This conflict of interest was, I believe, the main reason why communism failed and went down in flames. Communism and socialism had many great and noble ideas, but they ignored personal interests of human beings and presumed personal interests would give way to greater interests, the interests of the whole society. Sadly, that was not the case.
Individuals lacked any good incentives to do their job properly in the socialist system, because they didn't benefit directly from the work they did and common benefit was not enough to compel them to take their input seriously. Their output benefited all the others in the society, but not themselves directly and people lost their interest. They didn't have much to gain, so they just did what they had to do, but nothing extra. They didn't care to invent ways to make things more effective and we know the result. One big reason was probably also authoritarian leadership, but I strongly believe the lack of personal incentives played a very vital part in the collapse of socialism.
These powerful forces are still at play today as well, and will stay in play as long as humanity exists. In this conflict of interests there is also another side to the coin, and that also causes problems. Namely sometimes people have too strong individual interests at play and that may in some cases prove detrimental to bigger entity's welfare and interests. What organizations can do to change that is to try to align an individual's interests with the interests of the organization. In business world this is one important aspect of an area called organization design, which is a complicated science all on its own.
Before we plunge into how to align employee's interests with organization's, let us take a look at a greater framework first. In this context, I would ask you why exactly do we need laws and regulations and law enforcement in our societies? You guessed it already? Yes, through them we can align individual's interests with the whole community's interests. If there were no laws and regulations, it might very well be in persons' individual interests to rob people and places of their wealth so that they could themselves enjoy them. This kind of situation would lead into chaos and continuous crimes which would not be in our community's and mutual interests. In our community's interests is a situation where people can tend to their work and businesses in peace and create prosperity for themselves and for the community. That is why we have laws and regulations.
Laws and regulations and law enforcement efficiently align that above mentioned individual's interests with the society's interests, because it's not any more in that person's interest to rob other people. He stands to lose the loot and his freedom as well, and this way it is not any more in his best interests to try to rob other people but to try to create a wealth of his own by non-violent and legal means. In well thought out organization design we use rules and reward system practices in a way that aligns individual interests with the organization's as much as possible. The principle is therefore the same as in the laws and regulations governing our societies.
One simplified example of the interest debacle would be salesman's priorities. Let's assume your organization's salesman Mr. A is rewarded by paying him a certain percentage of the overall sales figure he can create in a month. So, no matter what the profitability of the deal is to the company, he get's his bonuses based on the euro value of the sales. In this situation, he might sometimes in tough competitive bids be tempted to make deals of zero - or even negative - profit to the company just to get a deal and his respective bonuses. Why would he care if the company doesn't make money on it?
If you now change his reward principles so that he earns a percentage of the deal's perceived profit to the company, suddenly his interests are more aligned with the company's in this regard and he's not any more interested in making unprofitable deals. Interesting, isn't it?
Now, how would you align the interests of different departments in your company so that they wouldn't fight so much with each other with such a different sets of objectives? And how would you align the interests of the conglomerate's subsidiaries which you would like to see co-operate efficiently instead of fighting for their own petty interests?
You could also apply this same principle to the situation where one company's individual interests differ from the interests of the nation it operates in. For-profit companies are after profit and that is their most important goal. They don't much care if their actions are not beneficial to that nation's economy either in the short or longer term, as long as they themselves can profit. Therefore the nation has to regulate individual companies' behaviour through laws and regulations and law enforcement. So, there are multiple levels of conflict of interests between an individual (a company or a person) and a bigger entity.
One interesting example of this is also the 2008 financial crisis and the involvement of investment banks in it. It most certainly wasn't in the interests of the owners of the investment banks that went bankrupt in 2008 to make those risky bets and cover their liabilities off the sheet, but it was in the interest of bonus earning employees' to make those risky bets and collect the respective huge bonuses. From the standpoint of those employees they didn't have much to lose. They had nothing to lose financially except their work and does it matter much, if you have been able to reap in a few million in bonuses in previous years? Why not try it also this year, if that is what the company pays for? "If it is not sensible in the longer term, do I have to care? I can laugh all the way to the bank, even if the company in the end goes under and I lose my job..."
That is exactly what the problem is: interests of an employee and his employer are in contradiction and they are not well aligned. Interesting example in this regard comes from the Brazilian banking system. It seems that they did not lose much of their own accord in this financial crisis and neither has there been need for a bank bailout in Brazil for several decades! Their banking system is considered VERY SAFE! And why is that? That is because the bankers are responsible for their banks' losses or bankruptcies with all of their own assets. In other words, they stand to lose their personal assets as well if the bank goes under. That means that their interests are almost totally aligned with their company's interests, in other words, their personal financial interests pretty much equal the financial health and future of their own organization. For some peculiar reason, these bankers suddenly feel the need to play it safe. Read more about the subject from this article in Finnish:
Taloussanomat - Tässäkö maailman turvallisin pankkijärjestelmä?
In other parts of the world, there clearly has been too much deregulation in the banking world. Presently new financial regulation is a hotly discussed topic in the United States. One often voiced opinion is that the banks and financial institutions that are "too big to fail" need to be chopped to pieces and kept smaller by regulatory means. New York Times columnist Paul Krugman thinks this is off the point and I happen to agree with him. In my opinion, chopping these big institutions into smaller ones is not the key issue here, it is the alignment of individual interests with the bigger interests. And if banks' and financial institutions' owners can't or won't do it, it is up to the regulator to align the interests. Name of the game has for too long been "Heads I win, tails you lose!"...
