‘In a principal-agent model,’ writes Nobel Laureate Richard Thaler in Misbehaving, ‘the principal is the boss, often the owner of a firm, and the agent is someone to whom authority is delegated.’
Let us for the sake of relatability apply the definition of a principal broadly. The principal could be a higher-ranking military officer who issues commands to subordinate officers, or the principal could be the manager of a team and the agent is a reportee.
Now, regardless of your current professional position, I guarantee you that you have been both principal and agent in some manner at some point in time. A manager is an agent to their boss—a manager of managers, who in turn is an agent to a CXO, who’s an agent to the CEO, who to the investors / board.
At the root of it, as a principal, you’re worried that your intent may have been mis-interpreted, unclear, or inadequate. Apart from the fear of being taken for a ride.
As an agent, you’re worried about not having the freedom to act or not having the knowledge to know what is and what is not acceptable.
Between these polarities, there’s a lot of play possible when it comes to the behavior of principals and agents toward each other. Hang on. Shouldn’t the principal always decide and the agent always execute?
As a leader at any level, you cannot be physically present at all places at once to direct action. You’ve to rely on the judgment of your subordinates to make the right decisions. And as an agent, you cannot wait for a written order from the top when urgent decision-making is needed. So why not learn how to do this principal-agent thing better?
The rest of the article is written from the perspective of the principal. But I believe it should not be hard for you as an agent to take value from it.
The principal’s main tools are rewards (and penalties) and rules. Neither is fail-safe for the complex organism that the agent is. Incentives as an extrinsic motivator in terms of monetary rewards or penalties wear off over time AND rules encourage anchoring, defiance, and fraud.
So, how can the principal get the agent to behave optimally?
By empowering the agent to act.
Consider this all-too-common situation…
As a manager of managers, you have developed a plan for your business unit. You share that plan with your second line, who try to get a measure of it before passing on a further simplified version to their reports, the frontline staff.
All of this cascading communication culminates in action on the ground—a launch is made, a program is implemented, et cetera.
But soon enough, an unanticipated situation emerges. Customers are not responding as they should or regulation in a certain market has changed or a competitor has changed strategy. The novel situation doesn’t have to be negative. It could very well be that the implementing team has achieved success in half the time and with a quarter utilization of available resources. In both cases, the question is: what to do next?
At this point, you as the commander and your second line are taken into separate rooms and asked the same question. You’re asked about how your second line whom you had initially briefed would respond to the new situation, and your second line is asked about what they would do. What would be the degree of match between the responses?
This is not a hypothetical question. One US military study decided to go the empirical way and investigated the communication of intent in four active-duty combat arms battalions. Result? In only about a third of the cases—11 out of 32 cases, or 34%—did the battalion commanders and their subordinate company commanders think along the same lines.
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Figure credit: Lieutenant Colonel Lawrence Shattuck, US Army, Military Review (2000)
The core issue is that as a principal you do not have, and it is practically impossible to have, control over your agents’ actions. This predicament is thankfully not limited to any domain, so you have plenty of sources to learn from if you want to put into practice a system that consistently improves the chances of your team making smarter decisions in uncertainty.
A proven system is that of the Germans.
Commander’s Intent
The German army introduced a concept called Auftragstaktik in the early 19th century. Lieutenant Colonel Lawrence Shattuck, US Army, offers this description in Military Review (2000):
Auftragstaktik_, best translated as mission-oriented command, was developed in response to the French revolution and “Napoleon’s method of waging war, which swept away the traditional armies and their linear tactics, iron discipline, blind obedience and intolerance of independent action.”_
The bit in quotes is from a 1989 piece published in Infantry by Lt. Col. J. L. Silva. Go back to the German lexicon, and you’ll find that _Auftragstaktik _(mission-oriented command and control) stands in contrast to Befehlstaktik (order-oriented command and control). Chapter 6 of the German field manual Bundeswehr describes mission-oriented command and control as a system where the subordinate leader is given ‘freedom of action in the execution of his mission, the extent depending on the type of mission to be accomplished.’
The Germans seem to have realized early on that a leader cannot dictate terms of engagement for all situations. Instead of aspiring to run a tight ship, no matter the scale or circumstances, they laid the ground for a system to manage complexity.
Here’s a fascinating commentary on the idea behind Commander’s Intent by a German, Lt. Col. Knut Czeslik, a military historian himself:
_The principle creates, for all leaders at all levels, the freedom of manuever for independent action. The most senior military leader passes on the objectives, provides the resources, and coordinates the combined arms co-operation. He never determines, however, _how the mission is supposed to be accomplished.
This is the leap-off point for this article. I’m now going to suggest something you perhaps would not have thought of, and may even dismiss upon hearing. I only hope you’ll hear me out first.
Undergirding Commander’s Intent is the same belief that shores up a founding principle of Netflix, a company that many believe has revolutionized HR practices. The belief is this: If you treat people as fully formed adults, they’re more likely to behave in a manner that is beneficial to the company. If you let employees ‘rely on logic and common sense instead of on formal policies, most of the time we would get better results, and at lower cost.’
Wait a minute. This appears to go around the earlier stated twin tools of rewards and rules to manage agents, doesn’t it?
Let’s see how Netflix principals deal with agents. Here are some more similarities between Netflix HR and Commander’s Intent.
Netflix doesn’t have a formal leave policy. Employees can take whatever time off they feel is right. Commander’s Intent demands ‘thinking officers’ who understand what it means to act freely within operational parameters.
Netflix doesn’t have a formal travel and expense policy. Employees are expected to spend company money as they would their own. Commander’s Intent necessitates few binding orders from the top and heavy reliance on on-the-ground judgment in volatile situations.
I cannot be sure that Reed Hastings and Patty McCord read the German manual but they seemed to think rather alike on matters of staff management.
The Bones of Commander’s Intent
When the Americans find an idea worth keeping, they usually find it worth polishing, dressing it up, and making it their own. This quality shows in how the principle of Commander’s Intent is written into US military training manuals and taught across schools. And that is where we’ll go to understand the bones of Commander’s Intent.
‘There are four equally important components:,’ writes US Army Lt. Col. Shattuck, ‘formulation, communication, interpretation and implementation. The first two components formulation and communication are the senior commander’s responsibility. Subordinate commanders interpret and implement intent.’
Let’s make this bifurcation simple for us knowledge workers. The senior commander is the boss (principal). The subordinate commanders are the reports (agents). And the split in responsibilities between the principal and the agent is the split between _what _and how. The principal decides the what; the agent, the how.
If the what is not clearly defined, it’ll muddy up the how. Even when the what is clearly defined, Plan A for the how may go up in the air if the situation is volatile. When that happens, the principal cannot be everywhere at once. So, it is fruitless to rely on direct command to get things done. Instead, the principal could empower the agents to adapt to the situation and make good decisions in uncertainty by communicating to them her intent and giving them the freedom to act.
This may look like abdicating responsibility, especially for new managers. They may see it as their job to take charge of the situation. Perhaps it is because they want to prove to themselves that they belong in the principals’ room.
The best commanders and leaders, though, accept reality for what it is. They prepare for missions to not go as per plan. They realize that it is better that their troops act decisively in new and unanticipated contexts instead of waiting for an order from the headquarters.
Where do you deploy your last resource? How do you spend your last dollar? Should you still make the big bet now that your competitors have a heads-up on your strategy? The questions are endless for the agent if the end state is not clear, and endless for the principal if they hold on tight to all decisions on the means to reach the end state.
With so much riding, how do leaders trade direct control for self-motivated action? The answer is a five-letter word: trust. Trust that their subordinates will act in integrity, of course, but also trust that they will exercise their judgment _in service of _the commander’s intent.
**How to trust when sh*t hits the fan—and what can go wrong? **
The Germans did not think of Auftragstaktik as a set of procedures but as a ‘social norm within the German army.’ They acknowledged that battle is marked by chaos and ambiguity and traded any false assurance of control for agent-driven action.
That’s easier said. How do you trust someone else to do the right thing when lives and livelihoods are at stake? Is there a way to trust well? Where should you not trust? I promised to show the double edge of Commander’s Intent and here we are.
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Pic: Midjourney rendition of a supreme commander catching forty winks in the heat of battle after having shown exemplary Commander’s Intent.
When a business leader identifies the correct end state (the what) and shares the same with subordinates without interfering in the methods (the how) to get to that goal, she trusts the judgment of the subordinates to make smart choices en route.
But reports acting out their boss’s intent have different thresholds for uncertainty. They have different levels of compliance. Or they could be in disagreement with the what. In each of these cases, mistakes will happen.
The workaround is not to have blind faith but in taking steps that can help you as a leader to impart your presence short of being there in your reports’ ears.
1️⃣ Ensure that the formulation and communication—the purview of the leader—captures not just the what but also the why. Before project kickoff, you could explain how you came to the conclusion on the project end state. By explaining your rationale, you allow your reports to fully take your perspective.
2️⃣Meet periodically, when possible, to reinforce the original intent or lay out any change in operational limits with the accompanying explanation. Putting out how your thinking has evolved with the changing situation puts up a scaffolding for your reports to lean on and think from. Of course, there are situations when such transparency can backfire but by and large it breeds trust in employees.
3️⃣ Understand your reports. That means seeing them as individuals, not as cogs in a well-oiled machine. Acknowledging the differences between those you manage helps you access them better. Some want more context, some less, some act best when challenged, and some when reassured.
4️⃣ Practice and reward behavior you want to see. Penalize what you don’t. Walking the talk builds culture. And we know that culture eats strategy for breakfast.
5️⃣ Seek feedback often. Despite clear and multiple briefings, miscommunication is possible. As word travels distortions occur. Close the loop by correcting them.
**Why do companies keep adding pages to their rulebooks? **
Treating employees like fully formed adults is not the norm in companies. Which is why the bigger the organization the fatter their rulebook. So, what are we not talking about when talking up freedom of action and independent thought and thinking officers? Why is a best practice in the military an exception in corporations?
Three main reasons explain this difference.
1️⃣Treatment of personnel - This is where the paths of the military and the modern corporation separate. Put simply, the military cannot throw money at the problem of quality of personnel. It relies on the intrinsic motivation of its employees to pull them through difficult times. ‘Civilian corporations,’ in the words of retired four-star US General Stanley McChrystal, ‘don’t spend much time on leader development anymore.’
For corporations, grooming tomorrow’s leaders may not be top priority if the rewards of that effort are going to the next career destination of the employee. It’s simpler to not invest in them, or to hire the best talent. Contrast this with the military that as General McChrystal says ‘for all its weaknesses, spends an awful lot of time developing leaders.’
2️⃣Threat of extinction - Agents who can think like their principals make their principals redundant. If you can consistently exercise good judgment on matters in your boss’s remit, why should you be not doing your boss’s job? As the delta between the principal and the agent closes, a survival-of-the-fittest frame becomes all the more compelling.
3️⃣Cost of inaction - The cost of inaction is much lower in the boardroom than it is in the war room. Corporate teams avoid wrong decisions a lot more than military units do. On the battlefield, no decision is the worst decision. ‘Decisive action is the highest dictate in combat,’ says the German military manual Bundeswehr.
‘Auftragstaktik,’ writes Lt. Col. Czeslik, ‘is also an essential foundation for the career satisfaction of a soldier.’ Human beings are driven by autonomy, mastery, and purpose. The philosophy of Commander’s Intent seems to capture all three drivers better than other schools of thought around personnel management. It also strikes a balance between direct command and control (micromanagement) and complete delegation (abdication).