[MUSIC]. Okay so let's let's try and summarize a little bit what we discussed before. So here's The idea. We have, in Rome, a spectacularly successful result. Right? We have a city of a million people. The largest, the next largest city was maybe 400,000, so it's twice as large as the next largest city. And it stays that way for half a millennium, so a very long period of time. And in order for it to be able to sustain that size it has to be the beneficiary of a very successfully functioning market. When we look at the market itself that provided grain to Rome, we see a problem. We see a market that is characterized by persistent informational uncertainty. And a market that doesn't have the information that it needs is a market that we would predict cannot function. So that's fine, we did our Gedankenexperiment, our thought experiment, we gave the market the information that it needed, and we did so quite well. But the problem was that when Fernando then went into the bakery in Rome to buy his bread, he was shocked and appalled at how much it cost, and left in disgust, and burned down the Governor's palace. So, no functioning market. We noted then that the problem is that when we have an entrepreneurial driven market, so in other words when we have individual intermediaries in the market, the result is unacceptably high transaction costs. So solving the problem for information, fine, but then we end up with a problem of costs, we have a problem of transaction cost. The mechanism that we use to control for transaction cost, and I suggested the Coaseian framework from 1937, elegant then, elegant now, is that a firm, the nature of the firm, is simply an organizationally efficient response to a transaction cost problem. It's cheaper in the end, to use the market by domesticating those transaction costs under the umbrella of a single organization, and so that the entrepreneur moves within the organization. And the coordination of production then takes place under the mantle of that, of that organization, of that institution. That solves for the cost problems and we saw then that the Romans had these found institutions that enabled their market to function. So they have for example, a robust legal frame work, which allows them to sign contracts in triplicate, and actually enforce the terms of contractual obligation. They also have this ability to measure, to, to impose quality control mechanisms, which allow for the grain to move, and you know, you could be confident, that it is what you're contracting for. But most importantly, they had a mechanism of slavery. This idea that slavery is a found institution, that is to say an institution that predates the rise of the Roman corporation, turned out to be a very useful mechanism to control the fundamental problem of agency that a firm inevitably engenders. That is to say, when I give somebody my money. how do I know that that person is going to go out and use it well and efficiently? How do I know they're not just going to take it and buy themselves a nice yacht or a nice house or hire their friends, or whatever? How do I know? The answer to that we would say is monitoring. I monitor what those agents do. When Ben goes and buys grain on my behalf, I want to know, how much did you pay for it? Did he get a good price? If he didn't, I'm going to inter-, I'm going to intervene. But that monitoring capability was not available to the Romans because they didn't have any kind of ability to improve the velocity of information. Which puts us into this odd conundrum. Because we know from Chandler, the Chandlerian argument is that the enabling condition for the firm is that you have sufficient velocity of information to enable a hierarchical, managerial structure. That's when firms exist. And yet here we have a Roman firm driven market that exists for hundreds and hundreds of years, operating with near optimal efficiency, because we have a million people living in Roman, more or less happily, who didn't have that kind of monitoring. So where, how, what did the Romans do right to control for this agency problem if monitoring was not particularly available to them? And that's what I'd like to talk, that's what I'd like to turn to, to now, is to consider this question of, of agency, of how we control for agency costs? How we, in a management context, talk about agency, illuminated by the Roman example to look at it as it exists in the firm today. So what I'd like to do is to spend our time today looking at this particular question. And the framework that I want to use is one that I think will be familiar to many of you. It's known as the "Forced Distribution Ranking Scheme," technically, but many of you will know it as, "up and out!" Or "stack and rank," or "rank and yank." Sounds a little dirty to my mind, but there we go, right? How many of you in this room have been ranked and yanked? By which I mean quarterly evaluations, right. That's essentially taking a curve and applying it to an employee base. So, you go through a six-month, three-month, one-year evaluation. Two people get promoted. Six people stay where they are. Two people are invited to consider alternative career choices. How many people in the room, just as a show of hands, out of interest, have worked under a scheme like that? Hands up. Okay, quite a few. What we've, I mean, these are, it's a very common scheme for controlling the agency problem. We see it in many Fortune 500 companies. All of the Big Four do this, many of the banks do this, so it's a very common scheme. How many of you who've worked under this like it? How many of you liked the experience? Did you enjoy it? You didn't like being put into a quintile? >> It compares apples to oranges, everyone had different circumstances but it threw everyone together. >> Okay so you weren't particularly happy. You did like it, is that what you're saying? You thought it was a good scheme? >> For me I think it was good because this way I could understand what it takes to be successful in your job. >> Yeah, okay. Many of you, in your professional lives, are going to go out and both work under this scheme, and be, as managers, responsible for its implementation. If you go work for a consulting company, if you, if you're going to go work for many of these big fortune 500 companies, if you work for the Big four, you're going to fall under this curved evaluation scheme, the forced, the forced distribution ranking scheme. [BLANK_AUDIO] [SOUND]. Why do companies do this? What's the purpose of a scheme like this? You have people come into your off-, into your company, and you have, every three months, or six months, or a year, or every project, you bring people together, and you evaluate them, and you say: Two of you are doing great, six of your are fine. And two of you should consider other choices in life. Why do firms do that? What's the benefit to the firm of a scheme like that? >> It gives incentive for performance. >> Performance incentive. Okay, absolutely. So you have..., so you would..., so people are incentivised to work harder. Yeah, yes. >> It keeps from being sued when they fire someone. >> It gives you legal protections, right, because it establishes a kind of clarity about what the mechanism, mechanism is. >> They get monitored. >> Yeah, it establishes transparent monitoring schemes, right, so that you, you, you have good information flow in terms of how you're monitoring the agency within the firm. That's certainly true. So why do firms do this? First of all, in a scheme like this where you have a kind of constant evaluation, you're always identifying talent. And you're moving that talent forward. But you're also constantly identifying people who are holding you back, people who represent high agency costs for your firm, and you're inviting those people, as we noted, to consider better career choices for them, right? Give them a very nice letter of recommendation and, and send them out the door to find perhaps a better place of employment. It creates clear rules of the game. Right? It's very important. What are the conditions whereby I get my bonus, I get promoted, and so on. If you know what those rules are, if you know what the rules of the game are, you can conform to them accordingly. In other words, that kind of transparency is very useful to an employee in order to be able to evaluate their own performance. It facilitates information flows across a company, does it not? Because it creates a kind of constant environment in which people's performance is being evaluated. And information about that evaluation is being provided. And as a result, you get, you would assume, higher productivity on the part of people who are working under this, because they are motivated in that kind of a competitive environment, to work a little harder. No slackers. No complacent, happy employees, but that kind of low-level, competitive anxiety that you want in order to ensure good productivity. And finally we might note, it sends, well, I'll ask you, but I think we might note it, that it sends a good signal to the market, does it not? When you're looking to attract a customer. If you can tell that customer, we only promote the best and we're constantly getting rid of the under performers, are you not sending a good signal to your potential customer? I want to sign a contract with these guys, because they promote that kind of talent, they have that kind of excellence. So if we take all of those factors together, transparent information flows, knowing the rules of the game, promoting a kind of higher productivity and competitivity amongst your workforce, and sending good positive signals to the market, it makes a lot of sense to implement, essentially, a curved employee evaluation scheme. The downside seems to be, is that employees don't often feel. Happy... sanguine... easy. They don't seem to embrace this kind of scheme. It's a bit difficult to tell people that every six months, by the way, your future job security will be at risk and you might have to be invited to go look for other options. But, should we care about that? Is the purpose of the firm to make its employees feel happy about themselves? >> Yes, >> No! [LAUGH] Good heavens. 100 years of capitalism prove you wrong. >> But, I mean, it's it's always a risk to be outstanding. So, people wouldn't mind or might prefer to stay in the middle. >> Yeah. No, but I'm asking, when a firm is implementing a scheme like this, and one of the things that we see anecdotally collected as a result in a sort of a larger sociological context is, many employees feel that it puts undue pressure, and so on, but if it makes the firm more profitable, more competitive, if it makes it easier for them to acquire customers, shouldn't that be, should the firm then care that perhaps some of its employees are a little ill at ease? And isn't the firm ultimately about optimizing its own outcomes, and if that's the cost of optimizing its outcome, shouldn't it do it? >> If the employees aren't happy, they may not like to want to do their job anymore so then making the firm suffer at the end. >> Yeah, then they get fired. An employee who's unhappy and doing their job, happily there's a system which identifies those employees and invites them to find employment elsewhere, or perhaps an MBA program. >> [Laughter] >> I'm kidding! I'm kidding! [LAUGH] Of course. But what I'm saying is if this actually helps the firm optimize its outcome, it should do it. And if we look at it from the top down, there seems to be some pretty good reasons why they should. I mean, boosting productivity, constantly promoting talent, creating informational transparency, creating informational flows, and sending positive signals to the market. Those all sound like pretty good things. And if a firm can achieve those things Through something like the forced, the forced ranking scheme they should do it. [BLANK_AUDIO]
