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Positive Enterprise Value Blog Skin in the Game = Scar Tissue: Do EOMs Care More?
Skin in the Game = Scar Tissue: Do EOMs Care More?

Skin in the Game = Scar Tissue: Do EOMs Care More?

August 15, 2018

The other day I was with a friend/client who’s the owner-manager of a high-performing technology-enabled manufacturing business she’s been the primary owner of for a couple of decades. Over the past year or so we have been actively engaged in imagining, thinking aloud, and formulating plans for exploring the best long-term ownership alternatives for the business.

As we drove off to grab a quick lunch, she cut through the rear of one of the big parking lots that surround her headquarter’s facility in the small Midwestern city we were in. There were a couple of plastic trash bags tumbleweeding across the parking lot and we watched as they got caught up in the chain link fence surrounding the lot. My friend slowed, jammed her SUV into Park, and jumped out, leaving the driver’s door open and engine running. She grabbed trash bags off the chain link fence, picked up some soggy cardboard boxes on the ground next to them, and flipping open the tailgate, lugged the whole mess into the cargo area of the SUV. “Why is it”, she muttered only half to herself as she slid back in, giving me a sideways glance, “that it’s only the owner of the business who is the one who picks up the trash in the parking lot?”

Ahhh…that unmistakable feeling. Skin in the game. The feeling of ownership—not just the legal title of ownership, but the emotional responsibility of ownership. Being a principal.

Ownership of anything makes you a principal (as opposed to agent), and results in what we call skin in the game, right? The term skin in the game as used here is not merely an incentive issue, for example, purely having good alignment of benefits. No. It’s about the symmetry of benefit (or gain) and harm (or loss). An incentive on upside yes, but also paying a penalty if something goes wrong.

You might argue as Nassim Taleb does, that skin in the game has incredible benefits from an evolutionary point of view. There is no evolutionary learning—in fact, no evolution at all– without it. Skin in the game keeps overconfidence in check; it connects us to the consequences of our actions, for good or for ill. And for actions that turn out to be mistakes, that painful connection allows us to learn, change our future behavior, and grow by those errors and failures.

Skin in the game might imply you can skin your knee and get a scar. I often refer to scar tissue; it’s a form of feedback, evidence of little learnings. My scar tissue tells me we learn best if we bear the consequences of our own mistakes.

An agent on the other hand, is conveniently separated from the consequences of his or her actions. So, a natural strategy for agents is to optimize near term performance (in anything) without regard to long term anything. You can see this behavior from all kinds of leaders in the bureaucratic world, from “corporate” CEOs to legacy logo university presidents. (You might ask as I do: where is the governing board who is supposed to represent the principals, the stockholders, and other stakeholders? But that’s a topic for a different piece).

There are potential negatives of having skin in the game (being a principal) when you are competing with or being measured against an agent. For example: if an agent leads an organization where they meet or beat budget year by year, its customary they receive some kind of financial upside year by year. Then, if the consequence of all that short-term year by year optimization is say, a big loss in Year Ten, there are no consequences for the agent because they aren’t going to give the bonuses back. Even reputationally, they are usually gone by then. On the other hand, since principals are owners, they live with the consequences, good or bad, of their actions for the long term.

In the current environment, you might think of Jeffrey Immelt, who in a feat of breathtaking hubris, wrote an article titled “How I Remade GE” featured in the September-October 2017 issue of the Harvard Business Review. This article was published only weeks before GE was forced to restate several years of its prior performance under Immelt, resulting in a $12 billion loss (that’s twelve thousand million), and paid an additional $1.5 million fine to settle US Justice Dept. charges relating to its mortgage business. It has since announced that it will sell or liquidate two thirds of its entire business, leaving it a fraction of the size as it was on Immelt’s retirement less than a year ago. GE owners lost 50% of the value of their ownership during his 16 years of leadership. What were consequences to Immelt? Was he required to return any of the literally hundreds of millions of dollars of bonuses he was awarded over the past sixteen years? What was Immelt’s skin in the game? You get it. Over the last forty years we have increasingly been surrounded by a class of people who appear good at knowing and explaining, rather than authentically understanding and doing—and living with the consequences of their doing.

As my business owner friend and I drove off to lunch in her SUV I thought about her passion and her rapid actions –and her life generally. She is strong, with strong views. As EOMs, it could be the way we lead our lives is seen by others to be too intense, too demanding, too profound. Yet it’s clear to us our real risk involves living disconnected from consequences—good or ill. We simply care more. For us, optimal learning and ultimately… optimal experience requires skin in the game.


Entrepreneur Owner-Managers or other organization leaders who are the owner of anything: your business, your investment account, your reputation, your personal goals, must be vigilant and deliberate about filtering what they hear from so called expert advisors—agents with no skin in the game. Why? Because iatrogenic risk is real.  In organizations where leaders are principals (have skin in the game), the range of expected outcomes resulting from following expert advice is not simply positive to neutral, it can be positive to really heartbreaking. Many times, not only have expert advisors with no skin in the game been unable to prove that their recommendations succeed, but no one has proved that their recommendations result in outcomes that… are neutral.

References and Further Reading:

Czikszentmihalyi, Mihalyi (2008). Flow: The Psychology of Optimal Experience. New York, Harper Collins.

Deutsch, David (2011). The Beginning of Infinity: Explanations that Transform the World. New York, Penguin.

Eagleman, David (2012). Incognito: The Secret Lives of the Brain. New York, Vintage Books.

Grant, Adam (2016). Originals: How Non-Conformists Move the World. New York, Penguin.

Hardy, Benjamin (2018). Willpower Doesn’t Work. New York, Hachette.

Hirschman, Albert O. (1970). Exit, Voice, Loyalty. Cambridge, Harvard University Press.

Pollan, Michael (2018) How to Change Your Mind: What the New Science of Psychedelics Teaches Us. New York, Penguin.

Roberts, Thomas B., Ph.D (2013). The Psychedelic Future of the Mind: How Entheogens are Enhancing Cognition. New York, Simon & Schuster

Roosevelt, Theodore (2017). Complete Works of Theodore Roosevelt. Seattle, Amazon Digital Services, LLC.

Russell, Bertrand: (2015). The Conquest of Happiness. Seattle, Amazon Digital Services, LLC.

Taleb, Nassim, N. (2018).  Skin in The Game: Hidden Assymetries in Daily Life. New York, Random House.

Zeckhauser, Richard, J. and Pratt, John W. (1985). Principals and Agents: An Overview. Cambridge, Harvard Business School Press.

Note: I view Zeckhauser’s important work as the definitive source for those interested in applied scholarship on the asymmetry in, and built in conflict between principals and agents


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