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.
- First, it can be very hard to obtain reliable information from the intermediate levels in any hierarchy.
- Second, you need to be aware that agents and their teams often resist the introduction of (what they see as) tedious protocols - even those aimed at improving quality or safety. Rail and marine accident reports include many examples of such behaviour. It is quite common for teams to falsify data, including quality and safety data. New recruits are told by experienced colleagues that formal instructions - or things they learned in an induction program - can safely be ignored as out-of-date or impractical.
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.
- Investigations into the LIBOR scandal unearthed some juicy emails showing junior (but extremely well paid) staff's willingness to disregard ethical and other rules. 'Its just amazing how LIBOR fixing can make you that much money ... it's a cartel now in London' wrote one trader. The Financial Services Authority subsequently concluded that some bankers had decided that 'the rules did not apply to them' and noted that 'In March 2011, RBS attested to the FSA that its controls and systems were adequate. The attestation was inaccurate.' It took another year before RBS concluded that the bonuses of the back-room staff who submitted LIBOR figures should not have their bonuses linked to those of the traders who might make money out of manipulating those same LIBOR rates.
- There are inevitably lots of examples in formal accident reports. Here is a nice one, following a collision in the English Channel in which one ship's collision avoidance technology had been partly disabled: "The settings in the 'guard zone' and 'target alarms' areas ... were locked. The adjustment of these settings was password protected and [the] deck officers ... were unaware of the password. The crew considered the resulting absence of alarms to be beneficial."
- An HSE Inspector reported that a contributory factor to a serious roller-coaster accident at Alton Towers had been that the frequency of false alarms meant that staff tended to assume that all alarms were false, and so restarted the ride without carrying our proper checks.
- Railway accident inspectors reported in 2018 that "Members of the [track maintenance] team told us that [their supervisor] neither fully briefed them on the safety arrangements, nor checked their track safety qualifications. Nevertheless, they all signed ... to acknowledge that they had received a briefing."
- The consequences were commercial rather than damaging to health, but I was struck by Nick Butler's comment, in the FT in January 2014, about a profits warning by Royal Dutch Shell: 'At the heart of the .. problem seems to be the gap between operational reality and top management, including the board. Big problems capable of triggering a profits warning in a company this size do not arise over 80 days. They grow more slowly and are often invisible to boards meeting every six weeks who have to trust whatever data they are given. .. The rest of the industry should avoid gloating. It would be much more useful for the boards of the other majors to ask themselves if they really know what is happening in the companies for which they are legally responsible'.
- 16 year old mental health patient William Jordan was left unattended for several hours before he hanged himself in a Priory Clinic - despite clear instructions that he was to be checked every 15 minutes. Staff then falsified logs so it appeared as if they had in fact checked he was OK.
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.