Corporate Governance in a Networked Age

We are currently experiencing a technology-driven transformation in how companies organize themselves. The proliferation of networked digital technologies is forcing companies to reconsider every aspect of firm operations and governance. In our new paper, ‘The End of the Corporation’, we outline how digital technologies are disrupting traditional business forms and describe the new organizational structures that are emerging in their place.

The main argument? The modern ‘company’—which has dominated the global economy for the last two hundred plus years—is facing an existential threat. We are living through the beginning of the end of the corporation. New ways of organizing business have emerged—‘platforms’ and, what we refer to as, ‘ecosystems’. Understanding the distinctive features of these emerging business forms and thinking about how to design a regulatory environment to facilitate these new ways of operating a business has become a crucial task.

One effect of the emergence and global dissemination of networked digital technologies is a transformation in how businesses structure themselves. We cannot think in terms of traditional corporate structures anymore. Company boundaries have become more porous. Traditional corporate organizations with their closed departments, divisions, and hierarchical relationships between different groups of stakeholders are changing as companies adapt to this environment.

To make sense of this change, we propose the concept of business ecosystems as a description of these nascent organizational forms. Such ecosystems combine the following features:

• Leveraging the unique characteristics of software technologies (e.g., low marginal costs) to deliver a powerful experience to end users.
• Adopting a flatter, fluid, and more inclusive style of organization built around networks of unbundled, high-performance, creative teams in which job roles are evolving continually.
• Utilizing open collaboration with multiple ‘external’ partners.
• Embracing a more transparent approach to communication and information management that relies on new computer-mediated communications, such as social media.
• Implementing a new digital leadership that focuses on creating an environment that facilitates creativity rather than supervising compliance or managing legal risk.

Together, these features distinguish an ecosystem from the modern corporation. In an age of hyper-competitive technology-driven markets, every company needs to consider reinventing itself as an ecosystem. If it does not, younger and more agile competitors better attuned to the realities of the digital world will replace it.

We believe that this change in how companies are organized has important implications for policymakers. Existing regulatory approaches are failing business organizations. In short, many corporate governance rules and regulations are programming institutions to be dysfunctional. There is an ever-widening gap or disconnect between regulatory strategies and the business needs of companies operating in fast-moving, technology-driven markets.

After all, the corporate governance discussion hasn’t evolved much since the early seventeenth century, when the Dutch East India Company turned to the public to raise capital for its highly risky overseas trade ventures. In return, investors received paper certificates (shares) that were tradeable on the world’s first stock exchange in Amsterdam. Despite the transferability of shares, the Dutch East India Company was prone to fraud and deception. Investors expressed dissatisfaction with dividend policies and the murky Company accounts. In response to these deficiencies and to minimize wrongdoing, the government demanded greater transparency and disclosure. It introduced an early form of a board of directors to monitor and advise managers.

If we fast-forward to today, we see that corporate governance debates haven’t changed that much. The focus is still on reducing managerial misbehavior and maximizing value for shareholders (the stakeholders who are taking the most significant risk). And the mechanisms for achieving this are more transparency and more supervision.

Unfortunately, however, these regulatory structures are often not fit for purpose. At least, if the goal of regulation is understood as facilitating innovation-driven ecosystems and not preserving the corporation. Too much regulation incentivizes the wrong kind of organizational structures, culture, and behavior, and makes leveraging new technologies unnecessarily costly. Company law, including corporate governance, has embraced an ‘agency-cost’ frame derived from the work of Berle-Means, and Jensen-Meckling. Regulation has been designed to maximize shareholder value and enhance shareholder-owner control over the firm.

However, such an approach does little to address a firm’s need to organize for innovation and operate as a sustainable and responsible ecosystem. Instead, most regulation creates an incentive for manager-agents to engage in formalistic compliance and adopt a short-term focus on financial metrics aimed at appeasing shareholders. The current regulatory framework distracts firms from doing what they should be doing to succeed in a networked age. As such, corporate governance results in costly bureaucratic and legalistic procedures that function as a drain on a firm’s resources.

Current regulatory approaches are failing business organizations. Too much corporate governance is programming institutions to be dysfunctional. There is an ever-widening gap or disconnect between regulatory strategies and the business needs of companies operating in fast-moving global markets.

The result? Many businesses and other organizations are ill-equipped to meet the challenges of today’s world. Instead, we need to design regulations that incentivize firms to establish the organizational structures and practices that will allow them to succeed. A new paradigm of corporate governance focused on supporting a firm’s capacity to innovate—as well as compliance and risk management—needs to be developed.

There is currently an enormous amount of interest in emerging technologies and what they mean for business and business regulation. However, the various stakeholders in the corporate governance space are moving at different speeds and in different directions. Everyone is aware that something important is happening, but there is much less agreement on what the digital transformation means for the future of business and business regulation. This is a crucial issue, as those jurisdictions that ‘get corporate governance law right’ stand to benefit enormously. 

Mark Fenwick is Professor of International Business Law, Faculty of Law, Kyushu University, Japan.

Erik P.M. Vermeulen is Professor of Business & Financial Law, Tilburg Law School, Tilburg University, the Netherlands. He is also Senior Legal Counsel at Signify (formerly Philips Lighting).