Management Practices in Europe, the US and Emerging Markets Nick Bloom (Stanford Economics) John Van Reenen (Stanford GSB/LSE) Lecture 6 1

Take away summary points from last week Many firms often are not adopting basic management practices, in large part due to a lack of awareness Changing practices is very slow – takes several years: Takes time for employees to buy into change Changes are complementary – e.g. monitoring & pay Change may not be permanent – need to change processes, incentives and often people to avoid backsliding

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

COMPETITION IS ASSOCIATED WITH BETTER MANAGEMENT PRACTICES Assessed management practice score Correlation of 0.854 Reported number of competitors LOX-AAA123-20050610-

WE FIND FIVE FACTORS ARE ASSOCIATED WITH DIFFERENCES IN MANAGEMENT PRACTICES Competition Ownership Multinationals Labor market regulations Education

FIRMS WITH PROFESSIONAL CEOS ARE TYPICALLY WELL RUN 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

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

WE FIND FIVE FACTORS ARE ASSOCIATED WITH DIFFERENCES IN MANAGEMENT PRACTICES Competition Ownership Multinationals Labor market regulations Education

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

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

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

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

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

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

Take away summary points Family, founder and government firms, in uncompetitive markets are likely candidates for bad management Detached external owners (private equity and dispersed shareholders) are associated with the best management Practices can be improved in every country – multinationals seem to be well managed everywhere

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…”