Naval calls the principal-agent problem [“incredibly important and seem to apply almost universally.“](transcripts/principal-agent.md#A principal is an owner; an agent is an employee) Like natural laws, it operates everywhere with predictable consequences.
The problem stems from misaligned desires: owners and workers want different things. [“The principal’s incentives are different than the agent’s incentives, so the owner of the business wants what is best for the business and will make the most money. The agent generally wants whatever will look good to the principal, or might make them the most friends in the neighborhood or in the business, or might make them personally the most money.“](transcripts/principal-agent.md#A principal’s incentives are different than an agent’s incentives)
Naval summarizes it with Napoleon’s quote: “If you want it done, Go. If not, Send.” Others lack intrinsic motivation.
This destroys wealth creation. Public companies where [“the CEO takes charge, stuffs the board with their buddies and then starts issuing themselves low-priced stock options”](transcripts/principal-agent.md#A principal’s incentives are different than an agent’s incentives) because no true owner with skin in the game exists.
[“Agents have a way of hacking systems. This is what makes incentive design so difficult.“](transcripts/principal-agent.md#If you can work on incentives, don’t work on anything else)
This is complex systems thinking: people find loopholes in any game you design.
Naval’s solution requires long-term thinking: generous equity and alignment over advantage. [“Be generous with your top lieutenants—in terms of ownership and incentives—even if they don’t necessarily realize it; because over time they will and you want them to be aligned with you.“](transcripts/principal-agent.md#When you do deals, it’s better to have the same incentives) Compound interest works on relationships too.
For employees, his advice demands personal transformation: “If you think like the owner and you act like the owner, it’s only a matter of time until you become the owner.” This requires developing unique insights and sound judgment rather than just following orders.
The insight explains why scaling destroys quality. In big organizations, [“the principal and the agent are highly separated.“](transcripts/principal-agent.md#Deal with small firms to avoid the principal-agent problem) You lose direct accountability and human-scale feedback loops.