When a person acts on behalf of others they may act in their self-interest. This may be counter to the best interest of those they act on behalf of (principals) because of diverging interests and asymmetric information (agent knows something the principals don’t). Examples include politicians, CEO’s, brokers, even doctors, etc.
Links to this note
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Favor Full Time Employees over Part Time Contractors
In the early days of a startup, hiring the early team is one of the biggest challenges. It can be tempting to hire contractors and part-time workers to get some help in the short term.
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There are three groups of people within an organization: Sociopaths (tend to be at the top running the company, characterized by self-interest and need to control), Clueless (tend to be middle management, characterized by misplaced loyalty to the organization), and Losers (tend to be at the bottom, characterized by striking a bad economic bargain). The Gervais Principle speaks to the dynamics between these three groups with the Office as allegory.
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Venture Capital Has Conflicting Incentives With Founders When it Comes to Outcomes
Venture capitalists and institutional investors need big returns and therefore they fund companies pursuing a big market (investor returns follow a power law). Fund sizes have increased and investors need larger and larger returns. However, there is a tension with founders' incentives to have a wide range of exit outcomes. An exit in the $100s of millions is life changing for a founder, but not a good enough outcome for investors. Investors are incentivized to push founders to riskier, but bigger opportunities even if the set of possible positive outcomes for the founder are significantly smaller (e.g. a highly competitive winner-takes-all market).
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Anyone can follow instructions—performing a well-understood task step-by-step until it is completed. However, most challenges a startup faces are not well-understood.
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Shared resources used by individuals with no ownership end up depleting it. Common examples include fishing (over-fishing) and forests (deforestation).
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Accountability is a distinguishing feature of progressing into leadership roles. As a general rule, moving “up” means more accountability. Being a high performing contributor means being accountable for yourself. Being a leader means being accountable for others. Being an executive means being accountable for what you can not control (e.g. the market). There are many counter examples where leaders are not held accountable or getting promoted doesn’t increase the level of accountability, but acting as a principal is still the best strategy.
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Remote Work and the Principal-Agent Problem
Does remote work make the principal-agent problem worse? If so, why?
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Most managers, at best, are a form of benign neglect. Continual attention (micro management) usually results in the opposite of what a manager hopes for—less motivation from employees, learned helplessness, and worse performance. Benign neglect leaves room for employees to have agency to do their work but it’s kind of like the placebo effect, maybe most managers are better off doing nothing at all.
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Business Writing Should Always Answer a Key Question
An easy way to spot bad business writing is to check if it poses and answers a key question. Even a highly detailed document that goes to great lengths to explore a subject is not useful if it leaves it up to the reader to figure out what to do about it.
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Paul Graham’s essay on founder-mode vs manager-mode is about how the advice to “hire good people and give them room to do their jobs” doesn’t work well for founders in practice. Some of the blame, according to the author, is that professional managers and CEOs are really good at faking it and if founders only talk to their direct reports, they will be ineffective.