Print this page Principal Agent Issues Facing the Engineer-Manager
David J. Nowacki, MBA
Course Outline
Agency Theory applies to all aspects of the licensed professional engineer in describing that person’s motivation, their interaction with other engineers and other disciplines and in dealing with external non-engineer decision makers such as political office-holders. The course applies centuries-old theories developed in economics and finance and behavioral sciences , which are still relevant today. Applications of Agency Theory cover individual, managerial and employee work performances, partnering issues, and contract negotiations. Economic topics such as Moral Hazard, Utility Theory, Game Theory and Agency Theory will be described independently then interwoven into how professional behavior and management techniques utilize contracts to achieve mutually beneficial goals. Rarely does an engineering education include these topics yet Agency Theory is considered one of the most critical concepts in both personal and professional lives.
This course includes a multiple-choice quiz at the end, which is designed to enhance the understanding of course materials.
Learning
Objective
At the conclusion of this course, the student will be able to:
- Identify where the Principal-Agent Problem exists;
- Identify where and when moral hazards exist;
- Define Utility Theory and marginal utility of individuals, corporations and governmental bodies;
- Using marginal utilities as it applies to decision-making;
- Learn to develop First and Second Best Solutions;
- Identify the differences between price and value;
- Define asymmetric information and how to address contracts when asymmetric information is apparent;
- Define survival bias and why some industries don’t act in the best interest of their customers;
- How monitoring costs affect contract structure including contract enforcement;
- Realize the total costs of the Principal-Agent problem for individuals, corporations and society at large;
- Applying Agency Theory to contract construction;
- Introduction to Game theory and some applications to engineers; and
- Appreciation to America’s Founding Fathers for addressing the Principal-Agent problems with the creation of the branches of government.
Intended Audience
The Principal Agent topic is relevant to any member of society. Agency Theory applies to all aspects of an individual’s life as it helps explains personal interactions. These interactions include family, business and societal relationships. Since the course applies centuries-old theories developed in economics and finance, engineers can begin to understand the “how’s” and the “why’s” decisions are determined in business, in politics and in life.
Agency Theory helps explain: the Enron debacle, Fannie Mae and Freddie Mac implosions, the Financial bailout including how US Congress passed the bailout legislation, why stock options are a good and bad thing for owners, and even sheds light on how a non-engineering spouse can make “incorrect decisions” at the grocery store. Many of these topics tend to frustrate the ‘logical thinking’ engineer such that these individuals do not understand others.
All engineers, ranging from non-management to managers to owners, should benefit from understanding the decision process of others. All engineers will be in a better position in dealing with others, be it engineers or the non-engineering
public.
Benefit for Attendee
Since Agency Theory applies to all aspects of the licensed professional including the practice of engineering, working with other disciplines, including political office-holders, and personal activities, the benefit to taking this course is vast. In the business or professional setting, the engineer can better understand the appreciate the business decision-making process spanning the ownership, political and managerial viewpoints. From an individual point of view, the engineer should better understand societal interactions such as how and why Congress passes the laws that they do, why Enron failed and why our financial system needed a bailout.
Applying topics in the course further, the engineer can: better negotiate employment agreements for himself and/or his firm; better understand why actively managed mutual funds under-perform the market averages, and better understand the motivations of all people that are involved in their lives.
Economic topics introduced here, such as Moral Hazard, Utility Theory, and Game Theory, can better prepare the engineer for continued successes as there are significant applications for their day to day lives.
Course
Introduction
This course introduces the professional engineer to the principal-agent problem, commonly known as “agency”. Agency Theory applies to all aspects of the licensed professional including the practice of engineering, working with other disciplines, including political office-holders, and personal activities. The course applies centuries-old theories developed in economics and finance, which are still relevant today. Applications of Agency Theory cover individual, managerial and employee work performances, partnering issues, and contract negotiations. Economic topics such as Moral Hazard, Utility Theory, Game Theory and Agency Theory will be described independently then interwoven into how professional behavior and management techniques utilize contracts to achieve mutually beneficial goals. Rarely does an engineering education include these topics yet Agency Theory is considered one of the most critical concepts in both personal and professional lives.
About Course Author
Professor David J. Nowacki is an adjunct professor teaching graduate finance courses at Texas A&M University-Commerce and through the Mechanical Engineering Department at Southern Methodist University (SMU), Dallas, Texas. Mr. Nowacki has 20 years experience in the investment-banking arena having worked for Wall Street firms in New York City, San Francisco, Houston and Dallas. His specialty is fixed income securities and derivatives including hedge strategies. Mr. Nowacki also consults on merger and acquisitions, strategic planning and the venture capital arena.
Course Content
The course content is contained in the following PDF file:
Principal Agent Issues Facing the Engineer-Manager
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Course Summary
Agency Theory applies to all aspects of the licensed professional lives. The topic is too vast to completely list all areas of its impact on the daily activities of engineers. However, the course should add comfort to the right-brained engineer in the sense that it helps to explain why others do what they do, especially when such actions seem like it is contrary to a firm’s goal, government’s goals, or society at large.
The course applies centuries-old theories, which are still relevant today. This implies that Agency Theory will be with us from some time to come. By better understanding how the principal-agent problems affect engineer’s lives, they should be able to position themselves into the correct career paths. Furthermore, learning these concepts should reduce frustrations of the engineer in dealing with non-engineering people such as politicians (governmental and corporate).
Last, the course should direct the engineer to learn more about the vast range of applications of the principal-agent issue. By learning more, the engineer should be a better contributor to their own family life, community, work-place and society in general.
Quiz
Once you finish studying the above course content, you need to take a quiz to obtain the PDH credits.
DISCLAIMER: The materials contained in the online course are not intended as a representation or warranty on the part of PDH Center or any other person/organization named herein. The materials are for general information only. They are not a substitute for competent professional advice. Application of this information to a specific project should be reviewed by a registered architect and/or professional engineer/surveyor. Anyone making use of the information set forth herein does so at their own risk and assumes any and all resulting liability arising therefrom.
