Agency Cost Revisited & Again!

Q.
Why my bosses are so fluent with the business, and yet I have to do the job?

A.
The below conversation happened in a meeting.

A: Why the pricing strategy could not be repeated?

The sales staff Mr A asked during the meeting. The product X has not been selling well, and the southern trend seems not likely to stop in a month or two. The competitor is slashing prices with promotions. Customers being price conscious, switched to competitor brand Y.

B: You expect everything is about price? Think, use your brain to think! Aren't you not employed to think? Can I slash your salary?

A: But... this is exactly the feedback from our customers. We are speaking based on market feedback! Our position is eroding due to competitor gaining market share!

B. No! You can do better! You can always try other methods! We have brand superiority. We are longer and stronger in the market! Your customer will need to be convinced! You have not tried enough! That is your problem, you always look for the shorter way!

A: Yes, Boss! We tried! We have been facing this issue from last year! We had a good sales because we did a promotional offer. This is currently eating into our market as our customers are still stocked up with our products. That is why they are not yet buying!

B: See, you cannot understand! You need to convince the customers! They will listen to you if you continue to highlight the quality of our product, our long term reputation, and our support for their business! This is all about customer relationship selling!

A: ... (Tongue tight).

The above scenario is very common in boardroom meeting. The issue is the bosses are always right! They are good! They have the solutions! But, wait a minute!

Are we in the wrong planet here?

If the bosses are so good and knowledgeable, why can't they go and grab the business themselves? Why they have to use their sales force to go to the field and tell the customers? Isn't it better if the business is more efficient and effective when the bosses go down to the ground and be productive to the organisation?

Putting the issues of commission and benefits aside - for bosses are better paid with incentives and commissions than the ground staff - lets discount that factor, here we concentrate only on the business model alone.

Before moving on with what will happen to the above story, I want you to witness the best form of Agency Cost in its full deployment!

The business employs people in the organization - the bosses and the field staff. The bosses were field staff before. This is likely the case although there may be exceptions, e.g. very smart 'blue eye boy' or bosses' children.

Let's remind ourselves that 'agency' means the business employs an agent to run its daily operation. The agent has his or her own priority over that of the business. This priority of the agent may not be in congruence with that of the business. The cost to pay for this defect is 'agency cost'.

So, let us come back to the above scenario.

Mr A had no choice, but to swallow the defeat. B is 'Boss' and 'bosses are always right!'.

This is an universal rule in organizations, and for that the field staff would want to be bosses one day. No doubt, there are benefits of bosses that ground level staff would never enjoy. For the very basic, they work more in the board room and less in rain and hot sun. They are paid more for thinking rather than sweating!

So, if they are so good - (that is why they are promoted, right?) - why can't they solve the market problem directly?

Apart from not doing the donkey work themselves (that is why there are upper management and lower management), the answer lies with the issue of 'today' and 'tomorrow'.

Today, in the meeting room, an idea may be an excellent idea. Tomorrow, it may not be anymore. So, when a boss has a brilliant idea today, he may not be able to carry out tomorrow. So, the issue is 'who is to take the blame?'.

In politic, this is called 'duck'. When an arrow is shooting towards you, you duck to avoid the arrow. (Duck here carries the meaning stoop or bend suddenly).

The today excellent idea when in the hand of the staff can become a lousy idea tomorrow. Whatever said, that is not the mistake of the bosses but the staff who never execute the brilliant idea well. In between, the idea, mind you, had never changed. The market may or may not have changed too. In the first place, it may not be reactive to the idea. In fact, you don't need to be a nuclear scientist to understand that there are too many variables in a market dynamic to consider!

Then, when comes to pointing fingers, the staff get fired! Not the boss.

So, you get the idea?

Reflection

Don't expect too much from your bosses, they are just agents of the business. Each and every individual in an organisation is more interested in one's priority over the firm, over their dead bodies!

Even if your boss is the owner of business, the 'agency cost' element still exists. It may not be in the form of politicking the board room, but other personal agenda might dominate the decision. For example, exploitation of staff benefits like not paying your EPF or even restrict your claims, making you slave of his dominance!

That is why 'real leaders' are never 'bosses', and 'bosses' are seldom 'real leaders'.