Ever since the owners of organizations put agents in
charge of operations, because of growing scale and perceived need for
management specialization, shareholder value maximization has not been Pareto
optimal for decision-makers. Much has been written and studied in this area
with little effect on organizational structure, systems, and strategies (1).
From the advent of computers, agents have been effective in claiming
superiority over machines because of a lack of transparency for the owners.
Although it is difficult to prove that machines possess superior
decision-making capabilities in real companies and markets because of the lack
of data from long and repeated experiments, it is clearly the case in financial
markets.
With
clear and consistent data in the financial markets, it has long been clear that
financial intermediaries and traders have been destroying alpha, forever. With
misguided and a confusing focus on "absolute returns," these agents
have been successful in siphoning out wealth from owners in fees and expenses.
An illustrious investment bank seems to have recently recognized that
"trading," done by humans creates no value for its clients. Machines
are infinitely better as they can
act based on complete information without bias. Decision-making, thus, is
better delegated to machines.
In real markets, this is equally
applicable. Because of high diversity in types of decisions and long durations
to outcomes, agents have long claimed superior capabilities compared to
machines. This is true at all levels of organizations (1) and in every
function. Since distributed owners are unable to understand the inner workings
of complex organizations, agents simply claimed they are better without any
contention. This has significant negative effects on the economy and its
potential to grow. A structural change that culminates in the reassignment of
human responsibilities in the enterprise may be afoot.
The emerging principal-agent-machine
problem is real for modern organizations. Institutionalization of agents since
the industrial revolution has run its course. Owners may finally have an
opportunity to break this stalemate.