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Posted by Andrew & Nada on 3rd September 2021
Time to face-up to a lack of digital governance

Leading digital organisations including Google and Amazon are becoming ever more dominant in a world poorly equipped to regulate or govern a newly emerging and diverse array of ‘Platform-Based Entrepreneurships’ (PBEs), say Nada Kakabadse, Professor of Policy, Governance & Ethics, and Andrew Kakabadse, Professor of Governance & Leadership.

Digital platforms such as Google, Facebook and Amazon have critically changed the way in which companies compete, generate and deliver value to their customers.

Entire ecosystems of value-creation and exchange have been repositioned with the opening of new online spaces and channels that are allowing entrepreneurs to create and operate new firms.

These platforms are continuously evolving so that organisations can:

  • Bring sellers together to coordinate entrepreneurial activities within a single platform ecosystem
  • Create value by generating and harnessing market supply and demand economies of scale
  • Use modular, technological architecture based on a central core, made up of data and algorithms, software development kits (SDKs) and application programming interfaces (APIs)
  • Employ periphery activities using generative technologies that integrate with other products and services, and which continue to evolve in use and functionality

An unhealthy market dominance
Generative platforms are disruptive, controversial and notoriously unpredictable due to the terms and conditions they impose upon ecosystems. In addition to purported concerns around the use of privacy, certain platforms present an unhealthy dominance over their respective markets – a clear case in point being Amazon’s global impact on consumer shopping habits.

Through the storage and use of information and connectivity, platforms connect multiple product offerings from independent firms to provide customers with integrated service solutions. As these platforms become more popular, their user value increases and stimulates rapid nonlinear growth, to the point where entire markets coalesce around them.

Google Search is a good example – it links users searching for information with advertisers, who in turn provide channel-relevant information. Others, like Amazon Marketplace, facilitate transactions between providers of goods and customers, while Apple’s iOS platform enables firms to build complementary goods – Apps - that extend core functionalities of the platform to end-users.

The strength and popularity of these networks lead to high levels of market concentration, where the winner often takes all. This is the heart of platform value creation and capture. Such dynamics make leading platforms powerful oligopolies or even monopolies that prevent market access for new entrants and drawing any remaining independents towards their centre.

Platforms proving highly adaptable to global economy
Although multiple platforms can compete in the same market, those with overriding dominance are identifiable by best using technical attributes to meet users’ needs. For example, the Apple iPhone and accompanying iOS App Store for mobile apps controls a large share of the smartphone market and its design characteristics define industry norms for its competitors.

Similarly, Google’s Android, Amazon’s Kindle, Apple’s iTunes, YouTube, Flipboard, Google and Apple News, and Valve’s Steam (the downloadable PC games market-leader) have all gained centrality in today’s digital business landscape.

The most distinctive aspect of the top digital platforms is their generative, continuously evolving and functional nature. They define themselves through superior connection and integration with other products and services. For example, smartphone apps extend the value and functional use of a device by allowing its users to gain access to, and consume, other products and services.

This attractiveness is hard to deny and the adaptability of platforms means that they are suitable for almost any sector of the global economy. New Fintech start-ups are moving into the financial services sector, and many incumbent banks are considering how to introduce platform services.

Traditional retailers are also shifting product distribution channels from physical stores to online platforms, questioning conventional market boundaries by redefining the type and intensity of competition. In fact, the success of these platforms is forcing organisations to completely re-examine their overarching business models.

PBEs offer entrepreneurships access to large-scale markets
Platforms welcome an entire constellation of producers, from sellers through to specialised service providers, and give them a base to build their business. Familiar names including eBay, Etsy, Facebook, Instagram, Yelp, and YouTube, make it easier to generate income by offering platform-based entrepreneurships (PBEs) access to large-scale markets, along with a variety of incentives to populate their platform ecosystems, simultaneously fulfilling two functions.

PBEs operate businesses using the platform as the intermediary. However, to the platform owner, the PBEs are complementors, whose existence is only important if it adds value to the platform.

As members of a platform ecosystem, PBEs are at the receiving and of a power imbalance in comparison to the platform owners, who can unilaterally enforce changes to the competitive conditions of the platform.

While the quality of the platform’s technological core is important, two other factors contribute equally towards establishing market dominance:

  1. The size of the installed base - the number of end users who have adopted the platform
  2. The availability of complements – for example, video games or software applications that run on the platform

In many markets, the platform with the largest installed base and the highest number of complements can lock out rivals and dissuade complementors and end users from switching to a competitor.

As a result, with digital technology becoming ever more central to a firm’s competitive advantage, businesses are experiencing an increasing dependence on platform competitiveness.

Large corporations earning half of revenue from platforms
Understanding platform competition is essential to untangling competitive dynamics in digital markets. This is crucial for leaders’ knowledge of revenue growth and the future profit margin prospects, especially considering that 60 of the world’s 100 largest corporations ranked by market value earn at least half of their revenue from platforms.

Despite this, governments frequently struggle to adapt to fast-changing technological realities and take a glacial approach to designing appropriate governance mechanisms or appropriate regulatory frameworks that are suitable for these new types of organisations.

This outdated adherence to traditional corporate governance frameworks is now proving to be problematic. Original approaches were developed for the realities of short-term, hierarchical, compliance-oriented and centralised 19th Century organisations. These frameworks are ill-suited to the business needs of digital platforms, which are continuously adapting to shifting technologies, markets and consumer demands.

An urgent need for digital platform governance
There is an urgent need for governance in the digital-platform age to account for the diverse coalition of actors now working in partnership and also to provide contingent and dynamic solutions to the winner-takes-all outcome.

Smaller, leaner firms operate through a combination of software platform, network technologies and market-based transactions while gathering information on market actors and rapidly negotiating and concluding agreements. These entities contradict the hierarchical control and monitoring mechanisms of present-day corporate governance.

Existing corporate governance frameworks promoting shareholder primacy may have been suitable to closed company hierarchies and cautious decision-making processes with clear reporting structures, but they are ill-suited to digital-platform businesses. The current experience of so many stakeholders feeling alienated by the way corporations treat them should not be allowed to continue, particularly as it undermines a platform’s opportunities for success.

The present-day focus on increasing the accountability of corporate executives to shareholders does not address the business needs of innovative firms born in the digital era. Rather, it has the harmful and counter-productive effect of incentivising opaque legalistic financial reporting.

This unhealthy, short-term focus on share price and formalistic compliance with market valuations constrains genuine innovation and openness and sets in process predictable and long-term decline.

Strengthening control mechanisms creates a culture that is at best inefficient, and at worst, institutionalises box-ticking and indirect evasion of legal obligations, resulting in socially destructive behaviour and corporate scandals.

Regulators and legislators need to consider more dynamic and responsive governance frameworks that are fit for the emerging purpose. Governance and regulation should similarly promote and guide entrepreneurial innovation for sustainable and responsible businesses.

The lifeblood of any digital platform is its connections and ability to connect. This offers an opportunity to facilitate openness, inclusiveness and diversity by designing a regulatory framework focused on connectivity at key touch-points, namely the combination of channel, device and user tasks.

Stewardship presenting greater relevance in digital markets
The world of fast-evolving ‘business needs’ is best balanced against the requirement for ‘responsible action.’ Both are integral regulatory requirements that require a strong willingness to engage in responsive, regulatory solutions that draw on active stewardship rather than the deadening hand of compliance.

Regulatory responsibilities will increasingly cross many boundaries in the digital world. The new frontier incorporates local, national and supranational state and non-state authority lines. Private actors with complex new technologies will change what we consider to be ‘normal’ through the deployment of technology, which in turn will require regulators to understand and steward vital touch-points.

Stewardship will continue to have greater relevance and meaning in digitally-determined markets, which will legitimise the governance of partnerships that work to provide contingent and dynamic solutions for emergent and diverse coalitions of actors. The question is how?

The purpose of governance and boards is to provide oversight of the assets under their care in order to realise greater value than was previously the case. The more traditional meaning attached to value was purely monetary, or profit.

However, with climate change and the erosion of our ecosystem value, from today onwards, needs to encompass supporting and enhancing human and societal wellbeing. In fact, advances in technology have surfaced long-standing concerns for human rights and quality of life.

Take, for example, the desire of many employees forced into homeworking because of the pandemic. At least 50% of UK workers say they have become less career-focused during the COVID-19 outbreak, and just as many add that they would prefer greater workplace flexibility and the opportunity to continue working away from the office.

Technology has brought about new meaning to stewardship. In the more traditional entities the practice of governance was, by its nature, vertical. The board looked down on the C-suite and the senior management below with their particular responsibility for strategy execution.

As a result stewardship to date has focused on mediating through two tense fracture points, namely between the board and the C-suite - the meeting point between governance oversight and strategy creation, and then between the C-suite and the key general management – essentially the tension between corporate strategy initiation and the reality of strategy delivery.

Most boards have not become involved in working through the tensions of fracture point two, often to the detriment of the enterprise. Misalignments continue to occur, to the dismay of critical stakeholders who have considerably invested in the enterprise.

The growing predominance of technology in business will change the very nature of stewardship as the simplicity of vertical oversight is circumvented by horizontally-driven stewardship mentoring.

This involves multiple entities, who by the nature of the new markets change identities from customer to supplier to information controller. The number of fracture points now multiply, exposing the company to greater risk and reputational concerns.

There is little understanding of the number and nature of the sensitive interfaces that require stewarding from the central information hub to the dynamic entities that provide purchase capacity concurrent with being competitors.

How many fracture-points the boards of the future will encounter remains a known unknown for the time being, but what we can foresee is that the ever changing nature of those networked intra-relationships will clearly become a board responsibility.

As technology develops, we are facing a revolution of governance. The board director of the future is no long longer dependent on compliance. Instead they will have to mediate across the multiple entities which make up the network. The greater the network complexity, the more the board is exposed to having its credibility damaged, not because of poor product or service offerings, but more likely owing to stakeholder demands and rights that have not been sufficiently observed.

The governance of the information organisations of the future is likely to be as, if not more, important than the information itself.

A version of this article first appeared in Governance + Compliance magazine.

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