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.

This entry was posted in How the World Really Works. Bookmark the permalink.


  1. Richard says:

    Surowiecki’s article is available online.

  2. Dave Pollard says:

    Thanks, Richard. I thought I’d included the link — now added.

  3. Jon Husband says:

    bravo … clear and hard-hitting, and imo, right.

Comments are closed.