Cooperation Without Trust?

7. Organizational Design for Reliability

133 Chapter 7 Organizational Design for Reliability W E NOW turn to situations in which it is clearly imprudent to rely on trust relations to secure desired goals. Midlevel organizational design provides alternatives to trust relations in promoting productivity and quality output in most workplaces, and especially bureaucracies and firms. These settings are the classical loci of principalagent problems and often involve hierarchical relationships of unequal power. Typically, there is little basis for trust and some reason for distrust among principals and agents given the inherent conflict of interest in the relationship and the potential for exploitation. The primary means of aligning agents’ interests with the principal’s generally require organizationally induced self-interest, as discussed in the last chapter. Individuals are constrained to behave in ways that contribute to the goals of the organization through institutional arrangements and other devices for assessing and enforcing performance. Internal incentive systems and monitoring induce agents to be reliable even if they are not, by our definition , trustworthy. Yet, ironically, in just these contexts so generally antithetical to trust relations, contexts in which hierarchical power relationships and con- flicts of interest dominate, trust relations sometimes emerge as complements to monitoring and discipline. Trust relations can moderate the counterproductive consequences and negative externalities of hierarchical supervision with respect to workers’ attitudes toward the job and their bosses. By supplementing formal institutions with informal relations of trust and reciprocity, employers may induce greater employee effort and loyalty. The whole subfield of management science, beginning with Frederick Taylor, seems dedicated to figuring out new and better arrangements for inducing agents to cooperate more enthusiastically with their principals and become more productive (Bassett 1993; Perrow 1972). A recurring theme in the organizational literature is that improvements in effort and output follow from organizational role holders treating each other as trustworthy. Institutions still play the role of punishing those who shirk, but monitoring is reduced and grants of discretion are increased. In what follows we attempt to clarify when institutions and incentives supplant, complement, or are irrelevant to trust relations within organizational settings. In chapter 6, we laid out the four primary means for managing conflicts of interest. In this chapter, we argue that organizationally induced self-interest is the major determinant of employee reliability . Self-interest and legally backed enforcement, two of the possible alternatives, are unlikely to align principal and agent interests effectively, as explained in the last chapter and elaborated here. Institutional designs for organizationally induced self-interest, however, often promote opportunism or have other dysfunctional consequences. This has led many organizational theorists to consider individual commitments to trustworthiness or the introduction of trust relations as additional means for securing reliability. We argue that trust relations and trustworthiness are, at best, complements to organizationally induced incentives. Institutions and Incentives To the extent that it can be, reliability must be designed into organizations . Typically, institutional design takes the form of establishing incentives for proper behavior. Hence, in principle there need be little or no direct oversight or sanctioning. Instead, each agent of the organization simply faces a schedule of incentives that make the agent’s self-interest and the organization’s purpose congruent. Institutional design includes monitoring and penalties as well as, in some organizations or for some organizational actors, room for discretion. Few organizations of substantial complexity are likely to be so well designed, although some assembly lines come close. Within firms and bureaucracies, although not always within politics, those who are meritorious receive bonuses, pay raises, and the like while those who are shirkers or ineffectual suffer demotions, loss of pay, and even loss of job. Regulations and laws that create the external environment of organizations make certain behaviors criminal or subject to civil penalties; to the extent that laws affect motivations and competence , they affect reliability and are an alternative to trust relations as a way of aligning interests. Those who run firms, bureaucracies, political parties, governments, and other complex organizations can have private goals that run counter to the official aims of the organization or to public interest; in such cases, managers often establish institutional incentives for reliability that are particular to their organization, as elaborated in the last chapter with respect to lawyers, scientists, doctors , and businessmen. 134 Cooperation Without Trust? The major problem with dependence on external enforcement devices, however, is that it is nearly impossible to write a complete and perfectly enforceable contract...