A Sustainable Platform Economy & the Future of Corporate Governance

A Sustainable Platform Economy & the Future of Corporate Governance

Mark Fenwick, Erik Vermeulen

April 17 2019

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.” Think Amazon, Facebook, or Uber.

A platform can be defined as an organization that uses digital technologies to facilitate connections between two or more groups of users. 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 more than half 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 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. And, more recently, as new Fintech startups are moving into the financial services sector, many incumbent banks are considering how to introduce platform services.

Whereas in the twentieth century, capitalism was organized around large, industrial companies, much of the contemporary economy is now organized around technology-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.

Nevertheless, legitimate concerns about platforms shouldn’t blind us to the potential of this new 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 therefore 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 must align itself with these goals.

Although there is no “one-size-fits-all” solution, our new 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.”

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 an ideal that has implications for business models and regulation, particularly corporate governance.

After all, corporate governance rules were 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 an emerging gap or “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 gap – 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 and the development of a new 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.

Authors

Real name: 
Mark Fenwick