• Mark Fenwick, Joseph A. McCahery

The End of “Corporate” Governance (Hello “Platform” Governance)

There was a time when entrepreneurs could scale a new company by following a relatively simple formula: identify an existing business model for a product or service, “tweak” it slightly and focus all out on execution (e.g., standardizing production or service-delivery). For an established business, the pattern was similar; an “older” firm would focus on making incremental improvements to their existing product line and gradually expanding market share.

To achieve these objectives, firms were organized as closed, centralized, and hierarchical structures. Such a highly bureaucratized model of organizational design made sense when a firm’s primary objective was to minimize transaction costs and information asymmetries and deliver a (relatively) static product or service to a (relatively) stable national market.

However, the world is different now. All businesses now operate in hyper-competitive global markets against a background of exponential technological change. This new operating environment creates a constant pressure to innovate. Simple “tweaks” to existing business models, products or services are no longer enough.

So, how can firms organize now for success tomorrow? And what can regulators do to help firms maximize their performance and capacity for innovation?

One important adaptation to the new business environment has been the emergence of so-called “platforms.” Examples include “social” platforms (Facebook, Instagram), “exchange” platforms (Amazon, Airbnb, Uber), “content” platforms (YouTube, Medium, Netflix), “software” platforms (Apple iOS, Google Android), or “blockchain” platforms (Ethereum, EOS).

Our new paper - The End of “Corporate” Governance (Hello “Platform” Governance) – examines platforms and identifies two distinctive features of this business model.

Firstly, platforms facilitate transactions of different kinds. For example, economic exchange (Amazon), the transfer of information (Google) or “simply” connecting people (e.g., Facebook). The platform makes possible interactions between creators and extractors of value and generates wealth for the owner-controller of the platform.

But there is more to platform companies than utilizing network technologies to facilitate economic or social interactions. They also organize their internal operations in a flatter and a more inclusive way to enable collaboration amongst multiple stakeholders. By doing so, they maximize opportunities to deliver constant innovation in platform services and functionality.

This combination of features (“transaction facilitators” + “organizing-for-innovation”) that distinguish platform companies from the traditional closed, centralized and hierarchical business organizations that dominated in an earlier phase of industrial capitalism.

From the perspective of economic theory, platforms are interesting because digital technologies have resulted in a decrease in information costs, and this transforms the traditional balance between the benefits of internal (i.e., closed organizations/firms) and external markets. In this sense, information technology has contributed to an erosion of the boundary between the firm and the market and undermined the rationale for the existence of hierarchical firms.

To assist businesses in operating as platforms, we suggest that policymakers need to revisit their approach to business regulation, particularly corporate governance. Traditionally, corporate governance has emphasized the “primacy” of shareholders – i.e., the economic, legal and moral owners of a company. Policymakers imposed measures on firms designed to compel actors all the actors within a company to act in the best interests of the shareholder-owners.

Problems arise because the shareholder primacy model has not always operated as intended, and there have been several well-documented “side-effects.” These include a myopic focus on shareholder value and overly bureaucratized organization. All-too-often, the unintended effect of corporate governance has been to entrench inefficient hierarchies and create a short-term and overly cautious corporate culture.

In short, the current regulatory framework is promoting an unhealthy “corporate” attitude that is failing platforms, and a new direction – what we term “platform governance” – is urgently required.

One response to this regulatory challenge is to consider how businesses might organize their operational governance as successful platforms and then seek to align regulatory measures with such strategies. Although there is no “one-size-fits-all” solution, our paper outlines three interconnected strategies relevant for any firm looking to operate as a platform.

The paper concludes that policymakers need to consider how best to incentivize firms to embrace these strategies. Those jurisdictions that are most successful in developing a new direction for corporate governance stand to be the primary beneficiaries of the digital transformation.

Mark Fenwick, Joseph A. McCahery, and Erik P. M. Vermeulen

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