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Information-Driven Business Revolution

Don Tapscott
Author
Thursday, November 13, 2003; 1:00 PM

The information revolution will require companies to be more open with their customers, partners and workers, according to the authors of the newly released book, "The Naked Corporation: How the Age of Transparency Will Revolutionize Business." Co-author Don Tapscott was online with .com columnist Leslie Walker to discuss his thesis.

An edited transcript follows.


Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

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Leslie Walker: Hello everyone and welcome to today's chat. We'll be getting started at 1 p.m. EST.

In case you haven't read Don Tapscott before, you should know he's prolific. So far, he's published ten books on how technology is shaping business, including "Digital Capital" in 2000, "Growing Up Digital" in 1998 and "Digital Economy" in 1995.

For years, he has chronicled how the industrial-age corporation is coming apart and being reshaped by technology. In his latest work, he and co-author David Ticoll look at how greater access to a company's information by employees, shareholders and partners is transforming corporate ethics. Critics scoff that their view of today's crisis in corporate governance is naive; they doubt the information revolution will really lead companies to be any more honest.

What do you think? Submit your thoughts and questions now. Tapscott will start answering at 1 p.m.

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Leslie Walker: Welcome, Don. Thanks for joining us today.

Let's start with your thesis. Why do you believe companies will be less secretive in the future than in the past? Not everyone is convinced the information revolution leads inescapably to the "naked corporation." What are they missing?

Don Tapscott: Transparency is more than the obligation to discuss financial information. Its become a powerful new force in society - really gaining momentum over the last decade. Sarbanes-Oxley and other legislation is more a symptom.

Transparency is being caused by profound changes in technology, our economy, demographics, and the socio-political landscape. As a force it will not go away, it will only get stronger.

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Washington, D.C.: Can you have too much of a good thing when it comes to corporate nakedness? That is, what limits do you recommend on corporate disclosures?

Don Tapscott: Of course companies have legitimate trade secrets, intellectual property and so on. Firms also need to protect the privacy of customers and employees. There's also a battle taking place between transparency and opacity. Deceit still works in some cases, especially in the short-term. Think about spammers. You don't know who they are. The subject line is misleading, etc. There's a danger of "transparency fatigue", where we all know so much, we may just get tired. We're not just "transparency literate" and we end up making mistakes, revealing not enough or too much. But overall, the horse is out of the barn. All the different stakeholders that interact with stakeholders have unprecedented visibility. They can find out, inform others, and self-organize. So companies need to become actively transparent.

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Baltimore: Companies have always had implied responsibility for communities, environment and stockholders. We have seen major downfalls of corporations. Now, Healthsouth appears to be in the news for alleged misuse of funds. How would your plan protect the future of companies such as Healthsouth or Enron?

Don Tapscott: We're arguing that you're going to be naked, so you'd better be buff. Your company will need to have the best products and services, the lowest prices, the best relationships - and it will need to have integrity - because people can find out what you're really like. So the disgraced companies are not evidence that corporations are becoming worse. They're evidence of the dying model - of companies that don't understand the new transparent business environment.

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Washington, D.C.: So what are some of the most open companies today, and conversely, the most opaque?

Don Tapscott: We give dozens of examples in "The Naked Corporation" and there are great stories from every industry.

One that comes to mind is Progressive Corporation - the first to publish their own prices and their competitors prices on their web site. Customers love the IT-enabled candor - and Progressive employees become highly motivated to fix high-profile price deficiencies. They also publish operating results monthly. They're annual report has a picture of a naked man throughout the report, illustrating their drive to become a fully transparent company. Oh yeah, we all should have invested in them three years ago. Their stock price has gone up 100 percent.

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Vienna, Va.: Wasn't the Enron scandal out there on the Net for anyone to anticipate in advance, if they had just read the disclosures Enron had actually made to regulators?

So why will such disclosures make any difference in the future, if it didn't with Enron?

Don Tapscott: As an individual shareholder, we all could have read JaniceJoplin298's dissertation in a 1998 chat group about how off-balance sheet financing, and other monkey business, was going to sink Enron. But it was pretty tough to discern this one piece from the thousands of other breathless comments about Enron being America's corporation for the next two centuries. The biggest change that's taken place is that the owners of wealth - institutional shareholders (the largest being pension funds) - are starting to become active. So you and I don't have to spend all day on an Enron chat group to figure out what's going on. The institution who invest on our behalf are doing this.

In the book we talk about the Ontario Teachers' Pension Fund ($80 billion) who says they want to know everything about a company they invest in, including how management thinks.

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Leslie Walker: You say "Transparency is being caused by profound changes in technology, our economy, demographics, and the socio-political landscape."

Can you elaborate on the key changes driving this transparency force?

Don Tapscott: First is the rise of the Internet. Other modern media - newspapers, TV, movies and radio - are one way broadcast, centrally controlled, and easily subject to economic concentration. The Internet is the opposite of all these. For the first time in human history, individuals and groups have a cheap, universal communications tool that lets them find out what corporations are doing, inform others, and self-organize a response. Music-swappers, anti-fast food campaigners, and US workers up in arms over offshore outsourcing - all are evidence of how the Net delivers information and organizing power.

Second is the clear and growing need for transparency in business to business dealings. As market capitalism goes global, it imposes a performance discipline on the competitive success of firms and nations. The crises of 1998 in East Asia and 2002 in the US exposed the costs of cronyism, corruption, and false reporting. In addition to bankruptcies, job losses, and stock market crashes, underhanded behavior adds a risk premium "tax" onto loans and investments. Banks charge more interest and investors demand more equity (or back off completely) in the face of dubious business practices and opaque corporate governance.

Another business-to-business issue: Global supply chains need easy, efficient transactions based on fast flowing, immediate - and true - information. Celestica and Solectron compete to build circuit boards for brand name companies like Hewlett-Packard and Nortel. Yet they willingly reveal capacity forecasts, actual production costs (and glitches) to HP and Nortel, which in turn share market demand data with Celestica and Solectron. Celestica CEO Eugene Polistuk said to us, "Before, companies guarded and filtered information. Now we're all naked. It's like the CNN of business - instant availability. No room for bull. Transparency and networking squeeze out all the zero value-added information, distortion, and ineffectual management."

The third driver of transparency is a revolution in corporate ownership. Since the dawn of shareholder capitalism there has been a fundamental conflict: the separation of ownership from the control of companies. As early as 1933, US economists Adolf Berle and Gardiner Means wrote that a company's "controlling group can serve their own pockets better by profiting at the expense of the company than by making profits for it." In other words, executives do well when they line their own pockets at the expense of shareholders. Boards of directors are supposed to counteract this tendency; in practice directors have failed to exercise their responsibilities because of their close ties to management. These are structural issues. Neither complaining nor, for that matter, good will, can eliminate them.

Until now. For the first time in the history of capitalism, we see the rise of a new force - the pension fund - which represents shareholders and has clout. In the US, pension funds now own a quarter of the share value of publicly traded companies. As their battle with the Fidelity's of the world illustrate, the funds are demanding transparency as a weapon in the war for accountability and performance. And they have begun to draw blood. Not only are they winning the proxy disclosure battle, but the SEC recently announced a proposal for shareholders to nominate directors rather than simply to ratify, Soviet-style, nominations from the incumbent board.

Add these three factors up, and they become self-reinforcing, a potential virtuous cycle. Transparent supply chain activities become more visible to various stakeholders, who can then share information and organize responses via the Net. Some of these stakeholders are also future pensioners, which convinces pension funds to increasingly take broader issues (like the environment into which their members will retire) into account. Then, smart company directors and executives turn this stick into a carrot when they figure out how to improve revenues, reduce costs, and minimize risks, by taking the expectations of this ring of stakeholders into account - and behave in visibly trustworthy ways.

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New York: What can employees of major corporations expect now that transparency has come to the forefront?

Don Tapscott: Employees have unprecedented information about what's going on in their own companies. For starters, they can find out through intranets, internal email, and other electronic 'water cooler' technologies, or they can go to public sites like "internalmemos.com", "vault.com", or "f-edcompany.com", but smart companies are actively transparent towards their own employees. In our research we found that transparency drops transaction costs internally and increases trust. It has the effect of improving collaboration and the metabolism of knowledge work. It also correlates with employee loyalty. So, transparency internally makes a lot of business sense - of course, within the limits I've previously mentioned.

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New York: Should the same principles of openness which you discuss apply to government as well as private business? Some people are concerned that, especially after 9-11 and under the current administration, government has gone in the opposite direction from what you recommend and that will hurt its accountability and efficiency. Do you agree?

Don Tapscott: We didn't tackle the issue of government transparency as it raises a whole number of other complex questions. But just as candor makes sense for the private sector, it makes sense for government. And there IS evidence of a disturbing lack of candor with many governments these days, including the federal government. The geo-political situation - war, terrorism, the so-called clash of the civilizations - all tend to encourage opacity as well. However, its not just customers, employees and shareholders who are getting used to their institutions having candor - it's citizens. Perhaps the next book should be "The Naked Government!"

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Baltimore: So, if corporations are going to be fully exposed to their stock holders, how will this curb insider trading within the top levels of management?

Don Tapscott: Two factors - the rise of transparency as a force, and new legislation and institutions which require transparency - is going to make insider trading more difficult and dangerous. Someone was telling me a couple of weeks ago a good analogy - "If you're a bank robber and you know that 100% of the time it will be known who you are when you rob the bank, you'll be much less likely to rob banks."

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Vienna, Va.: What do you see as the next step in the Internet's impact on corporate disclosure? IE, what can we expect to see next year in terms of new Web resources dealing with company info, or in terms of corporate sites disseminating more info online?

Don Tapscott: Already companies are using the web to become actively transparent - rather than simply being forced to disclose pertinent information. Glenn Renwick, CEO of Progressive, discloses monthly operating results because "these numbers belong to my shareholder, not to me." In doing so, he builds trust.

More important, every company has a "stakeholder web", whether they know it or not. These are internet-enabled networks of stakeholders that scrutinize companies. Smart firms use the Net itself to engage their stakeholder web, and build relationships. This goes beyond corporate sites disseminating information to what we call "stakeholder engagement."

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Leslie Walker: We are only halfway through the chat. Keep those good questions coming in!

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Washington D.C.: How much longer will all these corporate scandals last? Are we more than halfway through??

Don Tapscott: It depends how many people buy copies of "The Naked Corporation" - LOL!

No, seriously, the old paradigms die hard and expect the corporate graveyard to be constantly populated by the bodies of firms that didn't understand the world was changing. Its tough to change a corporate culture, especially a bad one, and I suspect that a non-trivial proportion of companies have a terminal corporate character.

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Leslie Walker: How do you respond to critics who say you're wrong to advise corporations to work more closely with activist groups, because they often become more aggressive toward companies that show a willingness to bend?

Don Tapscott: You need to develop an engagement strategy. There are some organizations in your stakeholder web that have interests that are antithetical to yours - you may never win them over. These need to be treated differently than other stakeholders whose interests can be aligned with yours. Most companies are not even aware they have a stakeholder web, let alone having developed a strategy for engagement.

McDonalds published a sustainability report and were crucified by organizations within their stakeholder web. The main opponents were people who thought McDonalds should stop killing cows. Some of these may be influenced by more vegetarian choices on the menu, but others will be intractable enemies.

Its true as you say though that there can be unintended consequences of opening the kimono in a careless manner. Its astonishing to note how most companies muddled their way into this.

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Washington, D.C.: Management at many companies seem predisposed to fight openness. Any advice for middle managers who are trying to persuade their bosses to release more company info?

Don Tapscott: Its a good question because corporate character comes from the top. CEOs set the corporate culture through their own behavior, whether they intend to or not. Yet we came across many cases where leadership for change began lower down in the organization. The principles of our book can be applied at any level and as they result in high performance and success, can influence senior management behavior.

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Columbia, Md.: If we can assume that information regarding activities that impact a corporations performance with be fully exposed, how do we sort out the truth from fiction? If you look at some of the information, such as the message boards on Yahoo, some of this information is purely one's wish list.

Don Tapscott: Technology helps but is insufficient. Yes, we can have spam filters and bozo filters and other tools to get to the bottom of things. But each of us also need to develop our own BS detectors.

I find that kids (the generation aged 4 - 24 that I call "The Net Generation" in my book "Growing Up Digital") are very good at this. Time online is taken away from time on TV, and rather than being passive recipients of broadcast video, they spend their time interacting, searching, authenticating, organizing, composing their thoughts, collaborating, Googling, etc.

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Herndon, Va.,: I am looking forward to reading your book.

Could you please address if more transparency on a company's side also requires more sophistication on the investors side. In other words, do we need to move away from this almost exclusive focus on the (quarterly) earnings number? Do you see any hope for this happening?

Don Tapscott: Good question. I think two seemingly contradictory trends are emerging. One is more frequent reports like Progressive's monthly statements. The other is more management attention to and shareholder acceptance of longer-term performance. Progressive, for example, doesn't give guidance. You would think their stock would be very volatile, but its not. Investors trust the company and have the patience to wait for good performance in the long term.

So I have lots of hope. Because economics is driving this, companies with candor toward shareholders tend to perform better.

Another important change is that institutional investors are becoming more active and knowledgeable about the companies they invest in. So rather than behaving like a firefly flipping from company to company, quarter to quarter, investors are having a more longer term view towards companies they believe in.

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Chesapeake Beach, Md.: Do you think the standardization of business reporting under a format such as XBRL will be a benefit or will it cause more confusion?

Don Tapscott: Ultimately it should strengthen financial reporting, making it clearer, more standardized, more accessible, and more real-time. In the transition, as with many transitions, there no doubt will be some confusion.

We're also seeing the rise of non-financial "reporting." Originally "the triple bottom line" or "social and environmental reporting" was viewed by many executives as tree-hugger stuff - largely coming from Europe. But now a growing number of leading American corporations view non-financial reporting as part of an effective engagement and transparency strategy. So standards will apply in these new areas as well to help make communications comprehensible, meaningful and verifiable.

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Alexandria, Va.: Does the outsourcing trend worry you at all, or is it a necessary outcome of the information revolution?

Don Tapscott: Outsourcing is a symptom of the unbundling (disaggregation) of the vertically integrated corporation that has dominated the business scene for a century. Companies now focus on what they do best, and partner to do the rest in "business webs." This is being driven by the Internet which is dropping transaction and partnering costs between companies.

Transparency within business webs improves supply chain collaboration and performance because it increases trust and drops interaction costs.

Sure, from a social point of view I have worries. Its not just low-level clerical, administrative, or manufacturing jobs that can be outsourced to, say, India. Its many professional jobs. Ultimately there's a danger that we create a two-tiered society with no middle-class.

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Bethesda, Md.: Tell us about corporate vigilantism on the Web--what are some examples, and how much is it really growing?

Don Tapscott: I'm assuming you mean anti-corporate vigilante-ism. Not just stakeholders, but enemies of a given firm can certainly use the Web to attack it. In "The Naked Corporation" we discuss a fake Dow Chemical web site being used by its detractors as a guerilla theatre. But strident, non-productive, and dishonest attacks on corporations are as transparent as bad corporate behavior. People who don't have a valid point of view tend to get dismissed.

Its the stakeholders that have valid concerns and criticisms about corporations that we need to pay attention to.

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Leslie Walker: We will be wrapping up here soon, folks.

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Los Angeles: Inter-office emails seem to be a risky form of communicating. What is the general tact of big business now that electronic paper trails have proven to be so insecure?

thanks

Don Tapscott: You should assume that any email you send, unless encrypted, will not be confidential. Its a tough thing to do because we all become complacent. I sympathized with Carly Fiorina during the Compaq merger when her internal voice mails became public. If you want emails to be confidential, encrypt them. I also recommend that companies don't make a practice of monitoring employees' emails as this undermines frank communications and organizational performance.

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Leslie Walker: Do you think the Sarbanes-Oxley Act goes far enough? What strategies do you advocate beyond Sarbanes-Oxley?

Don Tapscott: When corporations fail to behave according to the norms of the societies that give them permission to operate, governments need to step in. Expect a tumultuous period ahead.

On the one hand, market forces in the age of transparency, are causing companies to have integrity. On the other hand, there's a lag whereby some companies will continue to behave with deceit or violate other norms. For example, some companies will continue to externalize costs, such as polluting or making societies pay for their mistakes. So, expect a tension between market forces on the one hand, and zealous regulators on the other, both working to change corporate behavior. As for SOX going far enough, it will depend on how quickly companies choose to become actively transparent. The answer, my friend, is blowin' in the wind.

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Don Tapscott: I guess our time is up. Thanks for the thoughtful questions. I hope you all enjoy "The Naked Corporation". We'll be continuing the discussion on www.nakedcorporation.com soon. Please also feel free to submit your own review to Amazon.com.

Cheers!

Don Tapscott

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Leslie Walker: That's it for today. A big thanks to Don Tapscott for joining us, and to all of you who sent in questions. We hope to have him back next year for that next book, "The Naked Government." ;-)

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