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The Tech-Driven & Unmediated Corporate Culture of Today’s “Winning Companies [Volume 6 -2016]

7 September 2016

The Tech-Driven & Unmediated Corporate Culture of Today’s “Winning Companies”

What do today’s “winning companies” have in common?

They all strive to create an open and unmediated corporate culture built around technology, data and algorithms.

A tech-driven — more specifically, a data-driven or algorithmically driven — culture helps firms to build and maintain “relevancy” in a digitized and networked marketplace.

Relevancy, in this context, refers to designing and re-designing products or services that constantly deliver a personal, meaningful, relevant and satisfying experience to consumers. The most successful firms understand that achieving this goal means embedding new technology into every aspect of the organization and governance of a firm.

In a presentation at the DLD (Digital – Life – Design) 2017 Conference, Scott Galloway, Professor of Marketing at NYU/Stern School of Business, explained that an “algorithmically driven” culture helps companies achieve and maintain relevancy (and become a “winner” of the future).

In this way, the most successful firms are already using data analytics and smart algorithms to “un-mediate” and decentralize the relationship between their business and consumers. Technology enables them to use “consumer behavior data” and improve the “consumer experience” in real time.

Since ten of the thirteen S&P 500 companies that showed an above average revenue growth over the last five years can be considered “algorithmically driven companies”, it seems reasonable to conclude that technology, data and algorithms are the fuel of the companies of the future.

But it is not only about the relationship between a firm and its consumers and products. Take the example of “Millennials”. A generation that is uncomfortable with the idea of working in one place for “thirty years” and of being constantly told what to do, is attracted by organizations in which open communication and a “best-idea-wins” approach prevails.

Companies can use technology, data and algorithms to build an unmediated and inclusive corporate culture for all stakeholders, i.e., investors, executives, managers and employees, but also early adopters, former employees, other companies, service providers, the different layers of government and society at large.

Such an unmediated and tech-driven culture will give them a competitive advantage in attracting talent, raising capital, finding suitable partners and, perhaps most importantly, in remaining relevant in hyper-competitive global markets.

Facebook, Alphabet (Google), Amazon – but also Netflix and Tesla – belong to the group of winners that have embraced such a corporate culture. Their stock price return over the past five years are significantly higher than the average return of the S&P 500 companies.

How then can a firm build and manage a tech-driven, unmediated and open corporate culture?

Corporate Governance

Companies that are ahead of the curve embrace technology-driven “corporate governance” practices in their efforts to create and maintain relevancy. Most obviously, these practices contribute to an unmediated and open culture in which top-management continuously receives relevant internal and external input about the market and subsequently identify and plan for the future.

The theory that corporate governance improves the overall dynamism and quality of decision-making, affording companies with the best chance of succeeding, is not new. There is a general consensus that “good” corporate governance improves firm performance.

But, there has been widespread disagreement as to what this actually means or how we might achieve it. Such difficulties are hardly surprising.

But, most of the corporate governance discussion fails to recognize what is already happening and what needs to be done. An obsession with building and maintaining control has driven the agenda.

Such a trend is hardly surprising. Contemporary corporate governance frameworks were developed, in large part, as a response to the accounting fraud and corporate scandals in the 2000s. Yet, they had little or no impact on the performance of listed companies during the last financial crisis. Moreover, the number, scale and effects of corporate scandals and economic failures do not appear to be diminishing.

Stated bluntly, corporate governance has failed and continues to fail.

This failure has resulted in several more recent corporate governance reforms. These reforms diagnose the main problem as being a myopic focus on “short-term” shareholder value maximization, dividends and share buybacks. However, there are good reasons to be skeptical about such reforms.

For example, a focus on dividends and share buybacks makes it extremely difficult for a company to invest in innovations that are critical to maintaining relevancy over the long-term. What is interesting in this regard is that ten out of the thirteen S&P 500 with an above average revenue growth have never paid any dividends to their shareholders and were never engaged in share buyback activities.

In order for a company to remain relevant, a greater emphasis on creating a culture of “long-term value creation” is necessary.

An example of this trend to create more responsible “long-term value” corporate cultures, is the introduction of the so-called Commonsense” Corporate Governance Principles. A group of leading corporate executives, asset managers and investors unveiled a report in July 2016. The report sets out the “commonsense principles” for publicly listed companies, their boards of directors and shareholders (www.governanceprinciple.org).

The principles reflect the drafters’ intention to encourage executives to take a long-term approach to the governance of their companies (“the sort of approach you’d take if you owned 100% of a company”).

It is interesting to see that this focus on a culture of “long-term” value creation has become more widespread. Consider also The New Paradigm, A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth, issued on September 2, 2016, by the International Council of the World Economic Forum. Like the Commonsense Corporate Governance Principles, The New Paradigm gives the board of directors a crucial role in implementing corporate strategies and a corporate culture that pursues sustainable long-term value creation.

The most recent example is the launch of the Corporate Governance Principles for US Listed Companies by the Investor Stewardship Group, a coalition of institutional investors and global asset managers, in January 2017.

Unsurprisingly, these principles also focus on the creation of a culture of long-term value creation. They are based on the belief that shareholders/investors are best suited to appoint directors who represent the long-term interests of the company. The board of directors should monitor management and develop incentive structures that are aligned with these interests.

Still, it seems unlikely that these initiatives will work in the way that their drafters intend. The main issue with these initiatives is that they still frame corporate governance in terms of hierarchy and control. They, ignore that we are moving from a “centralized” to a “decentralized” (or “unmediated”) and “interconnected” world. Moreover, they largely disregard that this process is further accelerated by rapid technological change. Consider social media, blockchain-based smart contracts, decentralized autonomous organizations, big data and artificial intelligence.

Tech-driven Corporate Governance

Remarkably, the use of technology in “corporate governance” is often limited to the use of websites to disseminate information, such as annual reports. These websites (in most instances “investor relations” websites) are surprisingly dull, static and – in most cases – not very interactive. If regular updates are provided, the websites are often slow and, once opened, only give the viewer formalistic and legalized information. What is perhaps less surprising is that this information is usually highly standardized.

For sure, there is more technology used in “corporate governance”. Electronic proxies and electronic voting at annual meetings of shareholders become more and more used. Also, boards of directors appear to understand that IT services, Internet portals and board meeting management software can make them more efficient in performing their activities.

Yet, the technological revolution hasn’t led to more unmediated/decentralized corporate cultures. For instance, social media technology, which facilitates the real-time exchange of information, has yet to take a foothold in discussions about corporate governance. Indeed, an analysis of the 250 leading companies that appear on the Forbes Global 2000 list (which includes the leading publicly listed companies in the world based on sales, profit, assets and market value) shows that only seven percent have a CEO who is personally active and connected on Twitter.

Social Media Technology

Corporate organizations have historically been closed systems characterized by a lack of transparency and information flow. Clearly, social media technology represents a break with this. Without stating the obvious, social media technology is associated with a much greater degree of openness.

On the one hand, it is perhaps not surprising that only a small number of corporate CEOs, directors or other executives have run with social media. On the other hand, this can seem like a missed opportunity; those CEOs that have embraced new forms of communication have, most of the time, done so for the betterment of the company.

Pursuing this thought, the following schematic elements of an effective – and trust-building – strategy for a transparent, unmediated and unpolished “social media” dialogue can be introduced

Besides building trust and transparency there are several other advantages to the “unmediated dialogue” that is associated with social media:

1. (1) Honesty. What is interesting is that an “unmediated dialogue” usually strikes a chord of honesty. The “unmediated vision” helps create and maintain a “corporate” culture of honesty and openness.

In this regard, it is remarkable that “honesty” is not highly valued in a “centralized”, hierarchical environment. In the heavily mediated corporate world, the focus is on “good news only”. Nobody wants to hear bad news or be the “messenger” delivering bad news. Consider Nokia’s failure to effectively compete in the smart-phone market. Middle management was not encouraged to disclose the shortcomings of Nokia’s smart phone operating system. Volkswagen’s emissions issues and Samsung’s exploding batteries nightmare are other (of many) examples.

1. (2) Vision and Leadership. It appears that today’s winners usually have visionary and “founder-type” leaders. These leaders are often known for their charismatic keynote presentations that contribute largely to stakeholders’ expectations and view about the (future) relevancy of the company. But, these “visionary” leaders also deliver clear, concise and relevant narratives/stories via unmediated communication, such as social media.

Some say that these “storytellers” have an unfair competitive advantage. Their companies are more likely to remain relevant in the near and distant future. What is interesting, however, is that leaders with “sub-par” presentation skills are also able to shine in the world of social media. Social media technology makes it possible for every leader — irrespective of their personal charisma — to become a visionary.

1. (3) “Heart and Soul”. It generally follows from discussions with corporate lawyers and corporate governance experts that they don’t encourage a more personalized and “speech-like” way of communicating. Particularly, they are reluctant to promote the use of social media by corporate executives and directors in fear of the misunderstandings that it may cause in the market (and subsequent liabilities). Obviously, we are not yet familiar with CEOs or other high-placed executives actively using social media to engage with stakeholders.

We just have to give it more time to get used to it, but eventually engaging in a more unmediated dialogue will be one of the key responsibilities of a good “corporate” leader. The use of social media, for instance, can be extremely powerful for corporate leaders. It forces them to think, articulate, and question. The content of the message can go a long way in bridging the knowledge gap between the company and its stakeholders, giving the company a “heart and soul”, and ultimately aligning incentives between the company and its stakeholders.

1. (4) Real-time Feedback. There are multiple additional benefits for a company in adopting an unmediated, open and engaged communication strategy. In particular, social media platforms provide the possibility to receive instant feedback from the “crowd” (often in the form of comments, likes and shares). The “wisdom of the crowd” helps companies carefully craft their brand, identity and even their governance.

Winners “Do”
There is a plethora of unmediated means that can now be utilized as a platform for communicating. For instance, an increasing number of company leaders now communicate with investors via an online “annual letter” and, in many cases such letters have become more important to investors as a source of information than the official annual reports or other more conventional or traditional modes of financial communication.

Clearly, such letters work best when written in a highly personalized, honest and unpolished style. Social media and other online media (such as blogs and YouTube videos) are becoming more important as a forum for disclosing information about a company. It is thus not surprising that winners use a variety of traditional and new opportunities and possibilities for more imaginative forms of information dissemination.

A well-documented example of a company that has adopted this type of approach is Warren Buffet’s Berkshire Hathaway. Buffet’s annual letters to shareholders are considered a “must read” for anyone with an interest in the corporate world. What is perhaps most interesting is that these letters not only provide investors and other stakeholders with last year’s financial information and future developments and growth prospects, but also include “personalized” business advice and insights.

What is even better is that these letters attract enormous attention on social media. They create significant hype, which makes the communication even more personalized, open, and effective. Tech moguls, like Jeff Bezos (Amazon) and Larry Page (Google, Alphabet) have also embraced this type of strategy.

Another important example of a similar strategy is Netflix. In 2009, its founder Reed Hastings pointed out that too many corporations have “nice sounding” value statements, such as integrity, communication, respect and excellence. In a 124-page slide deck, which is posted on Slideshare.com, Hastings outlined how the dynamic of this employer-employee relationship needs to be changed.

As stated in the slide deck: “The actual company values, as opposed to the nice-sounding values, are shown by who gets rewarded, promoted, or let go.” This forward-thinking approach to culture helps to attract talented people, as it offers them a much greater degree of freedom and responsibility.

Other examples of the use of social media technology are Mark Zuckerberg’s live Q&A to the Facebook community in June 2016; Mark Zuckerberg’s Manifesto posted on Facebook in February 2017; Salesforce CEO, Marc Benioff’s live streaming presentations at the yearly Dreamforce events; and Tesla’s Elon Musk’s active presence on Twitter with almost 7 million followers.

A “Data-driven” Board of Directors

Following the 2008 Financial Crisis, a predominantly independent board was considered essential to serve as a necessary and dynamic “wedge” between the company and its insiders, on the one hand, and the capital market and investors, on the other. The dominant view has been to treat the board as supervisor/monitors of the senior managers. In consequence, the board of directors tends to focus on the control of managerial misbehavior and the monitoring of company past-performance and sustainability.

An alternative way of framing the issue of the board would be to move beyond the “control frame” and embrace the crucial role that the board can play in advising and contributing to the strategic direction and future performance of a company.

But even this is not enough in the world of rapid technological change and millennials. The winners now seem to recognize that the monitoring and advising role is no longer sufficient and that the board of directors constitutes a “missed opportunity”.

Instead, the winning companies have included a diverse range of individuals who are expected to assist management by providing unmediated and relevant input from the market, which is necessary to identify a plan to remain relevant for the future. We call such directors “feedback providers”.

Recall the S&P 500 companies that showed an above average revenue growth over the last five years. Almost half of their board of directors (45%) consists of such “feedback providers”.

Who then are these “feedback providers”?

Some of them can be viewed as technologists or technical visionaries. Often such individuals have been responsible for product innovation or product development at companies that operate in similar markets or in the periphery of a company’s core business. Others may hold academic positions, particularly in the area of biotech, medicine, and engineering. This is consistent with the intuition that their presence can be an invaluable source of data for a firm in identifying issues and opportunities regarding disruptive innovation.

Artificial Intelligence

And the move towards an unmediated and data-driven/tech-driven corporate culture doesn’t stop here. Imagine a board meeting at a gaming company in the near future. The company faces a “make or break” decision that could determine the fate of the firm:

Do we want to go into “augmented reality” games?

Once a commitment is made, there will be no going back. This choice is existential; it will affect everything. Get it wrong and the firm may very well die. And the deadline for deciding has already passed . . .

The board is split down the middle. Four votes in favor and four votes against. An enormous amount of information has been gathered and perused, but endless meetings and heated discussion have failed to break the deadlock.

Finally, the CEO proposes a solution. “Why not let AIMEE decide?”

AIMEE is the ninth member of the board, an artificial intelligent machine, a super-computer making decisions using state-of-art algorithms.

The board considers the CEO’s proposal. AIMEE had been trusted with decisions before, but they usually involved the processing of vast amounts of data gathered from the crowd. This time was different. This time it was a strategic choice that required a delicate balancing of multiple factors.

Confident that AIMEE would make the only correct decision, the board unanimously agreed. AIMEE would deliver the casting vote.

Welcome to a world in which artificial intelligence will have an “independent” board seat and is trusted to make “smarter” – data-driven – choices than humans.

Blockchain-based Smart Contracts

The implications of this type of account go way beyond the traditional corporate governance discussion. Questions of “controlling” managers, promoting long-termism and independent boards are displaced by a set of questions that are more appropriate to a digital and networked age, namely the role of social media, “flatter” organizations and (soon) artificial intelligence.

Some might suggest that now is not the time to be worrying about these future, “science fiction-type” prospects. This suggestion is wrong. Genuine innovation is already occurring. Consider the appointment of “Artificial Intelligence”, called Alicia T, as a member of the leadership team of a Finnish Software Company, Tieto in October 2016. Moreover, multiple new technologies (in the form of blockchain-based, smart contracts, for example) are set to continue disrupting “corporate governance”.

Christoph Jentzsch, the co-founder of IoT company Slock.it, was one of the “key founders” of a digital decentralized autonomous organization in May 2016. The original idea was to set up a corporate-type organization without using a conventional centralized structure.

The organization, which was called “The DAO” was completely decentralized. It didn’t have a physical address. The DAO was “merely” computer code.

Indeed, the DAO didn’t have any directors, managers or employees. The governance structure was built with software, code and smart contracts that ran on a public decentralized blockchain platform, Ethereum. This automated structure was intended to give “participants” in the DAO direct real-time control over contributed funds. Everyone could become a participant by purchasing DAO Tokens during a crowdfunding campaign in May 2016. The DAO raised more than $168 million from approximately 10,000 “investors”.

Like shares in a traditional listed corporation, DAO Tokens were designed to be fully transferable and tradable on “peer-to-peer” exchanges. A series of smart contracts granted them voting rights. In this respect, the blockchain-based smart contract mimics the role of articles of association or bylaws. Since the code of the DAO was open source, the token holders would vote on any change made to the code.

To be sure, fundamental flaws in the DAO code made it possible for hackers to transfer one third of the total contributed funds to a subsidiary account. This, and other technological limitations, meant the end of the initiative, but it does not mean the end of this vision of “decentralized autonomous organizations”.

In January 2017, Christoph Jentzsch compared the development of decentralized autonomous organizations with the development of planes. The desire to build flat, unmediated, decentralized and fully democratized companies will not be stopped by setbacks.

Christoph Jentzsch announced his next project: a decentralized autonomous organization that operates in the area of non-profit and charity. The possibility to make donations and aid without the interference of bureaucratic authorities and institutions would set the stage for further “corporate governance” developments in a blockchain platform.