The End of “Corporate” Governance: Hello “Platform” Governance

Mark Fenwick is a Professor at Kyushu University Graduate School of Law; Joseph McCahery is Professor in the Department of Business Law at Tilburg University; and Erik P. M. Vermeulen is Professor of Business & Financial Law at Tilburg University. This post is based on their recent paper.

A significant development in the global economy over the last two decades has been the emergence of businesses that define and organize themselves as “platforms.” By platform, we refer to any organization that uses digital and other emerging technologies to create value by facilitating connections between two or more groups of users. Think Amazon, Facebook, or Uber.

The type of connection varies depending on the platform. Some platforms facilitate connections between the buyer and seller of goods (Amazon); some facilitate connections between those wanting a service and those willing to provide it (Uber); and others simply facilitate connections (information exchange) between friends (Facebook). There is enormous diversity of use cases for the platform model: exchange platforms, service platforms, content platforms, software platforms, social platforms, investment platforms and smart contract platforms. But what is common to all platforms is that they make connections between “creators” and “extractors” of value and the platform generates a profit from making these connections, either by taking a commission or through advertising.

If one compares a list of the world’s largest companies from 2008 with the same list for 2018, the rise of the platform is obvious. In 2008, none of the companies on the list were platforms. Now, you could make the argument that six or possibly seven of the world’s ten largest companies are organized as platforms or, at least, derive a significant slice of their income from platform operations (i.e., Alibaba, Amazon, Apple, Facebook, Google, and Tencent).

The emergence and growth of platforms is a significant event, not least because they have become a routinized feature of everyday life within such a short period of time. To illustrate this rise, consider that it took the radio 38 years to reach 50 million users. It took television 13 years to achieve the same degree of market penetration. But Facebook “only” needed two years to gain the same number of users. Now, it has an active user base of over 2 billion.

The remarkable success of platforms has been made possible by the emergence of a number of inter-connected digital technologies—most obviously, PCs and smartphones, the Internet, algorithms, and cloud computing.

The mass dissemination of these technologies encourages more users and other service providers to join a platform, adding more “content” which, in turn, attracts additional content “creators” and “consumers.” This is important because platforms benefit enormously from “network effects;” the more people that use a platform the more it benefits everyone else using the same platform.

Moreover, the global proliferation of digital technologies and communication networks means that platforms can be established anywhere. The emergence of hugely successful platforms in China (Alibaba) or Indonesia (GoJek) illustrate the universal appeal and adaptability of this business model. It also shows how less developed economies might employ platforms as a means of “leapfrogging” an earlier (industrial) phase of economic development and “jump” directly into the digital age. At least, that is what many governments and international organizations believe.

The diversity and adaptability of platforms mean that they can be attractive in any sector of the economy (and not just tech companies) and all over the world (and not just in more “developed” economies). And—as evidenced by the commercial success of platforms—platforms have been hugely popular with investors, as well as consumers (and other stakeholders).

The success of platforms has forced incumbent organizations to re-examine their business models. Many traditional retailers, for example, are shifting their distribution channels for their products from “stores” to online platforms. Many industrial organizations now wish to re-invent themselves as platform service providers rather than (simply or only) producers of goods. General Electric—the archetypal twentieth-century industrial giant—has tried to transform itself from a hardware manufacturer into a data science company that utilizes platforms, software, applications, and big data analytics. And, more recently, as new Fintech startups are moving into the financial services sector, many incumbent banks are considering how to introduce platform services.

In fact, every organization is now obliged to consider integrating platform ideas and experience into their operations. Think about it. Emerging technologies have not only enabled the management and coordination of creators and extractors of value (challenging existing business models and organizations), but they have also made products significantly more durable, forcing organizations to focus more on connected and sustainable services or to add more platform/network functionality to their products.

Whereas in the twentieth century, capitalism was organized around large, industrial companies, much of the contemporary economy is now organized around software-driven platforms. Within a generation, we have experienced a reconfiguration of global capitalism in which platforms and their founder-owners have acquired an enormous degree of economic power and cultural influence (think Jeff Bezos or Mark Zuckerberg).

As such, platforms controversial. Most obviously, they raise concerns about privacy (think Facebook or Google) and unhealthy market dominance (think Amazon or Google). As platforms have grown, they have struggled to maintain their initial promise and brands that were once disruptive have lost much of their shine. The result is that many people are deeply ambivalent about platforms. On the one hand, we use them on a daily (even hourly) basis but, on the other hand, we are wary of their influence and doubt the ability and willingness of platform leaders to exercise this new power responsibly. Trust in platforms is declining rapidly.

We shouldn’t allow concerns about platforms to blind us to the potential of this way of organizing a business. The essence of platforms is connections and connecting. They leverage technology to create trust between parties that facilitates the freer flow of goods, information and services. They promote more efficient and open markets and a more open society. We should, therefore, look for ways to harness the promise and potential of this new business form and the values of openness and inclusivity that (at their best) they promote. We need to focus our energies on developing an environment that can help nurture “better” platforms—the sustainable platforms of tomorrow.

Given the importance of platforms to the global economy, it makes sense to deepen our understanding of this new business form and ask what role regulators can play in promoting innovative and more socially responsible platforms. In identifying this new regulatory direction, our research focuses on strategies that firms need to adopt in order to develop as successful platforms. Any regulatory approach should seek to align itself with these goals.

Although there is no “one-size-fits-all” solution, our paper describes three interconnected strategies that are crucial for platform operations: (i) leveraging current and near-future digital technologies to create more “community-driven” forms of organization; (ii) building an “open and accessible platform culture,” and (iii) facilitating the creation, curation, and consumption of meaningful “content.” Platforms that fail to embrace these strategies are exposed to the risk of user migration.

As such, we explore the thought that platforms are organized differently from a traditional company. In particular, platforms face multiple incentives to organize themselves as flatter, more open and inclusive “ecosystems.” Of course, not all platforms reach this ideal—far from it—but this concept of a platform is, nevertheless, useful as a normative ideal that has implications for business models and regulation, particularly corporate governance.

Corporate governance practices—the rules of the game, if you like—were obviously developed in a pre-platform era and are primarily based on the needs of large, industrial companies. In contrast to platforms, such companies were organized as closed, hierarchical, internally compartmentalized systems. As such, there is a “disconnect” between the business needs and values of platforms and contemporary business and regulatory models. Moreover, it could be argued that existing regulations may be contributing to the difficulties that many platforms experience once they reach a certain size and face pressure to organize as traditional companies. Overcoming this disconnect—i.e., “re-connecting” platforms with regulatory models—is crucial for the future of platforms and the global economy, more generally.

Jurisdictions that are most successful in developing a new style “platform governance” based on the promotion of these strategies will be the primary beneficiaries of the digital transformation. Of course, this is much easier said than done. All levels of government struggle to adapt to the fast-changing realities of a networked age. Rapid technological change makes it difficult to identify and agree on an appropriate regulatory framework.

But, it seems clear, that existing corporate governance frameworks have become a part of the problem. Traditional models of corporate governance are an adaptation to a world of hierarchical and centralized organizations and seem ill-suited to the organizational and business needs of flatter and more open forms of business organization. “Corporate governance” feeds a short-term, compliance-oriented and cautious corporate attitude that is counter-productive in a world where companies need to be dynamic and continuously adapt to shifting technologies, markets, and shifting consumer demands. In short, the development of platform governance will demand more diverse coalitions of actors working in partnership to provide contingent and dynamic solutions. In this way, everyone can enjoy the benefits of this important new business form.

The complete paper is available for download here.

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