the board shall be decided using a roll call in which the votes cast by each director shall be recorded in the minutes.

ORSC: same as BWG. The BWG/ORSC position is motivated by concerns for the openness and accountability of the corporation. The IANA draft does not specifically address this issue.

Emergency Powers:

IANA: (Article IV of bylaws) The corporation shall not act as a domain name system registry or registrar or IP address registry in competition with entities affected by the policies of the corporation. “Nothing in this section is intended to prevent the corporation from taking whatever steps are necessary to protect the operational stability of the Internet in the event of financial failure of a registry or registrar or other emergency.”

BWG: (same section of bylaws) Adds after "IP address registry": or create or alter protocol parameters [as defined in article VI section 3 (a)(iii)] in competition with entities affected by the policies of the corporation. Eliminates the "nothing in this section" clause.

ORSC: (same section of bylaws) Follows BWG language. Also seems to add the comment to the draft: We note further, that there is concern that operational stability of the Internet could be harmed by the failure of some element of infrastructure under control of the Corporation. However, rather than giving the Corporation emergency powers, we note that the board has the ability to enter into contracts to provide such emergency coverage. We feel that is a course that is much safer than allowing the board to declare an emergency and give itself essentially unlimited emergency powers.

The IANA draft added the "nothing in this section" clause to ensure that the corporation would not be precluded from taking emergency action. The BWG and ORSC drafts have adopted the same language (it is unclear how much of the comment is actually incorporated into the ORSC draft in the BWG draft the language is set aside as a "comment") attempting to prevent the board from having this power of emergency action, and would have the board use contracts to structure emergency procedures.

Statement of Purpose/ Tax Status:

IANA: (Articles of Incorporation, Article 3) This corporation is a nonprofit public benefit corporation and is not organized for the private gain of any person. The corporation is organized, and will be operated, exclusively for charitable, educational and scientific purposes within the meaning of section 501(c)(3) of the Internal Revenue Code of 1986. "The corporation shall ... pursue the charitable and public purposes of lessening the burdens of government and promoting the global public interest in the operational stability of the Internet by..."

BWG: (same section of articles) "The corporation shall ... pursue the charitable and public purposes of fostering an open, competitive, global and fair environment in all areas of Internet responsibility, assuring fair and equal access to the resources of the Internet, providing cost effective services and providing for the operational stability of the Internet infrastructure by..." Other language is the same.

ORSC: (Certificate of Incorporation) The purpose of the corporation is to engage in any lawful act of activity for which nonprofit corporations may be organized under the General Corporation law of Delaware. Said corporation is organized exclusively for charitable, religious, educational and scientific purposes.

The BWG draft objects to the "lessening the burdens of government" language in the IANA draft as an insufficient guideline for the new entity. The phrase would require the corporation to consider all acts against that standard. The new language chosen by BWG is intended to open the corporation to benefit the entire Internet community, including governments. BWG also notes concerns about the assumed tax status in the IANA draft, and whether the corporation will be qualified for 501(c)(3) status in light of its stated purpose. BWG notes the importance of creating a financially viable corporation, and that principles should be recorded in the articles to establish the aims of the corporation and how these aims should be achieved.

Openness/Transparency:

IANA: (Article 4 of Articles of Incorporation) The corporation shall operate for the benefit of the Internet community as a whole, carrying out its activities with due regard for applicable local and international law and, to the extent appropriate and consistent with these Articles and Bylaws, through open and transparent processes that enable competition and open entry in Internet related markets.

BWG: (Articles of Incorporation) Suggested language includes that the corporation should "perform its functions so as to foster a fair, open, transparent, and competitive environment for the Internet, assuring equal access to essential resources." The purpose of these Articles and Bylaws is to create an entity consistent with the requirements and aspirations expressed in the document commonly referred to as the "White Paper".

ORSC: The articles of incorporation do not include specific openness language, although the draft expresses concern with the failure of the IANA draft to meet the terms for sound and transparent, fair open and pro competitive processes. Article III of the Bylaws is titled "Transparency and Procedures", and states that the corporation and subordinate entities "shall operate to the maximum extent feasible in an open and transparent manner and consistent with procedures designed to ensure fairness." Policies and procedures are to be adopted only after a process of receiving and evaluating comments.

The IANA draft added this language in response to comments encouraging recognition of the special nature of this organization and its general principles. The BWG draft includes a specific preamble to the Articles establishing the principles developed during the IFWP meetings, and expressly states that the corporation is to be consistent with the statements of the White Paper. The ORSC draft puts transparency provisions into the bylaws, and spells out specific openness requirements, such as: postings by the board on websites, procedures for parties seeking reconsideration of board actions, and requirements for recorded roll call voting on each matter before the board.

Other Concerns:

BWG notes the imbalance between the bylaw and articles of incorporation. The articles should be strengthened by moving major corporation issues into the articles from the bylaws. Provisions in the bylaws will require a ¾ majority vote of members to change, whereas bylaws can be changed by the majority vote of the board.

ORSC draft, Article IV clause 1(d) of bylaws provides that "the corporation has no power to violate the fundamental human rights, including freedom of expression, of any person or organization, or to abridge the rights of any person or organization without due process." This language was provided by the Electronic Frontiero Foundation.

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