Two economists just completed a huge worldwide survey on management practices. A team of MBA’s went to firms and interviewed them on their management practices, generating scores in three different categories (Incentives, Monitoring, and Targets) and then using the data to draw a whole bunch of conclusions about management. Everything in here is correlation (it’s not certain which way the causation runs) but when you generate enough correlations, it gives you an idea of the importance of good management, in a Bayesian sense.
- GDP and good management practices are highly correlated (R^2 of 0.81). That is, countries with high GDP are also likely to have firms with good management practices. Greece scores even worse than India and Brazil on firm management. Portugal is just slightly ahead of India and Brazil. Their low scores can be attributed in part to government intervention in the labor market.
- Improved reallocation accounts for a large percentage of the difference. That is, the market identifies more efficient firms and allows them to grow more rapidly in countries like the USA. Competition is highly important for this process, and also to weed out inefficient firms. It’s more important to look at the bottom of the distribution than the top to determine which countries have the best management; countries that allow inefficient firms to hang around score poorly.
- Higher management scores are correlated with better performance at the firm level. A one standard-deviation increase in management correlates with a 38 percent increase in sales per employee.
- Larger firms have better management. On the surface this may refute the Peter Principle, but it tends to suggest that smaller firms with better management out-grow other small firms with bad management. Over time, if a firm stays the same size perhaps management falls.
- At the firm level, better management is associated with improved health care outcomes, employee satisfaction, and energy efficiency. Note to shareholder activists: Promote better management!
- Labor market regulation hinders incentives management. At least half of incentives management is the ability to remove/improve low-performing workers, pay for performance and change the workstaff’s hours.
- In terms of classes of ownership, private equity companies have the best management, followed by dispersed shareholder ownership. Government has the worst management, followed closely by family firms with a in-family CEO, firms still owned by the founders, and firms owned by private individuals. I was surprised to see that firms owned by the founder (in 100-5000 person companies) perform so poorly. The authors suggest that necessary management skills for a start-up don’t transfer well to necessary skills for a 100-5000 person firm.
- Management practices diffuse slowly over time. Managers are not well informed about how good their own management practices are and which areas need improvement (ha! Maybe there’s a role for consultants after all.
All in all these suggest that one of the best things we can do for development is try to transfer good management practices to developing nations, either in the form of FDI or through education. There was a great speaker at the Ath last year whose firm provided business guidance to small companies in Mexico and helped them grow.
Another experiment by the same group took a random group of textile firms in India and provided them with free management consulting. Not only did performance grow in the firms provided the consulting, but they also said the reason that they didn’t implement the changes sooner was because they were not aware of good management practices.
Data collection is an underrated skill – this analysis was only possible because these guys arranged surveys of thousands of firms in 40 different countries. The impressiveness is in the dataset, not in the analysis; same goes for Ken Rogoff and Carmen Reinhart’s This Time is Different, which I’m currently reading. It’s usually lumped in with science or statistics but it’s something people should know how to do (and analyze)
Liked what you read? I am available for hire.