Prepare yourself because I am about to nerd out on Finance topics. I’ve learned in innumerable different classes and lecture classes about this issue of “Agency Problems” that management teams have when running a company.
The problems arise because management teams make decisions and strategic plans equipped with money that is not theirs, but the company’s. The effect is that decisions are made less rationally, more rashly, and without as much care because there is less responsibility tied to the money they are spending. In class the other day, a group of 20-year-olds gave away $100,000 easier with only minor issues and frustrations. This is the same group of people that individually have trouble spending $20 for a meal.
I had never actually felt the reality of what agency problems are until I took Strategic Philanthropy. How in the world was a group able to give away so much money with relatively little hesitation (marginally speaking, of course)? The only reason I can point to is a very distinct separation between the weight and responsibility of an amount of money far larger than any of us have seen and the cognitive decision-making minds of the people in the room. Even the smallest grant awe gave away, $5,000, is more money than any of us could individually afford to give away. When you think about it, it is truly remarkable that it actually took place.
Another way I like to think about it is if the situation had been turned around a little bit, I don’t think any decision could have been made. For example, what if all 25 members of our team had to put in $4,000 of their own money into the pot to make the $100,000? Not just some petty cash either, that would be what I call Sweat Equity, which is the type of money that you’d have worked hard for to save up. If that were the case, the tensions, frustrations, and already fiery opinions would have been magnified tenfold. In fact, I don’t think I could have handled the passion and emotion that that room would have contained. That’s a situation I don’t know if I would have signed up for.
At the end, $100,000 was given away gladly and with relative ease at the hands of 25 poor college kids. That is a feat in itself. I also did not expect to learn about financial management in this class, but this definitely turned into one of the wildest and clearest pictures of an agency problem that I could have imagined. I would also venture to say “problem” isn’t the best word for our class’s situation. It’s more of an “agency opportunity.” That being said, it’s a very interesting thing to note!
by Trevor Pownell ’18