Warren Buffett, the American business magnate, said in a recent shareholder letter relating obliquely to corporate bankers ‘advising’ on mergers and acquisitions, “Don’t ask the barber if you need a haircut”. Of course he will say you do. Whilst business managers rely on their employees and advisors for professionalism, expertise and objectivity and want to believe that they are always fully aligned to doing what’s best for the company, this isn’t always necessarily the case. Often employees have their own agenda. This is known in economic theory as the ‘principal-agent problem’.
This refers to the situation when the ‘principal’ or employer has one goal but an employee or advisor, called an ‘agent’, may have a different agenda altogether. For example, sales agents might work towards maximising their commission rather than the company’s profit. Ideally, these two objectives would be perfectly aligned, but this is not always the case. This phenomenon is an intrinsic element of human nature. As long as managers are aware of this possibility, it becomes part of their parameters when making a decision.