Principals and Agents

Large organisations can be surprisingly resistant to change, and front line staff can often behave in ways which are surprising and unwelcome to more senior executives.  Why is this?

Such problems arise when 'principals' hire 'agents' to pursue the principals' interests - but the agents develop priorities of their own.

The principal-agent problem is found in most large organisations, including in the way that shareholders and senior executives find it very difficult to ensure that middle managers, foremen etc. work to the corporate agenda as seen from head office. There is a strong tendency for humans to align their goals and behaviour to that of the team or work group around them. As a result, it often seems that corporations are in practice run in the interests of the firm's managers who have grown to regard their firm's economic interests as entirely coincident with their own.

It is for instance almost universally common for middle managers to focus on what they see as the long term good of their factory, office or other small part of the organisation. When asked to find efficiency savings they will fight hard to retain their budget and their staff numbers. They see no point in implementing all those 'stupid directives from head office, and find record keeping a bore. Boxes are meant to be ticked, whether or not the associated action has been carried out. They will often enter into an implicit bargain with their teams, allowing the use of material for personal ends, providing generous expense accounts, etc. so as to generate a better (non-confrontational) climate within the team - often characterised as 'high morale'. Such teams resist change - especially if it might lead to greater efficiency (working harder and/or job losses).

It is also the case, of course, that some middle managers are quite weak, and incapable of standing up to staff who are not doing a good or reliable job.

There are two consequences for policy advisers.

Leaders of rule-bending teams may ignore protocols so as to get through work more quickly, and/or to impress seniors with their achievements, or to get home on time, or to avoid a small amount of work running over into the next day. It is truly very difficult for policy advisers and decision makers to know that this is happening unless there are robust and unpredictable inspection arrangements backed up by a strong compliance culture, and opportunities for whistle-blowing.

Here are some examples of the principal-agent problem.

And the principal-agent problem is hardly a new one.  CE Montague tells the delicious story, in his book Disenchantment, of the old hand sergeant-major who, instead of taking his young recruits on a long training march, takes them to a pub where they are surprised to find that 'arrangements for serving a multitude are surprisingly complete', and that their sergeant-major is clearly well acquainted with the publican.  I suspect that armies have suffered from, and Generals will have cursed, this sort of problem right back to the beginning of armed conflict.

See Jean Tirole's Hierarchies and Bureaucracies: On the Role of Collusion in Organizations for a lengthier discussion of the Principal-Agent problem.


Martin Stanley

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