The Lumberworks Agent: When Trust and Integrity Matter to the Agent

Abstract

The problem of the principal-agent relationship is one that has plagued human transactions since time immemorial. Information asymmetry and moral hazard, (Eisenhardt, 1989) make it difficult to achieve the levels of trust that could reassure the principal that the agent’s interest is aligned to his, especially when viewed against the background understanding of man as ‘homo oeconomicus’, characterised by an utility maximizing perspective (Jensen and Meckling, 1976). Fligstein and Freeland (1995) identified the problems as issues of internal control, especially of hierarchy and motivation, and mention that they commonly occur where there is management on one side and workers on the other, or ownership on one side with control on the other, or division of labour into several levels of management.Agency theory postulates that once incentives are appropriately structured and information is made more symmetrical, agents will work in favour of their principals (Eisenhardt, 1989). Time and experience have shown that there may be other variables at work and that there is a need to exercise caution in applying agency theory (Donaldson and Davis, 1991). A single case study of Lumberworks Ltd. is used to explore, validate and extend these ideas, following the suggestion by Tosi and Gomez Mejia (1989) that there may be need to research agency theory using other behavioural science methodologies other than the psychometric approach commonly favoured, in order to enrich the understanding of the effects of monitoring and incentive alignment efforts. According to Yin (1984), looking at a phenomenon in a real life context makes it more intelligible and guides our further understanding of its confines and its reaches.Thus, using single case methodology, this paper suggests that monitoring and incentive structures, the most common responses to principal-agent concerns, are limited in their effectiveness and that a trust-building approach is what is needed to achieve the much sought after alignment of interests. Since trust can only be built where there is integrity, it would seem that integrity is what really matters to the agent, and a culture of integrity is what will grow mutual trust in such a way as to resolve all the conflicts thrown up within the agency relationship.The paper also suggests that there may be some institutional differences across cultures which affect principal-agent relationships and that, in Nigeria in particular, and perhaps for countries in similar emergent economic conditions, a deinstitutionalization perspective may be very useful. In such a case, the trust-building approach based on fostering a culture of integrity still is the solution, since it tends to generate a deeper and more long-lasting solution to both agency and institutionalization problems related to instances of negative work ethic. Further research could be aimed at exploring the distinct steps towards building cultures of integrity and the possibilities of deinstitutionalizing negative and or self-interested attitudes and replacing them with productive and other-regarding ones through education and training activity.