The Principal-Agent Problem

Agent Behavior: A Dead End on the Road to Progress

You can go through life and be one of two things: you can be a principal, or you can be an agent. Most people go about their day being an agent but if you want maximum leverage in life, it’d be wise to think more like a principal. So, what exactly is the principal-agent problem and why should you care about it?

The principal-agent problem is where you have a conflict of interest between two parties. The principal is an owner, the agent is not. We can separate these two by the following example: the owner of a business, the principal and the agent, an employee of the business. The crux of the problem lies in the misalignment of goals and incentives between the principal and the agent. The principal wants the agent to act in their best interest, but the agent might have their own motivations or preferences that differ from those of the principal. This can lead to situations where the agent makes decisions that benefit themselves rather than the principal, potentially resulting in suboptimal outcomes for the principal.

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“What is common to many is taken least care of, for all men have greater regard for what is their own than for what they possess in common with others.”

-Aristotle

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As an employee you can be a principal, you just must act like one. Taking the business owner's example, the business owner should and probably is acting like a principal but that does not mean that their employees cannot ‘act’ like an owner as well. This is the premise of acting like a principal. You act like the owner of something and if you are the owner of something you usually care about it much more. A business owner is interested in making shit loads of money, but they’ll pay their staff before they pay themselves, especially in hard times because the people who work for them are the foundation of the company. I’ve seen this happen at the place where I work.

I’ve recently had some good news which has got me thinking and now writing about the principal-agent problem. I’ve been fortunate enough to be offered the opportunity to become a part-owner of the company I work for. My father-in-law created the construction company I work for at the back of redundancy 10 years ago but is at that age now where retirement is on the horizon. My work colleague and I have effectively been given the reigns resulting in an enormous opportunity for both of us at a relatively young age. I’m part of the family but there used to be another guy who worked there, my boss who was due to get a piece of the pie but left. I was always going to be ‘brought in’ but not nearly as much as I am now. Better still my new business partner was due to receive a slightly bigger piece of the pie due to them working there longer but he straight away said he wants it to be 50/50.

Bonus! How did I get so lucky?

Well, I acted like a principal since day zero.

I received a golden nugget of wisdom when I joined the company nearly 5 years ago when my father-in-law told me “If you wouldn’t accept it in your house, don’t accept it on-site.” What he meant by this was the quality of the finish on the job I would be on at the time. If it wasn’t good enough for me to look at every day in my home, I shouldn’t hand the job over to somebody else! What initially started out as I didn’t want anyone taking the piss out of my father-in-law’s business has served me well as a great mantra. It’s even something I’ve passed on to new people in the company.

Over the years I’ve learned the benefit of acting as a principal even when I was just an employee. I’ve also noted from within our company and outside where people with similar values are as well and it’s clear when you act like a principal instead of an agent it serves you better in the long run. People want to re-work with us and it’s because at every level we care. We’ve also had people come and people go, friends and family included and the ones we’ve had to let go are the ones who have acted like an agent. It’s not a nice thing to do but inversely the same is true.

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“If you want it done, then go. And if not, then send.”

-Julius Caesar

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The principal-agent problem can be difficult to mitigate and as the principal it’s up to them to try to incentivise the people acting on their behalf. There’s no hard and fast way of doing this, human psychology is an enigma but as a start people want to feel valued. If you can make people feel like they’re inside your circle, instead of outside it, then that’s a decent start. As an agent, I think it’s important that you try to do things that you care about. Why would you really care that much if you work in a massive corporation? Some people will as they’ll want to climb the corporate ladder but you’re not indispensable, you’re just a cog. If you do something or work with people or things you care about it’ll be easy to think and act like a principal.

I’ll leave this week’s newsletter with the following by Marcus Aurelius. There has perhaps been no other person who has motivated the people around him to negate the will to act like an agent and to act more like a principal:

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“If you do the job in a principled way, with diligence, energy and patience, if you keep yourself free of distractions, and keep the spirit inside you undamaged, as if might have to give it back at any moment. If you can embrace this without fear or expectation - can find fulfilment in what you’re doing now, as Nature intended, and in superhuman truthfulness (every word, every utterance) - then your life will be happy. No one can prevent that.”

-Marcus Aurelius

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