Andi Owen Demonstrates the Principal Agent Problem All Managers Face

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Andi Owen got in hot water for statements she made to her employees last week. What she did, and why she did it, is a circumstance every manager may face. Because it was writ large by her role as CEO, it provides a good example of the issue. It’s important to understand the trap and how good managers can avoid making the same mistake.

On a company call Andi Owen, the CEO of MillerKnoll was responding to questions from employees concerned that they may not get their bonus. She replied, “Don’t ask about ‘what are we going to do if we don’t get a bonus?’ Get the damn $26 million. Spend your time and your effort thinking about the $26 million we need and not thinking about what you’re going to do if we don’t get a bonus. All right? Can I get some commitment for that?” (If you missed it, see this article; you can also see another article about her apology.)

To understand what happened, we need look no further than the principal agent problem. It’s a conflict arising from misaligned interests between the principal (such as a business owner) and their agent (such as an employee). Imagine that you own a shop, and you pay some $1,000 a week to run it. The more hours the shop is open, the more revenue you might make. The employee, however, gets the same $1,000 either way. He’d rather keep the shop open less, so he has more time at home, even if that means you make less as the owner. In a more ethically murky example, a bartender might give away free drinks for big tips. The cost of those free drinks is borne by the bar owner, but the tips go to the bartender.

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Salespeople at corporations are paid on commission which aligns their compensation to company sales. Unfortunately, not all jobs can be directly tied to sales and revenue

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The basic solution is to align incentives. This is why shop workers are paid hourly. It’s also why they are not paid to work at 3am when that work is unlikely to add to more sales for the owner. Salespeople at corporations are paid on commission which aligns their compensation to company sales. Unfortunately, not all jobs can be directly tied to sales and revenue.

Principals and agents can be relative. In this case Ms. Owen is an agent, not the owner/principal of the company. (Even then the board members she reports to may not be owners, but themselves agents of the owners, i.e., the shareholders, albeit with strong legal responsibilities to act in the best interest of the principals/owners.) But she is the owner of the goal to get $26 million in revenue. Why would she feel like she owns that problem? Probably because she likely has some of her job measurements (e.g., bonus, stock, not being fired) tied to the $26 million revenue goal. Her mistake was thinking that her employees, who she needs to perform well to achieve that revenue goal, would be equally aligned to it.

As a manager you will likely feel a sense of ownership of a goal for the team. This may be because it’s tied to your bonus, a promotion, other benefit, or just professional pride. To achieve it, it may require extra work, beyond the average output your team typically delivers. In this case you become the principal and your team the agents. If they don’t get a bonus or benefit (not the same size as yours necessarily, it could be proportionate to their role), why should they put in the extra effort to help you achieve your goal? Extra work may be extra hours or even just a level of effort in some cases.

The mistake Ms. Owen made was thinking about the situation from her perspective, not her workers’. To be fair, Ms. Owen may be under a lot of pressure. Maybe it’s because she’s worried personally, about being able to afford a G.I. Joe with the fun-fu grip for her kids; maybe it’s well-intentioned worrying about potential layoffs at the company, but doesn’t want to scare the employees (or risk people quitting) by telling them. Regardless of the reason, she is not seeing it from her employees’ perspective.

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As a manager it’s important that you empathize with your employees.

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As a manager it’s important that you empathize with your employees. At the very least, showing empathy is a better response than dismissing their concerns. In some cases, the discussion that comes from empathy may help you find other ways to meet their needs. Maybe you can’t provide them with their bonuses, but painting a brighter future or finding other ways to mitigate their concerns leads to better relationships in the company and can only help with outcomes. Simply saying, “focus on the future” is trying to blow sunshine where it doesn't shine. Talking through how the path forward she wants can concretely lead to the outcome they want, in a way the employees buy into, would have served her much better.

There’s the old TV trope of someone being promoted and suddenly her friends turn on her because now she’s the big bad boss; meanwhile, she is now seeing the management job is much more complicated than she thought it was back when she was a subordinate. There’s some truth to this. We’re often focused primarily on the view from our own chair. The solution for the forlorn TV character, and really for any manager, is to take into account the interests and perspectives of all parties.

It’s easy to write all this, of course. When big goals are on the line there is pressure and stress and that can give us tunnel vision. As a manager you should try to remember to take that step back and see things from your employees’ perspective, especially during stressful times. It’s not always easy, but that’s why the manager gets the big chair. Just remember to take in the view from those other chairs around the table from time to time.