 In an article in this week's New Yorker,
James Surowiecki's brilliant mind looks across a broad swath of
industries in the modern economy and finds a vexing and ubiquitous
problem -- the propensity of agents to exploit the ignorance and trust of their customers.
"A principal-agent relationship is formed whenever one person (the
principal) delegates authority to another person (the agent) to act in
his interest," he writes. We use agents for a multitude of reasons in
today's busy and specialized world: insurance, investment brokerage,
real estate, law, medicine, travel, ticketing, even executive
management (a double agency relationship, where the
shareholder-principals. through their agents the Board of Directors,
employ officers to be their agents).
The problem is that some agency relationships set themselves up for
conflicts of interest, and hence for abuse. In the recent
much-publicized scandal, NY Attorney-General Elliot Spitzer has found
insurance agency giant Marsh & McLennan conspired with insurance
vendors (the companies that actually write the insurance policies and
pay the settlements) to create false and fake high 'quotations' from
invented or complicit competitors so that the agent's favourite vendor
has the low bid. So if you asked them for an insurance quote, they'd
conspire with three companies, provide two absurdly high quotes and one
slightly lower, recommend the low one to you while notifying you of the
phony 'competing' bids, and get a kickback from the 'successful'
bidder. The three conspiring companies would take turns being the 'low'
bidder, all would overcharge the unsuspecting customers, and all would
pay Marsh a kickback. Spitzer is now suggesting that this practice may
be rife in the insurance industry, and has subpoened other
mega-brokers' financial records to see whether to add them to the
bribery and price-fixing investigation. Marsh's CEO resigned last week.
Surowiecki points out that real estate agents usually get better prices
when they sell their own houses than when they sell their customers'.
After all, they get paid a commission, so it's in their interest to
underprice your house so it sells fast and they get their commission
sooner with less labour invested. People hire lawyers to handle their
affairs, stockbrokers to handle their investments, etc. and in many
such cases there is an obvious method, motive and opportunity for the
agents to cheat their customers. "Such relationships play an especially
large role in an economy in which knowledge is specialized and
deferring to the judgements of experts makes sense", he says. And the
problem is that in many cases the customer doesn't know he's being
cheated, the fraud isn't apparent. It's yet another distortion in the
market caused by imperfect information, and the answer is what Elliot
Spitzer is thankfully providing: regulation, vigilance, and enforcement.
There's a role we can play as well. As Surowiecki puts it, "Now that
the Internet and cheap software enable buyers and sellers to find each
other with ease, why take a chance with a broker or agent who may be
ripping you off?" -- Cut out the middleman.
Those of us lucky enough to be able to afford the technology and
understand the business well enough, are already doing that in many
areas. We have learned how to become our own travel agents, our own
investment brokers, our own medical diagnosticians and health managers,
our own lawyers and tax return preparers, our own real estate agents,
our own auctioneers, and so on. For the vast majority lacking such
technology and competency, however, they remain at the mercy of agents,
and hope that those agents are competent, conscientious and ethical,
and that if they aren't, people like Spitzer will find them and shut
them down.
This whole agency problem strikes at the heart of the modern
controversy over the social responsibility of business. The neocons
would have you believe that the market will winnow out the incompetent,
the lazy and the corrupt, but that clearly isn't happening. The neocon
amorality also says companies should never put the welfare of people
above the single-minded and relentless pursuit of maximum short-term
profit. To do so, they say, abrogates their responsibility to the
shareholders and puts them in a conflict of interest -- who's their
boss, the shareholders or the public? This is textbook neocon
oversimplification. Most of us have at least two bosses -- the person
to whom we report and our customer, and it's a constant balancing act
to achieve their conflicting goals. But once the neocons have given
corporations carte blanche to
focus only on shareholder profit, the issue becomes where to draw the
line. It is in the corporation's best interest to screw the customers
(as long and as far as they can get away with it) -- that means getting
together with other suppliers in an oligopoly, fixing prices, reducing
competition, and charging exorbitant prices for your products. It also
means offering the lowest level of service you can possibly achieve
without causing a customer riot, and the lowest product quality (to
reduce cost) that customers will bear. And it's a short hop from there
to Enron-style fraud, tax evasion, and business practices that are
tantamount to theft from both employees and customers. These behaviours
produce enough windfall profits to buy or bribe a generation of
governments to 'deregulate' business so that the Elliot Spitzers of the
world are neutralized or disappear entirely, and to buy an army of
lawyers to threaten and intimidate any whistle-blowers and any
customers who try to fight back. That's corporatism in a nutshell.
Call me old fashioned, but I think businesspeople (let's call a spade a spade here -- corporations don't engage in this disgraceful behaviour, their people do) have a responsibility to act in a legal and ethical manner,
and that responsbility outranks their responsibility to maximize
corporate profit. Today, an agent who fails to exploit an opportunity
to gouge a customer to the advantage of his employer, or blows the
whistle on a technically legal but unethical business practice, exposes
himself to being fired, sued, or worse. This is just wrong. Corporate
charters need to be changed to give equal weight to the conflicting
needs and interests of the public, communities, the environment,
employees, customers, and
shareholders. No manager, director, controlling shareholder or employee
of an organization should be able to hide behind corporate indemnity to
avoid liability or prosecution for legal or ethical wrong-doing. Any
organization that fails to find an optimal balance between these
conflicting interests, in the collective view of all these
stakeholders, should have its management team replaced by a new team
selected by consensus of these stakeholders. And recurrent or
especially egregious abrogations of this responsibility should result
in immediate revocation of the corporation's charter, withdrawal of its
citizen-given right to do business.
Does this open up a whole complex rats'-nest of moral and ethical
challenges for businesspeople? Damn right. The world isn't simple, and
we've twisted ourselves in knots and let loose a corporatist
Frankenstein monster pretending it is. It's time to rein in
corporations, and recognize that ambiguity is ubiquitous, and that the
wisdom of an informed citizenry is limitless and produces better
decisions and solutions than the single-minded pursuit of narrow,
short-sighted parochial interests. In a world where we are all
responsible to and for each other, agents would not dare
cheat their customers and their executives and shareholders would not
dare ask them to, or tempt them to, or reward them for doing so. Such a
change would provide citizens and consumers with considerable legal
power, but, far more important, it would provide great moral force for
ethical business behaviour. Most business fraud and cheating occurs, I
would argue, not because it's rewarded by bosses and shareholders, but
because perpetrators can rationalize that, because it improves the
corporation's bottom line, it isn't really wrong.
Surowiecki's answer -- cutting out the middleman -- is a sensible
option, a great work-around, for those few of us able to take advantage
of it. We owe the many that don't have that luxury a more durable and
universally accessible solution to agent bribery, price-fixing, fraud
and all the other illegal and unethical shenanigans that untrammeled
corporatism has wrought. Corporations have outlived their usefulness. We the people,
connected, disintermediated, informed, altruistic, ethical, comfortable
with ambiguity, and complex -- have a better way to run an economy.
Postscript: I was intrigued that Surowiecki didn't mention the agency
relationships that are most on all our minds these days -- the one
between voters and elected officials, and one between citizens and the
media. It would be hard to image two groups of agents (politicians and
broadcasters) who have a more flagrant conflict of interest between
that of their customers (us) and that of their corporate owners. I also
thought he showed great restraint not suggesting the Wisdom of Crowds
(his bestseller) as a mechanism for disintermediation (finding the best
vendor without using an agent) or at least for finding the best agent
of a sorry lot.
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