CEO-employee agency loops

I’m intrigued by the relationship between ogregores and individuals, such as between employee groups and leaders. The usual assumption is that the CEO directs employees, but I suspect employees can direct the CEO, too. That is, employees and CEOs can form a principal-agent loop.

The principal–agent problem arises when one person or entity (the "agent") takes actions on behalf of another person or entity (the "principal"), and their interests are at odds (Wikipedia). Agents have their own agendas, and may not do what their principal wants.

In conventional principal–agent theory, the ordering is linear. For example: shareholders → board → CEO → management → employees. If one models the employees as an entity (a group agent or “ogregore”), the CEO is a principal and the employee entity is its agent. A loop arises if employees are a principal and a CEO their agent.

In the rest of this post, I’ll first show examples of agency loops, and then explore CEO-employee loops in particular. I won’t address the problems and opportunities of agency loops, including ambiguity about ultimate responsibility, allowing buck-passing; and leveraging collective intelligence to guide an organization in a good direction. I also won’t delve into ways in which feudalism, as a contract of mutual obligation between lord and vassal, and Confucian notions of harmonious relationships of mutual obligation between those of unequal status, could serve as a model for corporate governance.

Agency loops

The general structure is:

• E1 is a principal with respect to agent E2
• E2 is a principal with respect to agent E3
• …
• En is a principal with respect to agent E1

The shortest possible loop has two links:

• A is a principal with respect to agent B 
• B is a principal with respect to agent A 

Here are some examples of agency loops (h/t Claude 3.5 Sonnet):

Corporate structures

• Company A owns shares in Company B
• Company B owns shares in Company C
• Company C owns shares in Company A

For example, Volkswagen has ownership stakes in Porsche, which also holds shares in Volkswagen, leading to circular ownership. Many corporate groups have complicated cross ownership structures, including Mitsubishi in Japan, and Samsung and other chaebols in Korea.

Political Party Structures

• Party members (A) elect party leadership (B)
• Party leadership (B) sets party policy and strategy, including directing the activities of party members (A)

Legislatures

• Voters (A) appoint legislators (B)
• The legislators (B) make laws that constrain voters (A)

International Organizations

• Member states (A) fund and set policies for the organization and appoint a governing body (B)
• The organization's governing body (B) oversees operations, including a secretariat (C)
• The secretariat (C) implements policies affecting member states (A)

For example, members of the United Nation appoint a secretariat and commissioners like the UN High Commissioner for Refugees (UNHCR). The UNHCR has influenced how countries manage refugee influxes and shaped international cooperation on migration issues.

Employee-owned Companies

• Employees (A) are shareholders and elect the board (B)
• The board (B) hires management (C)
• Management (C) operates the business, directing the actions of employees (A)

Examples include some cooperatives and professional services firms.

Some trivia

A minor but amusing example is the Berlin Philharmonic, whose musicians choose their conductor/artistic director by secret ballot (DW). That makes the players a principal with respect to the conductor. However, the artistic director conducts the orchestra, develops concert programs, and shapes the orchestra's artistic vision, thus acting as a principal with the musicians as agents. (Musicians themselves fill vacancies in playing positions; Bassoonblog.)

And finally: I wonder whether parents and small children form an agency loop. Once children are old enough to understand instructions, they are told what to do by their carers. The grownups are principals, the kids are agents. (When they’re still babies, children are without doubt the principals.) However, kids manipulate and direct their parents, obtaining treats, special treatment, rule exceptions, etc. The adults very much look like agents being bossed around by the kids.

CEO-employee agency loops

CEOs as principals

Coverage of CEOs typically portrays them as principals. CEOs set strategy and direct employees’ actions. CEOs have a financial (and ego) interest in positioning themselves as in control. They use on an army of PR professionals to propagate this message.

One only hears about influential action by employees when something goes wrong, allowing CEOs to deflect blame and maintain an aura of competence. (See e.g. my Bud Light Blunders: An Ogregore Story, about Budweiser blaming mid-level managers for the Dylan Mulvaney incident.) Spin about corporate failures reveals employees’ power—though it could be overstated to obscure the responsibility of the CEO and other senior executives.

In the examples above, only employee-owned companies had formal agency loops as part of their structure. However, I suspect that many and perhaps most companies have this kind of agency loop, informally at least. That is, even though the employees as a body might seem to be the agent of the CEO, at times the CEO is subordinate to the employees’ agenda. 

Employees as principals

Employees have more power over the CEO than is usually apparent. 

CEOs are avatars. They personify corporate values, express the desires and agenda of the collective, and interact with the figureheads of other organizations, like CEOs or congressional committees. They are also a figurehead for closing deals, raising money, and managing shareholder relationships. 

There are also veiled ways employees direct the actions of CEOs.

Employees rely on CEOs to set strategies, raise money, and allocate resources in ways that serve them. Employees also have needs from their work beyond salary and wages, such as. At the most basic level, employees want job security. 

Employees influence company leadership to meet their own needs, from salary and job security to meaning, security, and identity. When those needs aren’t met, they leave or rebel. When companies are taken over by shareholders whose interests clash with those of current employees, tensions arise. This can happen through individual and collective bargaining.

Conflict indicates that leadership had been acting to serve employee needs in the past but was no longer doing so. For example, Vox reported in 2019 that employees at Google, Facebook, Amazon, and Uber were increasingly disillusioned with the actions of their employers on key political and moral issues. Some 20,000 Google employees around the world walked out in November 2018 (Wikipedia). While not all employee demands were met, it suggests they had been in the past. Twitter employees’ open letter to Elon Musk in the leadup to his acquisition in 2022 implied that he was reneging on previous leadership’s commitment, in line with employee needs, to “not discriminate against workers” and “to be treated with dignity” (Time).

Employees constantly influence CEOs in more covert ways. Leaders must always make decisions on too little information in too little time, and most of the information they get is controlled by employees who can then shape the decision. Here are some examples where CEOs were effectively figureheads for decisions and actions taken by employees:

• Exxon’s CEO Rex Tillerson was downplaying climate change in line with other managers and employees, even though publicly accepting the risks (WSJ).

• Before Elon Musk’s takeover, Twitter’s strategy and safety policies were uncontentious and reflected employee values. Twitter’s CEOs between Jack Dorsey and Musk (Williams, Costolo, Agrawal) were little more than functionaries.

• Both Intel and Boeing are having systemic problems that blamed on “financialization” (Lazonick), that is, responding to shareholders’ demands for financial value (cf., e.g, INET). The story pits shareholders and their CEOs (principals) against employees (powerless agents), particularly engineers. However, in the period before hyper-focus on shareholder value, companies presumptively pursued other goals, ones approved of by engineer-employees.

• In The Living Company, Arie de Geus argues that CEOs must balance the interests of multiple stakeholders, including employees, and that a successful CEO recognizes the importance of employee engagement and morale. His suggestion that that companies are like living systems reminds me of the argument that the care and attention humans provide to horses indicates a form of subordination to them.