The power of management

My scepticism about the effectiveness of management has been challenged by Luis Enrique, who directs me to research by Nick Bloom and colleagues. But his work does not undermine my scepticism.

Take, for example, this study of medium-sized manufacturers, which says:

Better managerial practices are significantly associated with higher productivity and other indicators of firm performance.

So, management matters. Or does it?

The practices it identifies are largely about whether there are good feedback mechanisms in place. Is the production process sufficiently well monitored that errors can be eliminated and efficiencies identified? Is there good performance appraisal of employees? Are goals clear and sensible? And so on.

What we have here, then, is not a story about CEO’s “strategic vision”, or about the power of great individuals, but about day-to-day administrative structures. Common sense says these must matter, and must be basic good practice for any firm.

However, Bloom and colleagues find that less than one fifth of the variance in total factor productivity can be explained by these management practices. I’m surprised by how low this is.

What’s more, they found that “a large number of firms are extremely badly managed with ineffective monitoring, targets and incentives.” Vast numbers of bosses, then, can’t even put in place basic good practice. Many managers, then, are poor even by quite undemanding standards. Why?

There is much evidence that management practices are hard to change and are deeply embedded in the culture of an organisation.

For example, older firms, and family-owned firms, tend to be worse managed, as are firms in less competitive industries.  Competition, says (pdf) Bloom, has a “critical influence” in improving management.

But this is just what I’ve said - that management is weak when set against more powerful forces such as path dependency and the complexity of social structures.

Comments

[Luis Enrique]

I am flattered by the attention.

We are suffering from a poorly defined question.

Is the question:

1. Does management matter: is the difference between "good management" and "bad management" important? (Bloom & Co say yes - and so I suspect would anybody with experience of working under a good and a bad manager).
2. Is management "effective": are managers mostly good or bad? (Bloom & Co say vast numbers are bad).
3. Is good management a matter of day-to-day administrative structures or CEO `strategic vision'? (Bloom & Co only study day-to-day admin).

Regarding "strategic vision" and such like, the concentration of power means management "matters" is a truism. CEOs decide things like what markets to enter /exit, what mergers to pursue/refuse, who to promote or fire and so on. You don't deny such decisions matter, do you? So we may ask another question:

4. Do good leaders exist: do some individuals possess experience/qualities so that they make better decisions on average than the next person?

But I'm not sure what to make of the answer, which I think is yes, but so what? If we could identify them, it might be worth paying them handsomely, but I don't think we can.

(Bloom & co also write: "We argue that these managerial differences could account for about half of the superior productivity growth performance in the United States relative to Europe in the decade after 1995." That sounds like management matters to me)

[chris]

I'm not sure I've ever said that management is irrelevant - I'd not be exercised by it if this were so. I'm just doubtful that CEOs, on average, have significant positive effects. Bloom &co's research is consistent with that.
I think mamagers can ruin a company more than they can make a great one; in this sense, their effectiveness, where it exists, is negative - the avoidance of stupidity. Bloom & Co's work doesn't bear much on this, insofar as I can tell.
Also, the management differences they believe account for the productivity gap are NOT exogenous, but rather in part a function of competition and vintage capital.

[Account Deleted]

"CEOs decide things like what markets to enter /exit, what mergers to pursue/refuse, who to promote or fire and so on".

This happens far less than you might imagine. The idea that this is what CEOs do is part of the problem with the superstar CEO myth: it becomes an expectation, leading to risky behaviour.

Many businesses aren't in a position to radically change their markets (or have no need to); mergers are high-profile but rare (despite the best efforts of the MMA industry); and most hire/fire/promote descisions are taken lower down the hierarchy (CEOs just rubber-stamp).

I understand Chris's point to be about "managers" in the sense of CEOs and other senior execs, not managers at all levels or the processes of management (which are undertaken by many people who don't have manager in their job title).

"I think managers can ruin a company more than they can make a great one". This is spot on, for the simple reason that it is easier to screw up a thriving business than build a successful one from scratch.

The truth is that most business failure is relative, rather than absolute, and is the product of inaction or complacency rather than vandalism. Equally, spectacular business success is mainly down to luck: right place, right time.

Good CEOs who turn around a business generally achieve mid-table respectability: Martin O'Neill, not Jose Mourinho.

[Luis Enrique]

"I'm just doubtful that CEOs, on average, have significant positive effects"

I hope I'm not being too obtuse here, but what's the counterfactual? I know you think alternative forms of organisation would do better, but that's not the matter in hand. So, holding organisational form constant, what doesn't the average CEO have positive effects compared to? Do you have in mind in comparison with, say, some randomly selected exec with the necessary skills (quite a large set, I feel) but no marketable CEO level "leadership" chops to speak of? What data could, at least in theory, settle the matter?

(really I just thought you were overdoing things charactising managers as self-deluded charlatans that contribute nothing. I know some are)

[BenP]

"superior productivity growth performance in the United States relative to Europe in the decade after 1995." That sounds like management matters to me"

Growth in performance for who? As Reinhardt summarises "the better macroeconomic performance of the United States and France is reversed when excluding the top 1 percent." So managment in the US are superior in feathering their own nest, who'd have guessed.

http://economix.blogs.nytimes.com/2011/09/02/what-does-economic-growth-mean-for-americans/

[chris]

@ Luis. Yes, I think the counterfactual would be CEO vs some intelligent guy with a grasp of decision theory, industry knowledge etc - the sort of professional compentence that should accompany an ordinary professional's salary.
As for performance data, there are lots of possibilities; I think a well-chosen measure of alpha would have some merits.
One problem is that CEOs are selected for defects; they are disproportionately likely to be overconfident for example. Such selection effects mean they could be collectively dysfunctional. But as we never see the counterfactual (comparing US to overseas bosses raises other problems)we can't see this clearly, even if its true.

[Red Priest]

I think the issue here is that of GOOD management vs BAD. And having suffered and/or prospered under both (and indeed in due modesty having been both myself), I would hazard that bad, or even plain mediocre, management produces and causes far more damage to businesses than the positive outcomes that good management can create. In other words, it's much easier - and longer-lasting - to screw things up than it is to improve/enhance business performance.

[Luis Enrique]

yes, we'd need to perform an experiment - we know leaders require multi-million pound salaries to get out of bed in the morning, so if we imposed a £250,000 total annual compensation cap, we'd see how companies perform once they are run by lesser mortals. Of course, ideally we'd randomly assign the caps, but I'd settle for blanket imposition.

this is one reason why I am more in favour of harsh salary caps than you might imagine. I think management matters and I think there is such a thing as a good manager, but my guess is we'd get just as much good management with more lowly individuals doing the job.

[Nick]

That's good post.I am searching more several blogs.Thanks for sharing..

[Rafort09]

When has centralized control ever worked? Given the increasing complexity of the information age and competing with lightning fast competitors, good managers pick the best people and provide them the resources to succeed.

[Rick]

I spent way too long this week looking through all this stuff. It's very interesting but there is masses of it.

Where do you get the 'less than one fifth' figure from Chris?