Workplace Bullying is an Agency Problem and Often a Crime (1 February 2016)

How the Hierarchical Management Paradigm Facilitates Workplace Bullying and Corruption

Qualification: I have no legal credentials and by no means should this article be regarded as though I do. The Agency Problem is being viewed as a layman from a systems thinking perspective. Corruption is always an Agency Problem. Workplace bullying is an undesirable management outcome from the standpoint of the enterprise (i.e., fictitious legal person – corporation). At the same time, the prevalence of workplace bullying indicates it is actually a desired self-interested outcome of certain agents. This conflict between enterprise objective interests and agent self-interests is an Agency Problem (in the view of this author). However, I would be very glad to hear comments about this from compliance and legal professionals, as well as others. – Steven D. Kalavity  

Criminals usually prey on weakness. They can smell it.

Steven Seagal

Bullies are always cowards at heart and may be credited with a pretty safe instinct in scenting their prey.

Anna Julia Cooper

Most any target of workplace bullying can easily understand how workplace bullying is corrupt and even criminal activity. There is no single legal definition, but an example of a working definition for workplace bullying is conduct that cannot be objectively justified by a reasonable code of conduct, and whose likely or actual cumulative effect is to threaten, undermine, constrain, humiliate or harm another person or their property, reputation, self-esteem, self-confidence or ability to perform. The ability to perform optimally is clearly the domain and primary responsibility of management. Contemporary literature is replete and nearly conclusive that workplace bullying is bad for business performance. Any intentional interference with this crucial and fundamental objective should sound the alarm to any responsible and conscientious enterprise executive management team. Why doesn’t it? Workplace bullying has been designated the silent epidemic, as it negatively impacts workplaces in every sector of the global economy. This reality points to a conclusion that workplace bullying is a byproduct of the prevalent corrupted hierarchal-authoritative management paradigm where agency actual authority is too often misused. Enterprise governance policy and procedures establish the processes of how decisions are supposed to be made. Every decision is a risk and so the process and constraints which form the decision-making processes define outcome, as well as the enterprise business culture itself. In the article, What Was Volkswagen Thinking?” , author Jerry Useem concludes that culture is the product of decisions. The prevalent hierarchal management paradigm which concentrates the influence of decisions by virtue of authoritative power of a few, and not policy or process performance, is at the root of many of the ills that infect the workplace, such as corruption, fraud, and workplace violence. Similarly, workplace bullying is an Agency Problem whereby agents act beyond their actual defined and prescribed authority contrary to the best interests of the enterprise. Further, workplace bullying is an Agency Problem especially in hierarchal systems with multiple agents assumed to be acting in the best interests of the enterprise. With disproportionate actual authoritative power comes disproportionate levels of responsibility. Workplace bullying is not an individual agent problem. It is a regime or group problem at the very least starting where authoritative decision-making power is most concentrated. In corrupt enterprises, internal governance is ineffectual and therefore toxic behavior becomes epidemic without external constraints imposed (i.e., laws/regulation). Fair markets are predicated on all players playing by the same rules. As with the Butterfly Effect, a single mishandled breach can become a tsunami of enterprise corruption that impacts many interrelated market sectors.

Those opposed to legislation against workplace bullying believe that laws to address workplace bullying directly would undermine business operations. Workplace bullying would need to be well defined, and even then could invite legal or tort claims which could hamper business and the broader free-market ideal. The prevailing view is that business enterprises should be free to define internally – within the scope of the business entity – how products and services are delivered through the enterprises management of resources. Thus, to a very large extent, enterprises tend to be self-governing. The presumption is that the enterprise will properly govern their internal practices. But, this presumption is very often false. Simply, while it is the principal task and responsibility of executive management to make certain that resources are utilized according to defined policy and processes, management is seldom held accountable to such specific measures. Without such a basis, how is the difference between good management and bad management even determined? Most often good management or bad management is arbitrarily decided or tied to enterprise share value performance, rather than the analysis of the processes that actually deliver share value. The primary measure of performance should be based on the adherence and analysis of corporate governance policy and procedures. And then the only way to validate such performance is through well thought out measures and analysis. Otherwise, looking at only the points on the board without understanding the rules and objectives of the game is ludicrous. Executive management establishes the policy, processes, and resource allocation required to deliver its products and services to market within compliance to internal governance and external laws. This is the main role of corporate management. How well enterprises manage these interrelated functions is the baseline to profitability in a fair and free market, and not an aside.

A principal-agent relationship is an arrangement in which one entity legally appoints another to act on its behalf. A corporation is a fictitious legal person. In a principal-agent relationship, agents, such as key executives, are to act on behalf of the corporate enterprise. Agents should not have a conflict of interest with the principal in carrying out their duties. The problem of motivating the agent to act on behalf of the principal is known as an Agency Problem. Agency Problems arise when the incentives between the agent and the principal are not perfectly aligned and conflicts of interest arise. In the corporate agent arrangement self-interests can become in conflict with the policy and principles of the fictitious legal person. The definition of corruption is the abuse of entrusted power. The great fallacy that guides many enterprise agents (high-level executives especially) is that their decision making authority is bounded only by their hierarchal position in respect to the organization. However, their actual authority is vested through corporate charter which is tied to local legal requirements in addition to internal governance policy and procedures. Internal governance and compliance programs do not work for corrupted regimes for the simple reason that self-interested authoritative power is not inclined to impeach their own authoritatively derived decisions. Authoritative power also has the ability to surround themselves with those who they like and comply with and support their own self-interests. Without a verifiable and stable process to gauge performance, performance becomes just a popularity contest decided by those with authoritative power. (“Performance” can be correlated most closely to the relationship between the appraised and the appraiser.) Targets of workplace bullying are vulnerable in such regimes because decisions are allowed to be driven by self-interests and not the actual power vested to them through their agency. This concept manifest itself in devices such as the annual performance appraisal given to for employees. The systems perspective which relies on process control and analysis applies to quality management, and is also applicable to enterprise governance.

Quality guru W. Edward Deming admonished annual performance appraisals categorically, calling such practices a deadly disease for enterprises. Deming studied organizations as a system to be optimized for performance. Deming constructed the Red Bead Experiment which clearly demonstrated several points about bad management practices. Through the use of statistical theory, Deming showed that worker performance was constrained by the system comprised of the physical environment, psychological environment, and of course the processes and interaction of human and non-human resources. Time after time it was shown in real-time that undesired outcome could be attributed to the system 85-99+% of the time and the remainder could be attributed to the employee. However, many organizations punish certain employees instead improving management and the system. This is management by fear, which is a derivative of the misuse of position. It is irrational and biased decision-making with no verifiable basis. It causes chaos in enterprises with its associated unpredictable outcome. It is the no-win situation that too many targets of workplace bullying are placed in. Management is supposed to be improving the production of goods and services through their understanding of the system and processes. This is their fundamental responsibility through their agency and actual authoritative power. Performance management is most often employee focused and not system focused. As such, performance management is very susceptible to the influences of corrupted authoritative power which is subjectively biased with self-interest above enterprise interest. This relates to workplace bullying directly because performance is the ruse often used to facilitate a targets exit. As written in previous posts, the ambush meeting (as described by Dr. Gary Namie, Researcher and Founder of the Workplace Bullying Institute) is the nefarious mechanism used by workplace bullies to expedite a targets exit. Note, workplace bullies are not individuals. They are regimes that cooperate for the regimes interests above the enterprise interests. The intention of the workplace bully is to force the target out of their job. Performance is a legal justification to terminate employment in most jurisdictions. But, performance must be fairly qualified somehow. It seldom is. Too often the only qualification of performance is the subjective edict of the supervisor. In corrupt systems with little process control it is almost certain that performance is not adequately measured or reasonably ascertained. This is especially true of knowledge work. Progressive organizations have finally started to abandon these destructive devices of misused authority driving  “performance” decisions.

Fighting means you could lose. Bullying means you can’t. A bully wants to beat somebody; he doesn’t want to fight somebody.

Andrew Vachss

A bad system will beat a good person every time.

W. Edwards Deming

Workplace bullying has often been an issue handled (incorrectly, yet by design) through enterprise human resources (HR) functions. As the WBI video states, a high level representative from HR is usually present at the all too common ambush meeting. In this respect, again, regimes cooperate to bypass reasonable practices, and use intimidation and surprise to exercise their abuse of position. HR operates at the behest of senior executives whose collective decisions form the enterprise culture. The prevalent use of this workplace bully tactic also indicates that it is an intentional debasement, as it most likely is not a documented or authorized enterprise procedure. The cooperation of agents to misuse their authoritative position could also be called a conspiracy. This practice of the ambush meeting seems to be allowed and exercised by too many enterprise executives. It is a product of a hierarchal paradigm that allows self-interested decision-making to trump agency authorized decision-making processes. It is then corruption and a form of conspiracy to defraud. Beyond this, workplace bullying is also recognized as a form of psychological violence. What else can one call such an unreasonable surprise tactic in a workplace? Again, such intentional tactics are used to destabilize and distress targets. Going back to the provided definition, workplace bullying is conduct that cannot be objectively justified by a reasonable code of conduct. The ambush meeting represents the culmination of working in a corruptly managed environment. Such an intentionally abusive work environment causes distress as well as a variety of physical effects. Targets of workplace bullying can suffer chronic fatigue syndrome, anxiety, lowered resistance and increased susceptibility to colds, flu, fever and viruses. Workplace bully targets have reported high blood pressure, migraine headaches, back ache, chest pains, hormone disturbances, physical numbness, irritable bowel syndrome, thyroid problems, skin irritations and ulcers. Targets of workplace bullying have a greater risk of heart disease. Vindictive workplace bullies – of which there are many – who evict targets from their current employment also impact future job opportunities. Whistle-blowers are routinely bullied out their careers. Workplace bullying exacts a physical, mental, and financial toll on targets and it is perpetrated by corrupt authoritative power which mistreats employees, and rejects enterprise policy and procedures out of self-interest. It should be a crime, but it must also in all cases be an Agency Problem. Corrupt and toxic enterprise cultures are a product of decisions. There needs to be a change in how decisions are allowed to be made.


Enterprise governance compliance officers are familiar with the Fraud Triangle. The first problem with internal compliance officers is that they are vested and empowered by the regime. While their agency is to uphold internal compliance and not protect management malfeasance, there is often self-interest in play which affect their decisions. In fact, the abuse of position is a category of fraud. The Fraud Triangle can also be called the Wrong-doing Triangle (in this article, anyhow). Again, corruption is always an Agency Problem. For an employee (agent) to do the wrong thing three elements must exists together: motivation, rationalization, and opportunity. These three components are the legs of the Wrong-doing Triangle. The system controls all of these to some extent, but especially opportunity. Executive management, those with the required level of decision making authority, control the performance environment through its resource allocation and use. The Wrong-Doing Triangle can also describe how faulty products or services are output from the system. A quality management system or safety management systems constrains outcomes by reducing or removing the opportunity for the undesirable outcome. This is reducing the risk of undesirable outcomes from the system. This is the same objective for corporate governance compliance systems. There is always a cost-benefit equation to performance which induces employees to take shortcuts which can impact quality and safety outcomes. Ideally, the easiest and most efficient way of doing something should be incorporated into the process and avenues to not follow the process should be more difficult and less efficient. If the likelihood of agents being caught and disciplined were significantly high enough, then compliance programs would be much more successful. Overlooking management failure to abide by policy and procedures, carry out thorough investigations, and otherwise execute governance policy fairly and indiscriminately is either negligence or corruption, but it’s always an Agency Problem. Agents are improperly allowed to make decisions with perceived authority that oversteps the bounds of their actual authority. An agent’s actual authority is legally constrained by enterprise charter, policies, procedures, and local laws and not share value.  The United States of America was formed from understanding the many problems of tyrannical rule. The tendency for authoritative power to become corrupt was also well known.  The abuse of concentrated power was the basis from which the new country created a democratic system which divided power into three branches of government.

It won’t do away with hierarchy totally, but the principal leader will be the person who most exemplifies the kind of organization and behavior required who is best able to create the conditions such organizations require. ~ Dee Hock

Because power corrupts, society’s demands for moral authority and character increase as the importance of the position increases. ~ John Adams

Concentrated hierarchical based organizations not only debases the democratic and free-market ideals, they contribute to the disparity of wealth and the decrease in productivity of the enterprises which they command. Corporate senior executives are the elite in terms of pay and authoritative power. But, they are too often only held accountable to investors. This is a false measure. Simply put, enterprise governance compliance is not a priority to corrupt and abusive regimes and it never has been. Self-interested authoritative power always trumps benign enterprise ideology. And actually, we have a good idea why.   Following the atrocities of World War II the world wondered what conditions would allow normal people to support such horrific abuse of fellow human beings. In an attempt to answer this question, in 1963 Yale researcher Stanley Milgram conducted experiments that demonstrated that ordinary people are inclined to follow orders given to them by a person with authoritative power, even to the extent of injuring and killing a human being. The Milgram Experiment has been replicated many times in many different countries.   In 1971, the researcher Philip Zimbardo followed Milgram’s study with his famous Stanford Prison Experiment which demonstrated how roles defined behavior. Student subjects were randomly placed into roles as either guard or prisoner. Zimbardo acted as warden and allowed the guards to self-govern as they saw fit, excepting that no physical punishment was permitted. Guards with the authoritative power to collectively determine treatment with few constraints imposed soon began behaving in cruel, dehumanizing and sadistic ways. Prisoners suffered intense psychological stress reactions from obeying the demeaning orders from the guards. At the same time, prisoners also became less compassionate toward one another and complied with the guards. Resisters of the dehumanizing treatment were ostracized by fellow prisoners. The experiment was ended in six days. Follow-up studies have concluded that the constraints imposed by the authoritative power in the onset of the experiment can affect results. Said another way, as a systems thinker, established controls and constraints effect outcome.

Enterprises are abstract legal persons operated by many self-interested agents. As the enterprise extent and diversity expands, the odds of aligning these varied interests with those of the legal entity without strong external constraints of the authority that allows their existence is slim. We know this. Leadership defines culture through the action of their decisions. Authoritative power makes decisions and defines what is allowed. It very clearly is projected from where the authoritative decision-making power is most concentrated – at the top of the hierarchy. The decisions made at the top are too often not aligned to the culture described in their corporate responsibility brochures or more importantly within the enterprise bylaws and policies. The reason is really simple and applies to all types of non-compliance, from quality control, safety, and enterprise governance. Outcomes, the measure of performance, must be defined through stable and verifiable processes. Local laws and enterprise process and procedures must always usurp the decision-making process and take it away from self-interested agents who abuse their bestowed trust and authority. Audits and punishments for these regimes must be justified, but be handled external to the enterprise. Breaking the rules of a public trust is a public concern, which is what agency is really about. It should not be so easy and frivolous to breach bylaws and policy for something as innocuous as share value.  The best way to reduce wrong-doing is through developing a system of transparency with routine checks that will reveal the negative outcomes so that processes can be improved. The only real measure of performance is derived from both the appropriate data as well as its appropriate analysis. Agent decisions need to be aligned to processes constrained by local laws and corporate bylaws and policy. An agents legal decision-making authoritative power simply is not authorized beyond this already broad scope. Workplace bullying is an Agency Problem and often a crime because there is no greater self-interest than exercising cruel and health-damaging control through unauthorized power. Internal governance compliance mechanisms are ineffective in most organizations because without external constraints agents are very corruptible. There needs to be external data-based validation to qualify agent decision making. The position on a hierarchal chart cannot mean more than the laws and policies which formed the actual fictitious legal person in the first place. The system should not have the allowance for the abuse of authoritative power built into it. It is no wonder that enterprise wrong-doing is at epidemic levels.  Corrupt and toxic enterprise culture is a product of agency authoritative decision making. We need to change how such decisions are allowed to be made so that they are better aligned with that of the enterprise mandates.

When your values are clear to you, making decisions becomes easier. ~ Roy E. Disney

Whoever fights monsters should see to it that in the process he does not become a monster.

Friedrich Nietzsche