In a networked and digital age, we need to rethink the structure of the modern corporation. In order to survive and grow, corporations must operate with a new set of assumptions and principles in order to remain relevant, competitive, and successful. Consider the growing number of technology startup companies that are doing something that once seemed unthinkable: challenging and disrupting traditional corporate giants. Even the behemoths that operate in industries that traditionally were not viewed as technology-related industries have not been spared from the impact of new arrivals and the resulting transformation in the business environment. With the rise of digital technologies, every corporation must now become agile, innovative and, more importantly, act as though they are dynamic technology companies. Ignoring the challenge of the networked age and the digital revolution is no longer an option as it will merely accelerate the decline and failure of large corporations.
So, how should large, well-established corporations operate in today’s business environment? The answer seems to be simple: by learning from the most innovative (particularly startup) companies. Significantly, these newer companies have mastered four digital technologies when developing new groundbreaking products and services, namely cloud computing, big data, mobile and social media. Decision-making processes are increasingly based on digital data, digital footprints are becoming an important factor for success, and policies regarding the use of digital technologies are adjusted to the expectations of consumers. Most importantly, products and services are currently designed with digital technologies in mind. These startups have benefitted from the opportunities that are offered by increasing global connectivity.
While this all sounds relatively straightforward, it often is not. A common refrain is that corporations quickly lose their entrepreneurial spirit as they mature, thereby becoming less responsive to innovative and disruptive changes in the market. Entrenched interests and the innate conservatism of larger organizations ensure that once the “magic” is gone, it can be difficult to recapture. As soon as corporations have “forgotten” how to develop and introduce new breakthrough and game-changing technologies, their decline can appear to be inevitable. This trend is reflected in the shorter corporate life cycle currently observed around the world.
The idea that I think we should explore is that companies that are able to reinvent themselves by adopting an entrepreneurial spirit or recovering the “startup feel” are arguably best prepared for future opportunities and challenges. Developing a better understanding of how to do this can then provide the basis for internal organizational reforms, as well as a re-thinking of the meaning of corporate governance in a networked and digital age.
A critical question then becomes how to conceptualize the relationship between investors, managers and employees. Reid Hoffman, co-founder of LinkedIn, together with San Francisco-based entrepreneurs Ben Casnocha and Chris Yeh, have already introduced a framework for re-thinking of the relationship between managers and employees in their book “The Alliance”. The fact that lifetime employment is not sustainable in a networked and digital age prompted the authors to come up with a model that would rebuild trust and loyalty, whilst at the same time creating incentives for employees to become more entrepreneurial and open to innovation.
But this is still not enough. The corporate governance structures of firms, that have lost the start-up feel, also need a facelift. One of the main problems, however, is that the regulatory environment has created a corporate culture in which the relationship amongst managers, directors and investors is hierarchical and agency-based. As a result of this, shareholders and boards of directors tend to focus on the control of managerial misbehavior and the monitoring of a company’s past-performance and sustainability, instead of actively contributing to its future success. The fact that academic theories typically view the “separation of ownership and control” as one of the hallmarks of the modern corporation does not help.
And yet, there are examples of established corporations that have been able to maintain or return to the innovation-oriented model, despite the agency-based and over-regulated environment. These corporations are, in essence, bringing the art of inventing innovative products and building pioneering businesses back to the forefront of their activities. Companies that are best in their class have taken it upon themselves to design governance practices that made them better innovators. They have been able to create a “test-and-learn” culture by implementing flat hierarchies and open communication, which in turn encourages greater cooperation, loyalty and mutual trust.
Such practices can be broadly categorized into three groups: (1) the appointment of founder-CEOs or professional CEOs who act like founders (knowledgeable, innovative, courageous and not threatened by technologists); (2) the importance of board diversity (in terms of technical and product/process-cycle expertise); and (3) the establishment of investor relation strategies that focus on non-financial metrics and a more fruitful (i.e. collaborative and not hierarchical) interaction between the corporation’s executives, board of directors and investors. What is interesting in this regard is that digital technology experts are increasingly appointed to the board of directors of the more innovative-minded traditional corporations.
Unfortunately, many of these practices are too often discounted as irrelevant traits of corporate governance. This is unfortunate as an empirical analysis of the organizational structures of the world’s most innovative companies (at least, according to business magazines Fast Company and Forbes) indicates that these practices are correlated to the innovation potential of companies. But a change in the way we think about the structure of the modern corporation is imminent. Consider the success of Warren Buffet’s Berkshire Hathaway, Jeff Bezos’ Amazon becoming the world’s most valuable retailer and Larry Page and Sergey Brin’s decision to establish their new holding company, Alphabet.
What these companies all have in common is that they are managed by visionary and charismatic CEOs who position themselves as “managing partners”/dominant leaders of a “corporate partnership”. Their companies are working for the long-term rather than on a quarter-to-quarter cycle. Moreover, they are characterized by an inclusive and collaborative management style, in which the shareholders and stakeholders are viewed as a community or an ecosystem that is working together to create value by delivering relevant new products and services.
The preceding post comes to us from Erik P.M. Vermeulen, Professor of Business & Financial Law at Tilburg Law School. The post is based on his recent article, which is entitled “Corporate Governance in a Networked Age” and is available here.