Management Practices in Europe, the US and Emerging Markets

1. Management Practices in Europe, the US and Emerging Markets Nick Bloom (Stanford Economics) John Van Reenen (Stanford GSB/LSE) Lecture 4 1

2. Management scores across countries Performance management 2

3. MANAGEMENT PRACTICES ACROSS COUNTRIES? Distinct groups Average Country Management Score

4. “TAILS” DRIVES DIFFERENCES ACROSS COUNTRIES Firm-Level Management Scores

5. COUNTRIES ALSO HAVE DIFFERENT RELATIVE STRENGTHS IN MANAGEMENT PRACTICES Relatively better at ‘operations’ management (monitoring, continuous improvement, Lean etc) Relatively better at ‘talent’ management (hiring, firing, pay, promotions etc) People management (hiring, firing, pay & promotions) – operations (monitoring, continuous improvement and Lean)

6. WE ALSO GOT MANAGERS TO SELFSCORE THEMSELVES AT THE END OF THE INTERVIEW We asked: “Excluding yourself, how well managed would you say your firm is on a scale of 1 to 10, where 1 is worst practice, 5 is average and 10 is best practice” We also asked them to give themselves scores on operations and people management separately

7. MANAGERS GENERALLY OVER-SCORED THEIR FIRM’S MANAGEMENT “Worst Practice” “Average” “Best Practice”

8. THIS BRAZILIANS OVER-SCORED THE MOST AND THE AMERICANS THE LEAST Self score (normalized to 1 to 5 scale) – Management score

9. SELF-SCORES ARE ALSO UNINFORMATIVE ABOUT FIRM PERFORMANCE Correlation 0.032* Labor Productivity Self scored management * In comparison the management score has a 0.295 correlation with labor productivity

10. Management scores across countries Performance management 10

11. Performance management Today we will run through 5 dimensions on performance management (questions 1, 3, 4, 5 and 6) The basic concept is around the collection and use of information within firms. While the data we have shown is for manufacturing, these questions have been used in retail, hospitals, schools, drug treatment clinics, tax collection agencies, charities, PPPs and law firms 11

12. (3) Process problem documentation 12

13. (4) Performance tracking 13

14. (5) Performance review 14

15. (6) Performance dialogue 15

16. (1) Modern manufacturing, introduction 16

17. (2) Modern manufacturing, rationale 17

18. But Lean is not always good…. The £7 million guide to a tidy desk, London Times, January 5, 2007 Red tape has given way to black marker tape for thousands of bemused civil servants as part of a £7 million paperclip revolution aimed at ensuring that they keep the tools of their trade in the right place. Office workers have been given the tape to mark out where they should put their pens and pencils, their computer keyboards and to indicate where to place their phones. National Insurance staff have been chosen as guinea-pigs for the latest phase of the “Lean” programme brought in by the logistics consultants Unipart. The programme prohibits workers from keeping personal items on their desks.

19. MY FAVOURITE QUOTES: The bizarre Interviewer: “[long silence]……hello, hello….are you still there….hello” Production Manager: “…….I’m sorry, I just got distracted by a submarine surfacing in front of my window” The unbelievable [Male manager speaking to a female interviewer] Production Manager: “I would like you to call me “Daddy” when we talk” [End of interview…]

20. Backup slides 20

21. WE FIND FIVE FACTORS ARE ASSOCIATED WITH DIFFERENCES IN MANAGEMENT PRACTICES Competition Governance - Family firms & Private Equity Multinationals Labor market regulations Education

22. TAILS DRIVES DIFFERENCES ACROSS COUNTRIES Firm-Level Management Scores

23. Better Managed firms are larger # firms 308 271 611 278 692 Employees in the firm 403 635 422 602 693 832 Average management scorefrom 1 (worst practice) to 5 (best practice) Note: Averages taken across all firms within each country. 5,747 observations in total. Mean and median firm size is 701 and 320 employees respectively.

24. COMPETITION IS ASSOCIATED WITH BETTER MANAGEMENT PRACTICES Assessed management practice score Reported number of competitors

25. TOUGH COMPETITION IS STRONGLY LINKED TO BETTER MANAGEMENT PRACTICES 1 1-Rents = 1- (operating profit – capital costs)/sales2 Includes 108 SIC-3 industry, country, firm-size, public and interview noise (analyst, time, date, and manager characteristic) controls3 S.E.s in ( ) below, robust to heteroskedasticity, clustered by country-industry

26. A VARIETY OF WAYS COMPETITION CAN HELP TO IMPROVE MANAGEMENT PRACTICES “Selection” effect – competition selects out badly managed firms (they go bankrupt) “Incentive/Boot up the ass” effect – competition forces badly managed firms to improve performance “Learning” effect – competition provides more firms in and industry, increasing experimentation and learning.

27. CHANGE IN COMPETITION LINKED TO BETTER MANAGEMENT: SO NOT JUST SELECTION 1 1-Rents = 1- (operating profit – capital costs)/sales S.E.s in ( ) below, robust to heteroskedasticity, clustered by country-industry UK, US, France and Germany only

28. COMPETITION NOT ONLY DRIVES OUT BADLY MANAGED FIRMS, BUT MAKES WELL MANAGED FIRMS LARGER “Selection” effect – market reallocates jobs to more efficient firms An additional point on the management score is associated with an increase of employment (Bloom, Genakos, Sadun & VR): US 715 more workers UK 546 more workers India 263 more workers Italy 253 more workers Competitive forces of reallocation weaker in India/Italy compared to US

29. SUMMARY: COMPETITION KEY FACTOR IN IMPROVING MANAGEMENT Selection effect important in accounting for US leading position Incentive effect also matters (from panel evidence on changes)

30. WE FIND FIVE FACTORS ARE ASSOCIATED WITH DIFFERENCES IN MANAGEMENT PRACTICES Competition Governance - Family firms - Private Equity - Government run Multinationals Labor market regulations Education

31. FIRMS WITH PROFESSIONAL CEOS ARE TYPICALLY WELL RUN. GOVERNMENT, FOUNDER, FAMILY MANAGED FIRMS ARE NOT Distribution of firm management scores by ownership. Overlaid dashed line is approximate density for dispersed shareholders, the most common US and Canadian ownership type Average Management Score

32. share family CEO share founderCEO (1st generation) share government owned ONWERSHIP PATTERNS OF THESE “POOR MANAGEMENT” GROUPS VARY SUBSTANTIALLY share of ownership (for types associated with low management scores)

33. FAMILY FIRMS AND MODELS OF MANAGEMENT PRACTICES • Likely family impact depends on involvement • Ownership but not management probably positive • Concentrated ownership so better monitoring • Management probably negative • Smaller pool to select CEO from • Possible “Carnegie” effect on future CEO’s • Less career incentive for non-family managers

34. FAMILY MANAGEMENT (PARTICULARLY A PRIMO GENITURE SELECTED CEO) IS PROBLEMATIC 1 Family defined as 2nd generation or later2 Based on question: “How was management of the firm passed down: was it to the eldest son or by some other way?”. Note includes SIC-3 digit, country, skills, firm size and public controls

35. Suggestive evidence that Private Equity can improve management Number of firms Average score on 18 management practice questions Management 134 Management (same ownership 3+ years) 635 722 625 290 138 174 1357 137 Note: Sample of 4,221 medium-sized manufacturing firms. The bottom bar-chart only covers the 3696 firms which have been in the same ownership for the last 3 years. The “Other” category includes venture capital, joint-ventures, charitable foundations and unknown ownership.

36. Private Equity firms have greater improvements in management practice over time Management Change Management Change (same ownership 3+ years) PE firms have faster improvement in management than other ownership types Firms with deteriorating management are more likely to be taken in to PE Note: Sample of 561 firms. Surveyed in 2004 and 2006

37. WHY DO PRIVATE EQUITY FIRMS RAISE PERFORMANCE? • Appear to raise operational performance, not just incentives to top managers • Davis et al (2009) find when firms taken over by PE productivity rises • Low productivity plants closed down • Net employment broadly the same, but a lot of change reallocating jobs within the firm

38. WE FIND FIVE FACTORS ARE ASSOCIATED WITH DIFFERENCES IN MANAGEMENT PRACTICES Competition Governance - Family firms & Private Equity Multinationals Labor market regulations Education

39. MULTINATIONALS APPEAR ABLE TO TRANSPORT GOOD MANAGEMENT AROUND THE WORLD Foreign multinationals Domestic firms Average Management Score

40. DOMESTIC MULTINATIONALS ARE IN-BETWEEN FOREIGN MULTINATIONALS & DOMESTIC FIRMS Foreign multinationals Domestic multinationals Domestic firms Average Management Score

41. MULTINATIONAL OWNERSHIP VARIES SUBSTANTIALLY ACROSS COUNTRIES Foreign multinationals Domestic multinationals Share of multinationals

42. WE FIND FIVE FACTORS ARE ASSOCIATED WITH DIFFERENCES IN MANAGEMENT PRACTICES Competition Governance - Family firms & Private Equity Multinationals Labor market regulations Education

43. LIGHT LABOR MARKET REGULATIONS ALSO FACILITIATE GOOD PEOPLE MANAGEMENT Average people management(hiring, firing, pay and promotions) World Bank Employment Rigidity Index

44. EDUCATION IS ALSO STRONGLY LINKED WITH BETTER MANAGEMENT PRACTICES Non-managers Managers Percent with a degree Management score (rounded to nearest 0.5)

45. WE FIND FIVE FACTORS ARE ASSOCIATED WITH DIFFERENCES IN MANAGEMENT PRACTICES Competition Governance - Family firms & Private Equity Multinationals Labor market regulations Education Bottom Line: Account for about 50% of the “lower tail” of badly managed firms and 50% of cross-country variation with these factors

46. COMPETITION, FAMILY FIRMS, MULTINATIONALS & LABOR REGULATIONS ACCOUNT FOR ≈ ½ COUNTRY SPREAD US Germany Sweden Japan UK France Italy Poland Portugal Greece China India 2.4 2.6 2.8 3 3.2 3.4 management predicted from comp, family, MNE and regulation raw management data Marginal R-squared on country fixed-effects reduced by 45% after controlling for number of competitors, family management and primo geniture, multinational status and labor market regulations

47. MY FAVOURITE QUOTES: The difficulties of defining ownership in Europe Production Manager: “We’re owned by the Mafia” Interviewer: “I think that’s the “Other” category……..although I guess I could put you down as an “Italian multinational” ?” Americans on geography Interviewer: “How many production sites do you have abroad? Manager in Indiana, US: “Well…we have one in Texas…”

48. BACK UP

49. EDUCATIONAL LEVELS VARY STRONGLY ACROSS COUNTRIES IN OUR SAMPLE Non-managers Managers Overall (share weighted average)

50. “GOOD DOMESTIC” (MANY COMPETITORS, NOT PG FAMILY) OR MULTINATIONAL N=2899 5.9% firms in tail “BAD DOMESTIC” (FEW COMPETITORS OR PG FAMILY) N=1244 18.1% firms in tail 1 Tail defined as a score ≤ 2. In the whole sample 9.6% of firms are in the tail.