What CEOs Can Learn from 'Pirate Management'

by: IPE at UNC

By Kindred Winecoff

This is normally Alex's provenance, but I smiled at these sentences:

It seems that today’s CEOs, facing public anger over executive pay, greed and governance failures, might have something to learn from “pirate management”. Those calling for greater employee ownership within struggling firms (as the Financial Times reports in Germany) might find ammunition from this tale of the high seas.

That's the PSD trying to apply Peter Leeson to the financial crisis. The gist is that pirate ships were owned by their crews, were democratic, strictly governed, and the pay-scale was non-hierarchical. This system of organization helped reduce principle-agent problems and lessened moral hazard.

Of course, pirate ships had other characteristics that made this management structure work: "workers" had no opportunity for exit (except by plank), and the potential gains were high so the incentive to get along with your coworkers was strong. Additionally, ships operated as cartels that benefitted the few sailers fortunate enough to be chosen for the crew, who faced no outside competition for their positions. Of course they were also criminals whose individual fates were somewhat intertwined. These criteria helped crews overcome the obvious prisoner's dilemmas and cooperate.

Many of the above are also true of crime syndicates, but their management structure is much more top-heavy. Why is that? It seems that in the top levels of a crime syndicate -- i.e. "the family" -- the mafia structure is somewhat similar to the pirate structure. But mafias need many more low-level operatives to be successful, and it is harder to keep them from defecting when better opportunities to arise. So "Omertà" is necessary for mafias but not for pirates.

Most corporations more closely resemble mafias than pirate ships: they are large and face constant pressures from without and within. Even the executives must be wary of encroachments on their territory, since executives are often removed or otherwise displaced. In most industries the corporation cannot act as a cartel, individual incentives diverge from corporate interests, and the potential gains from defection are often large.

Of course, corporations cannot murder defectors, but they can tie them down with non-disclosure agreements and a host of other legal arrangements that function as "protection" for the corporation against the individual. At the same time and like mafias, corporations reward good service by a series of incremental promotions and increases in compensation. These opportunities do not exist for pirates, but only because they are already sharing the bounty more or less equally. Corporations can also "buy off" public officials directly or indirectly through junkets, gifts, campaign contributions, and other types of lobbying. Through these mechanisms corporations can extract "surplus value" from their workers and redistribute upwards in a way that pirates could not.

Some industries might work well under the Pirate Model, but most will do better under the Mafia Model. The differences are primarily structural -- what gains would stock traders capture by unionizing? -- and this isn't necessarily a bad thing.