Mastering the Complex Relationships in Firms

Actors and relationships in firms: Board of directors, managers, workers, and the principal-agent problem

• Firms involve different actors, including the board of directors, managers, and workers, who interact on different levels according to the division of labor.
• The board of directors is chosen by shareholders, who own the company's assets and receive profits based on the actions of managers and employees, with shares representing ownership.
• Managers organize production and decide how much profit goes to the owners, but this separation of ownership and control can create a principal-agent problem regarding profit maximization.
• Workers cooperate and talk to each other, but they may not always provide managers with all relevant information, creating a problem of incomplete contracts.
• The principal-agent model can be used to study relationships with incomplete contracts, such as between employers and employees.
• The principal assigns tasks to the agent, who must decide how to complete them while considering personal goals, leading to scenarios where goals either match or conflict.
• Firms often set wages to motivate employees to work effectively and stay with the firm, creating mutual gains for owners, managers, and employees.
• Herbert Simon's theory of bounded rationality suggests that agents face uncertainty and limited information, leading to "satisficing" decisions rather than "maximizing" decisions.
• People may be intrinsically motivated to work hard, feel responsible for other employees or the employer, or reciprocate gratitude for good working conditions.
• Firms may identify teams of workers with measurable output and pay a benefit to the group that is divided among members.
• Laws and practices concerning the termination of employment for cause differ among countries, but employees still fear consequences for not meeting employer standards.
• Firms must design labor contracts and other mechanisms to address the principal-agent problem and incentivize workers, while also considering the complexity and uncertainty of the business environment.