A NEW CORPORATE CONTRACT FOR THE DIGITAL AGE
by Nicolas Colin

Posted on Posted in 8th Global Peter Drucker Forum

A corporation is a contract between four parties with diverging interests: the shareholders, the executives, the employees, and the customers. The value created by the corporate entity is turned into wealth to be divided as laid out in that contract. In some cases, the shareholders get the lion’s share. In other cases, employees have the upper hand. The customers, too, can bargain for lower prices and a greater consumer surplus. It all depends on the industry as well as on surrounding institutions. The object of the corporate contract is to manage that balance of power so as to better align the interests of all parties involved, thus making the business more sustainable.

For part of the 20th century, employees were the clear winners of that corporate game. In the industries most emblematic of the Fordist economy, workers were served by institutions that helped them to better defend their interests. Through collective bargaining, they could demand better terms. And thanks to the social state, which made workers less dependent on their employers, they could also exit the negotiations if they didn’t turn out in their favor.

Spreading the wealth around was sustained by a positive feedback loop: the workers’ bargaining power led to higher wages which, in turn, led to more tax revenue to bankroll the social state and improve the workers’ bargaining power even more. That institutional grip seemed designed to extract wealth from greedy shareholders and complacent executives, redistributing it to the many, sustaining mass consumption and growing the middle class in the process. The wealth-creating power of corporations was thus harnessed to serve sustainable and inclusive economic growth.

In those industries where employees had the upper hand, the difficult collective bargaining discussions didn’t prevent management from becoming a solid ally of the workers. A common corporate culture united executives and employees in their devotion to assembling affordable products for the masses. It was a time, as Rick Perlstein wrote, when industrial corporations had “the willingness to stake [themselves] to the long term for the sake of building something enduring”.

That corporate contract ended in the 1970s. Radical changes imposed on the world economy from that period onward had a profound impact on the corporate balance of power. Burdened with higher energy prices, corporations had to take measures to restore profitability. Confronted with unprecedented competition from abroad, they had to improve efficiency in their value chain, enrolling legions of business consultants to help them achieve what Walter Kiechel III calls “Greater Taylorism”. Above all, the financial sector became more globalized. As the economic playground got bigger, depth and liquidity increased exponentially on financial markets, making room for larger pools of capital, bigger bets, and higher volatility. Capital that was both more mobile and more concentrated could now exert pressure on corporations and obtain higher returns over shorter periods.

Interestingly enough, executives (the most opportunistic of the four corporate participants) always tend to align with the dominant party. Thus those executives’ priorities help us see who has the upper hand. From the 1980s, shareholders regained that upper hand as they sealed an alliance with stock options-incentivized executives now determined to maximize shareholder value. The losers of this round were the workers, whose unions were losing most of their clout, and the consumers, who were made to submit to the power of large corporations. Capital flowed to the corporations that best succeeded at weakening the positions of employees (who had to accept lower wages) and customers (who had to pay higher prices for lower-quality products).

Today, some signs suggest that the digital economy is perpetuating a version of the contract that greatly favors shareholders over others. Workers, in particular, seem weaker than ever, even though they no longer work for the corporations themselves—they’re either contractors under pressure or working on-demand through algorithm-ruled platforms. Furthermore, as technology augments workers’ skills, qualifications are less critical: more people can deliver a technology-driven high quality service without much preliminary training (for instance when real-time geolocation spares a driver knowing the map of the city by heart). This surely means more opportunities for the unemployed, but it also leads to more competition on the job market; in turn, this helps employers bring wages down. Overall, the digital economy does not help workers regain negotiating power. Rather, it seems to be plunging them into a new precariat.

Yet the digital economy has also shifted the overall balance of corporate power in another way, as the customers—the fourth, long quiet party at the corporate table—are finally rising. We’re already seeing signs of that. Shareholders, for one, have to give up short-term gains as technology companies don’t pay dividends, let alone make profits. Another even clearer sign is the behavior and discourses of tech executives, who are now more obsessed with providing their customers with an exceptional experience than creating shareholder value.

The reason for the unprecedented alignment between executives and customers is specific to the digital economy. As software is eating the world, the multitude of Internet users has become the source of powerful network effects that play a key role in tech companies’ performance and help them “deliver the highest quality with the highest scale”. In other words, Internet users don’t only pay a price in exchange for a finished product anymore. They also play a critical role in creating value within the corporate supply chain. Thus in the digital age, corporations have no choice but to reward those customers with an unprecedented consumer surplus.

The rise of the customers as the dominant corporate party should be taken into account in any musings on today’s social compact. The main balance of power is no longer between the shareholders and the employees, with the executives as an arbiter and the customers as passive spectators. Instead the customers have become the strongest and most active party.

The utopian vision in the tech world is that that huge consumer surplus obtained by empowered customers will be enough to give rise to a new middle class: we won’t earn more (far from it), but everything will be cheaper. In a more realistic scenario, the customers will bargain with the shareholders and executives at the expense of the employees, thus continuing Charles Fishman’s infamous “Walmart Effect” of a population fighting against itself for a share of the pie—for we are all both consumers and workers.

More optimistically, a new form of union will rise from the ashes of the labor movement to bargain directly with the customers and establish the terms of a social compact where, like during the post-war boom, the many are more powerful than the few. The recent victories on the minimum wage front in the US were obtained through an alliance between workers and consumers. For the first time in over three decades, workers seem to be regaining some of their long-lost influence, with household incomes now growing at the fastest rate ever. Will it prove a hollow victory or does it foreshadow the terms of a new corporate contract for the digital age?

 

About the author:

Nicolas Colin is a co-founder & partner of TheFamily, an investment firm based in London, Paris, and Berlin. He’s also an adjunct professor in business strategy at Université Paris-Dauphine in Paris.

Leave a Reply

Your email address will not be published. Required fields are marked *