Persuasive Communication - How Audiences Decide. 2nd Edition

50 Understanding Rational Decision Making

function as principals to their subordinates, suppliers, and borrowers. Principals set the terms and

conditions of any principal/agent relationship. They write the employee contracts, draw up the

requests for proposals, and stipulate the covenants for loans.

Agents , on the other hand, are the people who are obligated to act on behalf of principals. Agents

who are unhappy with the principal/agent relationships they have entered into may decide to leave

them once they have met their obligations to the principals. Employees may resign and leave an

employer; credit card holders may transfer their balances to another bank; suppliers may refuse ship-

ment to untrustworthy customers. Table 2.2 lists common principal/agent pairs as this text more

broadly defi nes the terms.

The six decision types concerned with the management of principal/agent relationships can be

further divided into three complementary pairs. The fi rst pair, oversight and compliance decisions,

execute principal/agent relationships that have already been established. For example, board mem-

bers make oversight decisions when they approve or reject executives’ plans and when they approve

or disapprove of executives’ performance. And executives make compliance decisions when they

decide whether to comply with directives from their board.

The second pair, staffi ng and employment decisions, establish principal/agent relationships

within an organization or between individuals. For example, employers make staffi ng decisions

when they hire, fi re, promote, or demote employees. And job applicants make employment deci-

sions when they accept or reject a job offer.

The third pair, exonerative and rallying decisions, help maintain good principal/agent relation-

ships. For example, customers make exonerative decisions when they decide whether to exonerate

from blame a supplier who failed to meet a delivery deadline. And suppliers make rallying decisions

when they decide whether to make an extra effort to provide high-quality service to their custom-

ers. In each of these three complementary pairs of decision types, one type is typically made by the

principal in the principal/agent pair and the other type by the agent. The principal typically makes

oversight, staffi ng, and exonerative decisions. The agent typically makes compliance, employment,

and rallying decisions.

Oversight Decisions: Responses to Requests for Permission

Audiences who are the superiors of others within an organization or to whom others are con-

tractually obligated, in other words principals, make oversight decisions about their agents’ plans

and performance. For example, board members, acting as principals, make oversight decisions

when they decide whether to approve management’s plans to pursue a new strategy; clients,

acting as principals, make oversight decisions when they decide whether to allow consultants to

continue working on a project that has fallen behind schedule; employers, acting as principals,

TABLE 2.2 Examples of Principal/Agent Pairs

Principal Agent

1. Stockholders Board members


2. Employers Employees


3. Customers Suppliers


4. Clients Attorneys


5. Legislators Bureaucrats


6. Investors Fund managers


7. Creditors Borrowers


8. Funding agencies Scientists