“We have met the enemy and he is us.” (Walt Kelly in Pogo)
Managing Intrinsic conflicts
Where two or more people are involved in a system, or in a system and its operating environment, there are intrinsic conflicts because individuals and the systems they interact with have different sets of priorities. Intrinsic conflicts cannot be resolved, however they can be managed and in the best cases become almost self-managing; that is, nearly all the stakeholders self regulate their actions to maintain a balance among conflicting priorities. Self-managed conflict resolutions take the least energy to maintain, but the most planning and the most energy to establish. Their creation and maintenance takes management talent and hard work that seems to be missing in most large organizations.
For example, we can drive on any road in the transportation system, in heavy traffic, with little or no external regulation because a uniform set of traffic laws and cues have evolved, been codified and then universally instilled in drivers through driver education, testing and social pressures before they took to the highways. (See Regulating Systems 101 for details on the driving metaphor) Those cues are reinforced with traffic tickets, fines and jail time to bring the more selfish into line, but their administration takes relatively little energy because most of us self-regulate. We follow most of the regulations most of the time and expect everyone else to do so; in fact our moment to moment decisions are based on that premise. We self-regulate to standards because we realize that it’s to everyone’s mutual benefit… i.e. the benefit of going from point a to point b safely, quickly and inexpensively enables us to self-align other priorities of our “freedom to drive” with the driving norms. From time to time drivers enact their selfish interests to the detriment of other drivers by ignoring laws, which increases the probability of accidents, gridlock or tickets. Without enforcement of traffic laws the selfishness would feed on itself until the system was regulated by gridlock and accidents; the free market solution.
Other examples of intrinsic conflicts are between customers and suppliers and between employees and their places of employment. In the case of employees, their priorities include earning money for present consumption and future savings, receiving a sense of self fulfillment and value from the work itself, and enjoying social relationships with others related to the job. Employees get their money when paid salaries or bonuses. Longer term incentives are problematic to personal priorities.
The company’s priorities include being profitable to its owners, a priority that only relates to the employee’s priorities in an indirect and long term way. In a large company’s it is virtually impossible for individual workers to relate their actions to corporate profits; even when that worker is a corporate executive! At the low end of the totem pole, an individual and the company operate on an honest day’s work (as defined by measurable time spent and results obtained) for an honest day’s pay. However, in middle and top management, this relationship is largely indefinable because the consequences of the work aren’t measurable right away. In many cases its only statistically measurable with a great deal of uncertainty and personal judgment, and in others it can take years to come up with a valid measure of the quality of executive actions. However, the compensation system of huge salaries and gigantic bonuses is predicated on measuring the relationship with one or two simple, quarterly parameters as though one were assembling widgets on a production line. Furthermore, this misalignment of compensation to results actually induces individuals to actions that are strategically destructive to the organization.
For example, at AIG, bonuses based on premiums collected for taking the strategic risks of financial derivatives incentivized top managers at AIG to bet the company. They were paid for doing deals and had no liability for the tragic consequences of these deals. (Welcome to most of the deal makers in the financial world!)
In truth, the top executives who set up and approved the bonuses triggered the tragedy, and they included all the executives and the board of directors; many of whom benefitted from the same bonus pool. Apparently, they were unable or unwilling to see that they were incentivizing behavior that was anathema to the interests of the corporation. Those managers and their brethren still abound at the executive levels of all major financial institutions. They form a tribe which takes care of its own, and collectively maintains control of Wall Street and ships people like Rubin and Summers to the government to stifle interference. (See my post Tribalism Undermines Wall Street Reform)
Mismanagement of the intrinsic conflict between individuals and corporations is a systemic sickness in almost every business. For example, almost all sales commission reward the salespeople on the basis of the total dollar value of deals they close. It takes management ingenuity and courage to do otherwise because that reward has become cultural, even though it’s frequently destructive for companies. Not all customers will be equally profitable; some will be unprofitable because they will abuse the product or the relationship to the detriment of the company’s total market. There are fairly clear indicators of which customers will be unprofitable, and I delineate them in Chapter 6 of: The Handbook of Channel Marketing, which can be downloaded from my web page www.elew.com for free. The first line of defense should be the sales team, but they are rewarded just as much for closing ultimately unprofitable customers as for profitable ones, and the unprofitable customers are usually easier to close; just as the unprofitable AIG contracts instantly rewarded the sales people and all the executives above them and were easy to close because they were outlandishly beneficial to those on the other side of the deals.
Is all a hopeless mess? No! But it will take more than a few government-imposed rules to fix. Intrinsic conflicts can be ameliorated and held in check in large corporations just as the human body selects and manages symbiotic microbes and nutrients while protecting itself from parasites, pathogens and poisons with the help of the Medical system.
The metaphorical answer is this: Large, older corporations with widely distributed ownership have virtually no immune systems. Executives with bloated compensations are primarily parasites and pathogens instead of symbionts. Nature keeps down average parasitic loads by imposing term limits on biological systems, we gave corporations infinite legal lives. Medicine’s primary role is to help immune system’s reject parasites, pathogens and poisons not to do the job by itself. Government regulation, when coupled with healthy corporate immune systems, and appropriate term limits, will dramatically improve corporate health and the health of symbiotic employees. Right now, the parasites and pathogens control enough money and people to infect government itself and to maintain their stranglehold until both the financial institutions and the government collapses. Thanks to the Supreme Court’s “Citizens United” decision, the job just got tougher. This metaphor should help identify the nature and scope of the mess we must deal with. But it won’t be done by the parasites and pathogens in industry and government.
(There will be another post on Intrinsic Conflicts, one which will further illuminate the issue of Free Markets and their over-rated role in the Industrial Revolution. It is my thesis that classic economists have completely misunderstood the root causes of the Industrial Revolution…one of which was to partition intrinsic conflicts between religion, politics and economics (traditionally resolved by the king) into separate, but relatively equal, entities thereby improving the speed, quality, productivity and sustainability of financial decisions.)
Related Posts:
Part 1 of How We Abuse Entitlement and Mismanage Intrinsic Conflicts
Executive Compensation and Other Parasitic Loads
Economic Regulation and the Myth of Free Markets
Economic over-centralization driven by tactics and weak executives!
Tribalism undermines Wall Street reforms
Regulating banks, businesses, markets and governments
Supreme Court may strangle our democracy
To download The Handbook of Channel Marketing go to the bottom of the page at: Ed’s Workshop
