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

Management scores across countries Performance management 2 2

MANAGEMENT PRACTICES ACROSS COUNTRIES? Distinct groups Average Country Management Score

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

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)

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

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

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

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

Management scores across countries Performance management 10 10

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 11

(3) Process problem documentation Score (1): No, process improvements are made when problems occur. (3): Improvements are made in one week workshops involving all staff, to improve performance in their area of the plant (5): Exposing problems in a structured way is integral to individuals’ responsibilities and resolution occurs as a part of normal business processes rather than by extraordinary effort/teams 12 12

(4) Performance tracking Score (1): Measures tracked do not indicate directly if overall business objectives are being met. Tracking is an ad-hoc process (certain processes aren’t tracked at all) (3): Most key performance indicators are tracked formally. Tracking is overseen by senior management. (5): Performance is continuously tracked and communicated, both formally and informally, to all staff using a range of visual management tools. 13 13

(5) Performance review Score (1): Performance is reviewed infrequently or in an un-meaningful way e.g. only success or failure is noted. (3): Performance is reviewed periodically with successes and failures identified. Results are communicated to senior management. No clear follow-up plan is adopted. (5): Performance is continually reviewed, based on indicators tracked. All aspects are followed up ensure continuous improvement. Results are communicated to all staff 14 14

(6) Performance dialogue Score (1): The right data or information for a constructive discussion is often not present or conversations overly focus on data that is not meaningful. Clear agenda is not known and purpose is not stated explicitly (3): Review conversations are held with the appropriate data and information present. Objectives of meetings are clear to all participating and a clear agenda is present. Conversations do not, as a matter of course, drive to the root causes of the problems. (5): Regular review/performance conversations focus on problem solving and addressing root causes. Purpose, agenda and follow-up steps are clear to all. Meetings are an opportunity for constructive feedback and coaching. 15 15

(1) Modern manufacturing, introduction Score (1): Other than JIT delivery from suppliers few modern manufacturing techniques have been introduced, (or have been introduced in an ad-hoc manner) (3): Some aspects of modern manufacturing techniques have been introduced, through informal/isolated change programs (5): All major aspects of modern manufacturing have been introduced (Just-in-time, autonomation, flexible manpower, support systems, attitudes and behaviour) in a formal way 16 16

(2) Modern manufacturing, rationale Score (1): Modern manufacturing techniques were introduced because others were using them. (3): Modern manufacturing techniques were introduced to reduce costs (5): Modern manufacturing techniques were introduced to enable us to meet our business objectives (including costs) 17 17

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.

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…]

Backup slides 20

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

TAILS DRIVES DIFFERENCES ACROSS COUNTRIES Firm-Level Management Scores

Average management score from 1 (worst practice) to 5 (best practice) Better Managed firms are larger # firms 308 271 611 278 692 Employees in the firm 403 635 422 602 693 832 Average management score from 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.

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

Dependent variable: Management TOUGH COMPETITION IS STRONGLY LINKED TO BETTER MANAGEMENT PRACTICES Competition proxies Dependent variable: Management Import penetration (SIC-3 industry, 1995-99) 0.066** (0.033) “1-Rents” measure1 (SIC-3 except firm itself, 1995-99) 1.964** (0.721) # of competitors (Firm level, 2004) 0.158*** (0.023) Observations 2499 2980 3589 Full controls2,3 Yes 1 1-Rents = 1- (operating profit – capital costs)/sales 2 Includes 108 SIC-3 industry, country, firm-size, public and interview noise (analyst, time, date, and manager characteristic) controls 3 S.E.s in ( ) below, robust to heteroskedasticity, clustered by country-industry

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.

Dependent variable: Change in Management 2006-2004 CHANGE IN COMPETITION LINKED TO BETTER MANAGEMENT: SO NOT JUST SELECTION Competition proxies Dependent variable: Change in Management 2006-2004 Change in Import penetration 0.013** (0.005) Change in “1-Rents” measure1 1.006** (0.415) Change in Number of rivals 0.120** (0.052) Observations 421 404 432 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

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

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)

WE FIND FIVE FACTORS ARE ASSOCIATED WITH DIFFERENCES IN MANAGEMENT PRACTICES Competition Governance - Family firms - Private Equity - Government run 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)

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

Dependent variable: Management FAMILY MANAGEMENT (PARTICULARLY A PRIMO GENITURE SELECTED CEO) IS PROBLEMATIC % Dependent variable: Management Family1 largest shareholder -0.137** (0.023) -0.008 (0.043) Family1 largest shareholder & family CEO -0.169** (0.025) -0.073 (0.049) Family1 largest shareholder, family CEO & primo geniture2 -0.254** (0.043) -0.223** (0.046) Observations 4141 1 Family defined as 2nd generation or later 2 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

Suggestive evidence that Private Equity can improve management Average score on 18 management practice questions Number of firms 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.

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 36

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

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

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

DOMESTIC MULTINATIONALS ARE IN-BETWEEN 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

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

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

COMPETITION, FAMILY FIRMS, MULTINATIONALS & LABOR REGULATIONS ACCOUNT FOR ≈ ½ COUNTRY SPREAD 2.4 2.6 2.8 3 3.2 3.4 US Germany Sweden Japan UK France Italy Poland Portugal Greece China India raw management data management predicted from comp, family, MNE and regulation 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

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…”

BACK UP

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

“GOOD DOMESTIC” (MANY COMPETITORS, NOT PG FAMILY) OR MULTINATIONAL 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. 50