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

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

Mark Fenwick, Joseph McCahery, Erik Vermeulen

February 05 2019

A significant development in the global economy over the last two decades has been the emergence of businesses that organize and define themselves as “platforms.” By platform, we refer to any firm that uses digital technologies to create value by facilitating connections between two or more groups of users. Think Amazon or Alibaba (connecting buyers and sellers of goods), Facebook or Instagram (connecting friends and family), or Uber or Airbnb (connecting service providers and service users). 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 advertising. Over the last decade, platforms have grown to become some of the largest companies in the world and all companies are now obliged to consider integrating platform operations into their business.

However, platforms are increasingly controversial. Most obviously, they raise concerns about privacy (think Facebook and Google) and market power (think Amazon and Google). And as platforms have expanded in size, they have struggled to maintain their initial promise and brands that were initially disruptive have lost much of their initial appeal (think Facebook, Google or Uber). Finding a regulatory framework that promotes socially responsible platforms has become one of the critical challenges in contemporary business regulation.

Our new paper examines the distinctive features of this new business model and its implications for regulation, notably corporate governance. In particular, the paper suggests that a tension exists between the incentives created by modern corporate governance frameworks and the business needs of today’s platforms. 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 platforms. Corporate governance feeds a short-term, compliance-oriented and cautious corporate culture that can be counter-productive in a world where companies need to be dynamic and continuously adapt to rapidly evolving technologies, markets, and consumer demands. The current regulatory framework promotes an unhealthy “corporate” attitude that is failing everyone, and that a new direction (what we term “platform governance”) is required.

In identifying this new regulatory direction, the paper considers how firms might develop as successful platforms. Although there is no “one-size-fits-all” solution, our paper describes three interconnected strategies: (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.” Deepening our understanding of how platforms operate can provide an essential preliminary step in future regulatory design.

After all, it seems clear that the platform model has disrupted traditional business models, firms, and markets. The world of closed, centralized and hierarchical corporations is being displaced, and this trend seems likely to continue. The Internet, algorithms, online ratings, artificial intelligence, provide instant access to all kinds of information. This provides almost unlimited opportunities for companies to bind users into their “platform,” to set up partnerships and to engage in constant innovation across multiple sectors of the economy.

Of course, adapting to this new reality is easier said than done. Many established companies find it difficult. Governments have also struggled to adjust to the fast-changing realities of a digital age. Rapid technological change makes it difficult to identify and agree on an appropriate regulatory framework. But existing corporate governance frameworks are not helping and can become an obstacle to firms looking to innovate.

As such, regulators and other policymakers need to do more. They need to re-think what they have been doing and focus on ensuring that the regulatory environment is conducive to building and maintaining the right kind of platforms. The paper concludes that jurisdictions that are most successful in designing a new style “platform governance” will be the main beneficiaries of the digital transformation.

 

Authors

Real name: 
Mark Fenwick
Research Member
Tilburg University Faculty of Law and Tilburg Law and Economics Center