[Reading the World Through Han Feizi] Leaders Do Not Rely on Subordinates’ Loyalty

The Principal-Agent Problem, or the Principal-Agent Contradiction

When you read Han Feizi, you can see economic insight. There are many passages that feel like something straight out of an economics textbook, including arguments related to the principal-agent relationship. The principal-agent problem is a frequently discussed issue and dilemma in economics and management, and Han Feizi also spoke of it at length.

In fact, when Han Feizi discusses the ruler-minister relationship, he explains it in terms of the principal-agent problem. His perspective on that relationship is fundamentally different from that of Confucianism. Is it a quasi-familial or father-son relationship, or one in which loyalty must be offered unconditionally, a relationship governed only by moral obligation and duty? No. Han Feizi sees it as a relationship formed through mutual interest, a principal-agent relationship. Is it a relationship in which the ruler’s virtue and the minister’s loyalty happily come together? To Han Feizi, that is nonsense. His view is that such an idea is wholly unrealistic and should not even be entertained.

It is impossible for the principal to carry out every task personally. That is why the principal inevitably appoints an agent. The principal has no choice but to bring in an agent and assign work, and in that process contradictions and problems easily arise. That is precisely what the principal-agent problem, principal-agent theory, or dilemma is about. Because the principal cannot do the work directly, he hires an agent and expects the agent’s conduct to serve his interests, but there is no guarantee that it will. The principal’s expectations are always liable to be betrayed.

A king hires ministers to handle the affairs of the state, strengthen national power, and build a wealthy and powerful country. He does not hire them because he is fond of them. He does so for his own interests. The same is true of ministers. They seek office and want to be employed by the king in order to receive official salaries, be granted fiefs, and obtain the intangible benefit of honor. Han Feizi thoroughly viewed ruler and minister as two parties brought together by interest, in a kind of contractual relationship. The problem, however, is that ministers may take only the benefits—that is, receive without giving anything in return to the other party to the contract—or they may deceive and cause harm. As agents, they receive benefits from the principal, yet betray his expectations, fail to provide benefit to him, and at times even actively infringe upon his interests.

In Han Feizi’s eyes, there were many ministers who appeared to be bad agents. So what should be done? Should Legalism, like Confucianism, tell bad agents—agents who are incompetent and insincere—that since they are ministers, they must fulfill a minister’s duty, be loyal to the king, and sometimes serve him as they would a father? Or should it argue that the agent must work from the principal’s standpoint? In other words, should it tell them to develop a sense of ownership? Han Feizi never advanced any such idea. He never, like the Confucians, demanded or expected that ministers devote themselves loyally out of ministerial duty and sincerity of heart, nor did he tell them to think and act as though they were the masters of their country or of court society. Han Feizi spoke instead of incentives. He said that proper work should be rewarded, and failure should be punished. In other words, an incentive system must be created.

If agents work for the principal’s interest, they should be given great rewards; if they work for the public interest, they should be allowed great private gain. If they exert themselves for the community, they should likewise be given what they want. Conversely, if they damage the public interest, harm the principal, and injure the community, they should be punished. In this way, agents will naturally come to work for the principal, for the community, and for the state. Han Feizi recognized that human beings have a desire for gain and that this is part of human instinct. Therefore, rather than simply telling people to work for the public good, he argued that the incentive structure should make them understand that by working for the public good, their own private interests can also increase, and give them confidence in that fact. He also believed that if the promised incentive system were actually carried out, agents—that is, ministers—could readily work for the ruler and for the state.

In Han Feizi’s view, the problem is not the person. The issue is not the minister’s loyalty, but incentives—the structure and institutions of incentives. Why trust people? Why demand loyalty from them? One should not trust people, nor demand loyalty. One must ensure that when someone works for the principal, private benefit is always provided, and when someone betrays the principal’s interest, punishment is always imposed. One must create an incentive system, enforce clear rewards and punishments, and trust that system. Going further, does someone who begs for loyalty even deserve to be a leader? A leader must not depend on the loyalty of subordinates. Rather, should he not create circumstances and conditions in which subordinates cannot help but display loyalty and cannot help but exert their abilities?

An Insight Directly Applicable to Modern Society

Han Feizi has much to say about the ruler-minister relationship. There are many passages in which he thinks through how ministers can be managed and controlled without gaps. Put simply, he talks a great deal about ministers. So when people say we should read and study Han Feizi, or when lectures are given on Han Feizi, such questions often arise: nowadays we live in a democratic society, not one with rulers and ministers, so why study Han Feizi and talk so seriously about how a ruler should handle ministers? That is not entirely mistaken. Modern society is democratic, and our country is clearly a republic. But it would be a great loss to discard Han Feizi’s insight into the ruler-minister relationship. If, like the Confucians, one speaks of ministerial loyalty and ministerial duty and then expounds the ruler-minister relationship by borrowing the authority of the classics, that is clearly anachronistic. It would also be useless.

But Han Feizi clearly speaks of the ruler-minister relationship differently from Confucianism. He explains it through principal-agent theory, and when he discusses the various contradictions and conflicts of interest that can arise between principal and agent, he gets at the essence of the ruler-minister relationship. Now let us pause and ask: Is the president our principal? No. Korean society may treat the president not merely as a principal but almost as a king, yet he is not our principal. We are the principals, and the president is only a term-limited agent. The same is true of all bureaucrats below the ministers, and the same is true of members of the National Assembly. We are the principals, and they are the agents. As agents, they must work for us, and we must ensure that they cannot help but work for us. That is why Han Feizi’s insight into the ruler-minister relationship remains necessary and valid for us.

He was speaking not simply about the ruler-minister relationship, but about the principal-agent problem, and today we live constantly encountering that problem, not only in politics but in countless other settings as well. Managers are agents of shareholders. Employees are also agents of managers. Workers are agents of employers. In every case, agents must be made to work for the principal’s interest, and diligent agents must be able to protect and expand their rights and private interests. If we focus not merely on the surface teachings of Han Feizi, who probed deeply into the principal-agent problem, but on the deeper lessons beneath them, the classics can readily be transformed into a source of insight applicable to the many problems of modern society. That is true of the ruler-minister relationship as Han Feizi understood it. Let us borrow Han Feizi’s insight. And let us make those who are our agents yet act like masters do their jobs—make them work diligently for us, the true principals.

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Original title: [한비자로 세상읽기]리더는 부하의 충성에 의지하지 않는다

Author: Geon-sun Im

Date: 2020-01-28

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=10&idx=22324