Skin in the game

When an employee of a small business acts maliciously or negligently while working on the business’ behalf, the business owner shoulders the responsibility and liability. While the owner enjoys personal liability protections via the veil of the LLC, the business loses it’s profits, pays damages, and suffers in all sorts of ways. In the shorter term that means sleepless nights and painful expenses for the business owner. In the longer term, the owner’s reputation, the business’ reputation, and the ability for the owner to earn a living is impaired. In extreme cases, their livelihood  might be destroyed.

This isn’t necessarily top-of-mind when business owners are considering new hires. Instead, they’re really thinking about all the great things a talented person can bring to the company. But in the back of their minds, they’re still asking themselves, “Might this person do anything really horrible that would jeopardize the strength of our business and/or my personal reputation?”

Nassim Taleb calls this attachment to outcomes “skin in the game.”

In the case of small businesses, the biggest beneficiary of the business’ success is generally the owner or owners, and those are usually the same folks who feel the most pain in the case of failures.

But if a high-ranking politician’s employees cause a bunch of innocent people to die, or if they single out a group for persecution, or if they wreak havoc on our environment through cronyism and misguided policy, then the worst outcome is they don’t get to ride on Air Force One for another term. The more likely outcome is the issue will go away after they deny responsibility or (if it’s too glaringly undeniable) promise to crack some skulls.

The small business owner doesn’t deny responsibility or promise to crack skulls. The small business owner says, “I’m sorry. Here’s how I screwed up. I won’t do it again. Please forgive me.” They do so because they have skin in the game, they are attached to the outcome, they feel personally responsible, and they act accordingly. Sometimes they handle it poorly. Sometimes they handle it well. Rarely do they avoid the consequences for a poorly handled mistake, and often they enjoy a reward for handling a difficult situation with aplomb.

But that’s not how it is everywhere. Wherever people benefit from socialized risk and privatized reward, you’ll see responsible agents avoid the risks associated with bad decisions and (even worse) benefit from immoral acts. It happens in government. It happens in finance. It happens to our environment. It happens with war. It happens in education. It happens in agriculture. It happens in health care. Even in small business, it can happen. It happens anywhere people don’t see it for what it is and prevent it from happening. And when the insidious dynamic finally weasels its way into a society, leaders must have the courage to root it out and eliminate it before it metastasizes.

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