Inspiring leaders crack the agency problem

Oct 23, 2012
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Of the multiple traits that distinguish inspiring leaders, I submit that the fundamental undercurrent relates to their ability to crack the agency problem.

The theory of the agency problem, or more accurately, agency costs, represents the inherent misalignment in the relationship between an agent and a principal.  Agency costs arise when a company’s employees (the agents) may act in their own interest in a way that is detrimental to the shareholders (the principals).

The concept of agency costs offers insight into why founders often make the best CEOs.

Minimizing agency costs comes naturally to the best entrepreneurs.  A good entrepreneur excels not only in recruiting top talent, but also in encouraging new recruits to behave with the same passion and fervor as if it’s their own company.

Although large complex organizations can find a way to stumble forward even while making their workforce feel like cogs in a machine (and I would argue that such organizations still fall short of their true potential), a successfully growing entrepreneurial venture requires all personnel to frequently punch above their weight class. Successfully minimizing agency costs plays a key role here.

Here are a collection of techniques for cracking the agency problem which I’ve observed in inspiring entrepreneurial leaders, many within our own portfolio:

  • Helping employees see the whole picture, and making them realize how their role in the company is crucial to the overall vision.
  • Opening the kimono and sharing virtually all company information with all personnel.
  • Providing regular communication with staff, and over-communication in times of uncertainty.
  • Giving employees a sense of ownership over decision-making.  Consulting with them before making decisions, and offering them a voice, if not a vote, in the decision-making process.
  • Granting employees the benefit of the doubt.  Defining their objectives clearly up front but then giving them free reign to achieve in the manner they deem appropriate.

I encourage all entrepreneurs to reflect on the agency problem when thinking critically about how to maximize their team’s performance.