Nobel laureate Bengt Holmström: “We see signs of a tsunami”

In early October, IESE’s Madrid campus welcomed scholars and guests – both in person and online – to the 2021 IESE-ECGI Corporate Governance Conference, an annual event that gathers some of the foremost experts in management and economics. On the first day of the conference, I had the great honor of moderating a panel session with Sophie L’Hélias, founder and president of LeaderXXchange, and Bengt Holmström, an MIT professor of economics and winner of the 2016 Nobel Prize in Economics.

In his session, Prof. Holmström warned us of a data-driven tsunami that promises to radically change how businesses will need to formulate their corporate strategy and consequently structure their governance. Below are a few key takeaways from his presentation, followed by some of my own observations on how they might impact family-owned firms.

An approaching data tsunami

A massive wave of data-driven innovations – artificial intelligence, blockchain, sensors and machine learning, among others – is dramatically altering the strategic landscape for companies by creating new value propositions.

When we compare the 2008 and 2020 lists of the world’s Top 10 most valuable companies, the shift is easy to see: in 2008, only 1 of the 10 companies had a platform model: it was Microsoft. Today, that number is 7, starting off with Apple, Amazon, Microsoft, Facebook and Google, which are each valued at around $1 trillion.

Unicorns are another example: of the 100 largest unicorns – privately held start-ups valued at least $1 billion – 70 to 80% are platform businesses. In the words of Prof. Holmström, concerning the theory of the firm, “Please don’t ask ‘what is new.’ Everything is new!”

Information is the new collateral

This constellation of new technologies and access to massive amounts of data are changing the competitive landscape. From online marketplaces to fintechs, the market abounds with new players that squeezed traditional firms and intermediaries out of the equation.

Airbnb is perhaps the most notable example: launched in 2008, today it is worth more than the largest three hotel chains combined. If data are the new capital, information is the new collateral. This is particularly relevant for developing economies.

Narrowing gaps between industries

The data explosion is triggering another major shift by narrowing the proximity among industries. As a former member of Nokia’s board, Prof. Holmström offered a cautionary tale of what happens when firms are unable to correctly read industry shifts.

In 2005, Olli-Pekka Kallasvuo was named CEO of Nokia, the largest smartphone maker in the world at the time. In a 2009 meeting with Steve Jobs, Kallasvuo was shocked when Apple’s CEO told him Nokia wasn’t considered a relevant competitor since they lacked a proprietary software platform. And the rest is history.

Surround yourself with good people

Apple would go on to dominate the smartphone market but their success offers another important lesson: Steve Jobs didn’t act alone. In fact, Apple would have never opened up its platform to third-party apps if it weren’t for other voices on the executive board. Fortunately for Apple, Jobs heeded their advice despite his reservations.

Apple’s experience underlines the need for top-quality boards, or as Gilson and Gordon described, “corporate boards 3.0” with “thickly informed, well-resourced, and highly motivated directors.”

As mentioned in a previous post, the digital tsunami Prof. Holmström describes represents unique challenges for family-run companies. Long-established family firms might need to strike a difficult balance between traditional business models and disruptive technologies, yet their ability to attract the best tech talent to guide this change isn’t easy.

Top-tier leadership is also paramount: the CEOs in most family-owned firms have longer tenures compared to listed companies. While this offers some advantages, it may be an obstacle when it comes to leading a digital revolution.