Famous Quote

“Today’s tactical victory does not guarantee tomorrow’s strategic success” is one of the famous quotes in the world. It can be applied into business world today. For example, many manufacturing companies producing digital camera face difficult time because smartphone’s camera is able to substitute it.

Another example is that many restaurants are difficult to operate due to the strict restrictions imposed by each country in order to avoid spreading the virus in 2020 and 2021. However, some restaurants can earn money normally or even more. This is because these restaurants transform their business digitally. As a result, they can make use of online sales and collaborate with multiple food delivery companies.

Therefore, we can say that management of every company has to understand his/her business environment. Also, it should make a decision based on insights and purpose, and to execute it thoroughly. However, it is easier said than done. A key challenge here is to transform each organization. In this article, we will analyze how difficult are organizations transformed. Therefore, we focus on one of the reasons why each company is struggling to be transformed: Principal Agent Problem.

Principal Agent Problem

First of all, what is principal agent problem? It basically means that motivations of a principal is different of those of an agent when s/he (a principal) asks her /him (an agent) to do something. In other words, there is dilemma between a principal and an agent.

Let us think of more specific examples. One example is that motivations of shareholders are different from those of management of a company. In this case, shareholders are principals and management of a company are agents. Shareholders want to increase market capitalization of a company or dividends of it. On the other hand, management want to increase their salary without hard work, for instance.

Of course, this is an extreme example, but it is also true for lots of companies. That is why they set a nominating committee, an audit committee and a compensation committee. Another example is that a sales manager ask her/his subordinates to increase their sales. In this case, a sales manager is a principal and subordinates are agents. We assume that manager’s motivation is to achieve her/his sales target and explain the current progress of it to a general manager monitoring the result. On the other hand, subordinates’ motivation is to earn enough salary without taking risks. Therefore, we can see principal agent problem anywhere anytime in every organization.

In order to make their business sustainable, companies are urged to transform themselves now. However, the important question here is that: Is the motivation to be transformed for whom? The answer might be “shareholders” or “management of a company”. However, do first-line employees worry whether a company is transformed or not? The answer can be “No”. Therefore, we can say that principal agent problem makes it difficult for companies to be transformed.