How Blockchain will Disrupt Corporate Organizations

Mark Fenwick is Professor of International Business Law at Kyushu University; Wulf Kaal is Associate Professor at University of St. Thomas School of Law; and Erik P. M. Vermeulen is Professor of Business & Financial Law at Tilburg University. This post is based on their recent paper.

Closed, hierarchical organizations have dominated political, economic and social life for the past several hundred years. Such organizations are characterized by (i) a centralized source of authority; (ii) a formal hierarchy with clearly differentiated functional “roles”; and, (iii) standardized operational systems and procedures dictated by the authority/hierarchy. This type of organization has exerted an enormous influence on the modern world.

In a business context, for instance, centralized, hierarchical organizations have been central to the emergence and global expansion of capitalism. Corporations are the most prominent example of such structures, and the advent and proliferation of the corporate form has been a defining feature of modern economic development. Recall the rapid growth of such organizational structures during the rise of mass production in the context of the industrial revolution.

Moreover, other types of centralized organization (banks and other financial service providers, for instance) played a crucial role as facilitators allowing third parties to engage in various business transactions. Finally, highly centralized “nation states” provided the supporting infrastructure—both political and legal—that allowed businesses to operate effectively.

As such, centralized, hierarchical organizational structures supported by the “correct” procedures have been hugely influential in “getting things done” efficiently and creating trust. Previous technological revolutions led to a concentration of such organizations, as society adapted to the uncertain meaning, effects, and risks of technological change by pooling authority. Regulatory models—particularly company law and corporate governance—were designed to support and sustain this form of business organization.

However, the world is different now. All businesses now operate in hyper-competitive global markets against a background of the digital transformation (i.e., the proliferation of cheaper hardware, global networks and emerging technologies, such as algorithms, Big Data, Cloud-based storage, and Blockchain). This new operating environment creates a constant pressure for business to innovate. Simple “tweaks” to existing business models, products or services is no longer enough. The risk for any company that fails to revisit its traditional business model is that they will become corporate “dinosaurs,” i.e., lumbering giants ill-suited to a rapidly-changing environment.

All firms today, for instance, have to engage with the Internet, the Cloud, mobile technologies, etc. The next “wave” of technological developments—currently, robotics, the blockchain, and artificial intelligence—is already having an impact on extant business models. In an age of ever shorter innovation cycles, the next significant technological development is always imminent. Anticipating, planning for, and integrating the next “big thing”—whatever it may be—is crucial in maximizing a firm’s chance of long-term success or even its very survival.

A particular significant effect of the emergence of digital technologies has been to disrupt the “old world” of closed, centralized, hierarchical organizations. Technology is currently introducing a shift in the mindset and practices of our society. In particular, the limitations of a centralized, hierarchical and “proceduralized” world are becoming more apparent. Most obviously, such organizations are slow to adapt to a fast-changing reality and are losing public confidence. New digital technologies are driving the emergence of “flatter,” more decentralized forms of social organization. This change is experienced across society, but particularly in a business context.

From the perspective of economic theory, this is significant because new technologies have resulted in a decrease in information costs, and transform 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 conventional boundary between the firm and the market and undermines the rationale for the existence of hierarchical firms.

The implications for regulators and other policymakers seem obvious. A disconnect is emerging between traditional regulatory models and the form of contemporary business organizations. It, therefore, seems appropriate to deepen our understanding of these new organizational forms as a necessary precondition to developing new regulatory models more suited to a digital age. In short, regulators need to better align regulatory arrangements with the business realities and needs of firms today. Jurisdictions that can do this seem well-placed to enjoy enormous benefits.

In our new paper—Why “Blockchain” Will Disrupt Corporate Organizations: What Can Be Learned from the “Digital Transformation”—we offer an analysis of how digital technologies are disrupting corporate organizations.

The paper first considers how the digital transformation has led to the emergence of “platform” companies. Perhaps the most 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).

These platforms utilized networked digital technologies to 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 simply 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.

Since blockchain technology can be viewed as a next step in the “digital development” of corporate organization, the paper then discusses the main features of blockchain technologies and smart contracts and examines the often-made claim that these technologies are all just hype / a fad. The paper then explores why these technologies are so potentially disruptive in a business context and introduce several examples of such blockchain-based business organizations, as well as possible future developments.

The central claims of the paper are (i) digital technologies have already disrupted centralized, hierarchical corporate organizations by facilitating “platforms,” (ii) this process of disruption will only continue as new blockchain-based technologies proliferate, and (iii) regulators need to more attentive to these changes and their economic and social effects, in order to design the regulatory models of the future.

We have already passed the “tipping point” in our experiments with decentralization. So, instead of blindly affirming the traditional “centralized” world or remaining trapped in the space between these two realities, it seems prudent to observe and study these new organizational developments. As such, it is necessary to become actively involved in the further development of blockchain and smart contracts and the creation of a decentralized reality. In this way, a decentralized world can reach its full potential and offer greater transparency, convenience, and trust.

The complete paper is available here.

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One Comment

  1. Aleksei Gudkov
    Posted Saturday, September 29, 2018 at 5:31 am | Permalink

    Really, good point that the “hierarchical and “proceduralized” world” along with overregulated corporate law and corporate governance is lost sense in modern society.
    One pitfall is to think that “platform companies” is adaptation of digital transformation.
    The platform companies are not something new. It is merely intermediaries-peddlers. The place where creators and consumers are met and exchanged content/assets/rights.
    In my opinion, the real transformation is based on greater speed of communication and trust, which provide blockchain technology. This allows unlimited number of participants be organized in decentralized networking creative groups under external management. The DAO is good example. They can cooperate, interact, get finance, create product, test business model and dissolve with the incredible speed and at lower cost.

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