What, if anything, is the relationship between tacit cognition and principal-agent jobs?
High degrees of executive wage have raised many superciliums in the past twosome of decennaries if non more. Questions that have ever been asked are whether the large fillips and big wages are justified ; the determinations that are made by directors how are they arrived at, how should their public presentation be measured, what is so particular about the directors and their decision-making procedure that they deserve the wages that they receive. In visible radiation of the inquiries presented above, the undermentioned paper will show the nexus between high degrees of wage by analyse and set uping a relationship between tacit cognition and principal-agent jobs. Sloman ( 2004 ) has defined principal-agent job as one where people ( principals ) , as a consequence of deficiency of cognition, can non guarantee that their best involvements are served by their agents. Bringing the above definition in the existent life context, proprietors rely on the expertness of their directors to accomplish the strategic ends of the administration. The directors in bend utilise cognition and experience in doing strategic determinations which will run into the aims of the proprietors. The intent therefore is to set up the nexus between silent cognition and chief agent job. Prior to researching the relation ship between tacit-knowledge and chief agent job, it is of import to understand the construct of silent cognition. The common subject behind explicating the construct of silent cognition is that it is a signifier of cognition which is hard to codify or papers. It depends on the experience of the person, his thoughts value and belief system. Harmonizing to Baumard, ( 1999, Tacit cognition in Organisations ) , cognition in general, and silent cognition in peculiar, can be both an property of persons and of groups, collectives or administrations. Some other writers believe that tacit cognition is a important input in the invention procedure in an organizational context. As Michael Polanyi famously observed “we can cognize more than we can state“ ( Polanyi 1967: 4 ) and, although this signifier of silent cognition can non ( by definition ) be explained in explicit footings, it can be revealed in the active procedure of ‘doing things ‘ orpattern.
It can hence be concluded that tacit cognition and chief agent job do hold a close nexus. First, in the context of principal-agent job, the principals have imperfect information and are in a weak place and they could accommodate the state of affairs by foremost, supervising the public presentation of an agent and secondly by set uping a series of inducements to guarantee that agents move in the principal’s best involvement. In the first scenario, the proprietors of the concern could keep general meetings and understand how the concern is running and the determinations that directors are taking ; they could hold or differ to the determinations being proposed. In the 2nd scenario the ( stockholders ) proprietors could guarantee that managerial wage is linked to public presentation of the concern. In this mode, principals could guarantee that the directors are working to accomplish their best involvement. This statement nevertheless brings out another key job of asymmetric information, associated with principal-agent job, which can be exploited by the directors.
Second, the directors have to keep the balance between fulfilling non merely the involvements of the principal but the other stakeholders involved every bit good. While the principals would desire net incomes to be maximised at any cost, clients would wish good quality goods and services and cheaper costs, providers would desire better monetary value on the supplies etc. Therefore when doing a determination, agents would non merely function principal’s involvement but besides aim to function their involvement and that of other stakeholders.
Therefore, silent cognition of the directors is the ground that explains the high degrees of wage for directors. As discussed earlier, silent cognition is based on individual’s belief values and premises. Therefore, a director doing a determination associating to the strategic way of the company would make so taking into history non merely the bing factors impacting the concern, but besides the past experiences he may hold had in the same company or in old administrations he would hold worked for. The proprietors of the concern would ne’er be able to grok the complexness behind a manager’s decision-making procedure. This undoubtedly high spots that there are information dissymmetries.
Whilst tacit cognition to a certain extent justifies high wages of senior executives or director or agents, it besides contributes to the chief agent job. One manner of covering with the job would be provide high-incentives for reassigning silent cognition. Harmonizing to Nonaka’s ( 1994 ) theory cognition can be converted and it progresses through 4 different phases viz. ;
- Socialization ( transition of silent cognition to tacit cognition )
- Combination ( transition of expressed cognition to explicit cognition )
- Externalization ( transition of silent cognition to explicit cognition )
- Internalisation ( transition of expressed cognition to tacit cognition )
One decision that can be drawn from the theory is the fact that silent cognition contributes towards the formation of organizational civilization. For an effectual cognition direction system it is indispensable that ‘embedded’ or silent cognition can be explained in words for all the other members to profit from it every bit good and hence aid in cut downing information dissymmetries.
Despite models and constructions being provided for cognition direction in administrations, silent cognition remains untapped. Whilst economic theory suggests that firm’s aim is profit maximization and an individual’s aim is public-service corporation maximization, in the existent universe they both can non be achieved at the same time. The principal-agent job is prevailing in the public sector particularly wellness services and instruction sector, where the consequences have non been in the best involvement of any stakeholder for that affair.
Theories which aim to supply solutions for principal-agent job must besides see the impact of tacit cognition in decision-making. Until and unless there is a mechanism of conveying silent cognition in the kingdom of expressed cognition information dissymmetries would ever be and parties privy to information would ever profit more than those who do non hold entree to information.
Therefore taking a expression at the two apparently unrelated constructs, tacit cognition and principal-agent job we can set up the fact that they are non unrelated. In really simple footings principal-agent jobs arises due to information dissymmetries which exists between agents and principals or stockholders and directors. Tacit cognition is the information which directors have and do non unwrap to the proprietors and hence usage to function their ain involvements instead than the principal’s. Hence what is required to get the better of the job of asymmetric information is to guarantee that an effectual cognition direction system can be adopted which can change over silent cognition to explicit cognition.
& gt ; From the predating paragraphs it can be concluded that there is a nexus between silent cognition and principal-agent job. It must besides be highlighted that the nexus is non every bit direct as might be expected. Their nexus is established by analyzing the inducement construction that principals may desire to set up to honor cognition and ability of the agents to do determinations which serves the principal’s aims. However, from the principal’s position they do non hold entree to finish information about the company which the agent may intentionally desire to conceal in order to run into their ain personal aims which may be in struggle with those of the principal’s. Therefore, pull offing silent cognition within an administration has become even more important in the cognition goaded economic system. It would non merely assist the administration to supply a solution ( to a certain extent ) to the principal-agent job by understating, if non extinguishing, information dissymmetries. In decision, it can be said that tacit cognition and principal-agent job are closely linked.
- Baumard, Philippe,Tacit Knowledge in Organisations,( 1999 ) , Sage Publications Ltd
- Dornbusch, R. , Fisher, S. ,Macroeconomicss,( 2000 ) , Eighth Edition, Mc-Graw Hill Education
- Griffiths, A. and Wall, S. ,Applied Economics,( 2001 ) , Ninth edition, FT Prentice Hall
- Grossman, Sanford, J. , and Hart, Oliver, D. , “An Analysis of the Principal-Agent Problem”, Econometrica, Vol. 51 ( 1 ) , January 1983
- Gwartney, James D. , Stroup, Richard L. , and Sobel, Russell S. ,Economicss Private and Public Choice,( 2000 ) , Ninth Edition, The Dryden Press.
- Nonaka, I. ,“The dynamic theory of organisational cognition creation”Organizational Science, Vol. 5 ( 1 ) 1994
- Polanyi, M. , ( 1966 ) ,The Tacit Dimension, Routeledge & A ; Kegan Paul.
- Sloman, J. ,Necessities of Economicss,( 2004 ) , Third edition, FT Prentice Hall