MEASURING AND EXPLAINING MANAGEMENT PRACTICES ACROSS FIRMS AND COUNTRIES

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MEASURING AND EXPLAINING MANAGEMENT PRACTICES
ACROSS FIRMS AND COUNTRIES October 2007 Nick
BloomStanford NBER John Van ReenenLSE NBER
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MOTIVATION

• Large persistent productivity spread across firms
  and countries
• people typically claim this is due to differences
  in management
• But what is the role of management?
• And why does it vary so much across firms and
  countries?

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SUMMARY OF THE PAPER (1 of 3)

• (1) Measuring Management
• Develop a survey tool to measure management
  practices
• New data on 732 firms in US,UK, France Germany.
  
• Management data
• Appears consistently measured within firms
• Correlated with productivity, profits, Tobins Q,
  growth survival
• Robust to measurement error and bias

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SUMMARY OF THE PAPER (2 of 3)

• (2) Explaining Management
• Observe big spread in management practices (Fig.
  2 over)
• Wide cross firm spread (like profits
  productivity)
• Significant differences across countries
• US 1st, Germany 2nd, France 3rd and UK 4th
• Demonstrate that two factors appear significant
• Production market competition positive effect
• Family managed firms negative effect
• Family firm ownership but not management is fine
• Family ownership and management problematic,
  particularly under primo geniture CEO succession

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FIRM LEVEL AVERAGE MANAGEMENT SCORES
France
n137
n157
Germany
n290
n154
UK
US
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SUMMARY OF THE PAPER (3 of 3)

• (3) Quantifying this Effect
• Competition and family-management important,
  explains about 50 of firm-level management tail
  and between 1/3 to 2/3 of US-Europe management
  gap
• Europe has lower levels of competition
• UK France also many more primo geniture family
  firms due to Norman legal origin tradition

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OUTLINE

1. Why should management practices vary?
2. Measuring management practices
3. Evaluating the reliability of this measure
4. Describing management across firms countries
5. Explaining management across firms countries

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Why Should Management Practices Vary?

• Two models - not mutually exclusive
• Optimal choice of management practices
• Another factor of production (like advertising)
• No better or worse style of management
  depends on firms circumstances
• Exogenous managerial inefficiency (Mundlak, 1961
  Lucas 1978)
• Part of total-factor productivity
• Strictly better or worse styles of management
• Empirically we find some support for both

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1. Why should management practices vary?
2. Measuring management practices
3. Evaluating the reliability of this measure
4. Describing management across firms countries
5. Explaining management across firms countries

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SOME RELATED LITERATURE - EXAMPLES

• Management, organisation performance
• HRM / Management practices Ichinowski, Shaw, and
  Prenushi (1997), Ichinowski and Shaw (1995),
  Black and Lynch (2001), and Lazear (2000)
  Cappelli and Neumark (2001), Bartel, Ichniowski
  and Shaw (2004),
• Organisational practices Bresnahan, Brynjolfsson
  and Hitt (2002) and Caroli and Van Reenen (2001)
• Individual managers Bertrand and Schoar (2003)

• Family firms
• Empirical La Porta, Lopez-De-Silanes and
  Schleifer (1999), Bertrand et al (2004),
  Villalonga and Amit (2004), Bennedsen, Nielsen,
  Perez-Gonzales Woflenzon (2005),
• Theory Burkart, Panunzi and Schleifer (2003),
  Caselli and Gennaioli (2005)
• Economic History Landes (1969), Chandler (1994),
  Nicholas (1999)

• Competition and firm performance
• Empirics Nickell (1996), Syverson (2004), and
  Aghion, Bloom, Blundell, Griffith, and Howitt
  (2005)
• Dynamic theory Jovanovic (1982) and Hopenhayn
  (1992)
• Theory Schmidt (1997), Raith (2003) and Vives
  (2004)

• Productivity dispersion dynamics
• Establishments Baily, Hulten, and Campbell
  (1992), Bartelsman and Dhrymes (1998), and
  Jensen, McGuckin and Stiroh (2001), Foster,
  Haltiwanger and Syverson (2003)
• Countries OMahony Van Ark (2004), Caselli
  (2005)

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STEPS TO TRY TO MEASURE MANAGEMENT

• 1) Developing management practice scoring
• Scorecard for 18 monitoring, targets and
  incentives practices
• 45 minute phone interview of (manufacturing
  plant) managers
• 2) Obtaining unbiased responses
• Double-blind
• Interviewers do not know company performance
• Managers are not informed (in advance) they are
  scored
• 3) Getting firms to participate in the interview
• Introduced as Lean-manufacturing interview, no
  financials
• Endorsement of Bundesbank ,UK Treasury, Banque de
  France
• Run by 10 MBAs (loud, assertive business
  experience)

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MONITORING - i.e. HOW IS PERFORMANCE TRACKED?
Score (1) Measures tracked do not indicate directly if overall business objectives are being met. Certain processes arent 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
Note All 18 dimensions and over 50 examples in
Bloom VanReenen (2006).
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ADDITIONAL CONTROLS FOR BIAS NOISE

• 8 INTERVIEWEE CONTROLS
• Gender, seniority, tenure in post, tenure in
  firm, countries worked in, foreign, worked in US,
  plant location, reliability score
• 3 INTERVIEWER CONTROLS
• Set of analyst dummies, cumulative interviews
  run, prior firm contacts
• 5 TIME CONTROLS
• Day of the week, time of day (interviewer), time
  of the day (interviewee), duration of interview,
  days from project start

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MANAGEMENT SURVEY SAMPLE

• US (290), UK, France and Germany (150 each)
• Medium sized manufacturers (100 - 10,000
  employees, median 600)
• Medium sized because firm practices more
  homogeneous
• Manufacturing as easier to measure productivity
• Obtained 54 coverage rate from sampling frame
• Response rates uncorrelated with performance
  measures

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ADDITIONAL MATCHED DATA WE COLLECTED

• HR Survey
• Skills, demographics, hours, organisational
  characteristics, number of competitors etc.
• Ownership Family Survey
• Shareholders managerial characteristics, family
  involvement, family progression rules etc.
• Performance Data
• Separately match company accounts - so collect
  management and performance data from completely
  different sources
• Industry and Trade Data
• OECD

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• Why should management practices vary?
• Measuring management practices
• Evaluating the reliability of this measure
• Internal/External validation
• Contingency
• Measurement error/bias
• Describing management across firms countries
• Explaining management across firms countries

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INTERVAL VALIDATION OF THE SCORING

• Re-interviewed 64 firms with different
  interviewers and managers

Firm average scores (over 18 question)

• Firm-level average correlation of 0.759

2nd interview
1st interview
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EXTERNAL VALIDATION OF THE SCORING
Performance measure
country c
ln(capital)
management (average z-scores)
other controls
ln(materials)
ln(labor)

• Use up to 11 years of accounting data for
  1994-2004

• Note not a causal estimation, only an
  association

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EXTERNAL VALIDATION PRODUCTIVITY PROFIT
Dependentvariable Sales (in Ln) Sales (in Ln) Sales (in Ln) ROCE Tobin Q (in Ln) Sales growth Exit
Estimation1 OLS OLS OLS OLS OLS OLS Probit
Firms All All All All Quoted All All
Managementi 0.085(0.025) 0.034(0.011) 0.042(0.012) 2.469(0.688) 0.250(0.075)- 0.018 (0.006) -0.2000.026
Ln(Labor) it 0.999(0.014) 0.539(0.021) 0.540(0.021) 2.172(1.202) 0.209(0.109) -0.022 (0.011) 0.2330.045
Ln(Capital) it 0.103(0.013) 0.104(0.013) -0.148(0.899) -0.029(0.086) 0.024 (0.008) -0.1580.045
Ln(Materials) it 0.362(0.020) 0.354(0.020) -0.439(0.723) 0.130(0.050) -0.010 (0.007) -0.0840.231
Controls1 No Yes Yes Yes Yes Yes Yes
Noise controls No No Yes Yes Yes Yes Yes
Observations 6,267 5,350 5,350 5,089 2,635 4,777 709
Firms 732 709 709 690 374 702 709
1 Includes country, year, SIC3 industry, skills,
hours, firm-age, and public/privateRobust S.E.s
in ( ) below. For probit p-values in below
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EXTERNAL VALIDATION ROBUSTNESS

• Productivity correlations robust to type of TFP
  estimation
• OLS, Olley-Pakes, GMM Within-Groups
• Results also significant in most recent
  cross-section (2003/04)
• Results significant in both Anglo-Saxon (US and
  UK) and
• European (France and Germany) country subsets

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CONTINGENT MANAGEMENT PRACTICES
Dependent Var HC Management FC Management HC-FC Management HC-FC Management HC-FC Management
Level Firm Firm Firm Firm Industry
Ln ( degrees)ifirm level 0.220 (0.039) 0.100(0.043) 0.120(0.043)
Ln (ave wage)ifirm level 0.337(0.122)
Ln ( degrees)jIndustry level (US) 0.281(0.169)
Standard Errors Robust Robust Robust Robust Clustered
Firms 732 732 732 424 732
Note HC management average z-score of the 3
most human capital focused questions (questions
13, 17 and 18). FC management average z-score
of the 3 most fixed capital focused questions (1,
2 and 4). HC-PC management is the difference of
these two measures.
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CONCERNS WITH OUR MANAGEMENT MEASURE?

• Three potential issues
• 1) Measurement error (classical), but
• Attenuation downwardly biases our results
• We try to control for this with Noise controls
  (management interview characteristics)

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CONCERNS WITH OUR MANAGEMENT MEASURE?

• (2) Firm performance-related measurement bias in
  management score (i.e. the happy manager
  problem), but
• Surveying methodology using examples tries to
  minimize this
• Competition and management positively linked
  (later)
• Management-performance link is as important in
  France Germany (where managers less likely to
  talk up Anglo-Saxon practices) as it is in UK
  US
• No link between past productivity growth
  management
• Not all questions significant (and not linked to
  subjectivity)
• Other subjective questions insignificant i.e.
  feel-good work-life balance questions,
  organisational devolvement questions
• So potential problem but no evidence that major
  phenomenon

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CONCERNS WITH OUR MANAGEMENT RESULTS?

• (3) Reverse causality (management correctly
  measured but better firm performance causes
  better management),
• Yes but main point of performance estimations
  is external validity of the measure
• Also note that if interpretation is effect of
  management on productivity note that the bias is
  ambiguous

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OUTLINE

1. Measuring management practices
2. Evaluating the reliability of this measure
3. Describing management across firms countries
4. Explaining management across firms
   countries - competition - family managed firms

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FIRM LEVEL AVERAGE MANAGEMENT SCORES
France
n137
n157
Germany
n290
n154
UK
US
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COUNTRY LEVEL MANAGEMENT SCORES
US
Germany
France
UK
Typical UK managers?
Bad manufacturing management - a UK
tradition? Efficient management is the single
most significant factor in the American
productivity advantage Marshall Plan
Anglo-American productivity mission, 1947
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US FIRMS ARE ALSO BETTER IN EUROPE
Average management score by firm type in UK,
France and Germany
in sample
Domestic
379
Non-US multinational subsidiary
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US multinational subsidiary
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Controls for any sample selection on size
(direct and group) and listing
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OUTLINE

1. Measuring management practices
2. Evaluating the reliability of this measure
3. Describing management across firms countries
4. Explaining management across firms
   countries - competition - family managed firms

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Factors we did not find a significant
relationship for

• Unions negative but not significant
• But (i) sample 450 firms and (ii) issues over
  causation
• Was negative and significant for two individual
  practices
• Fixing/firing bad performers,
• Rewarding good performers
• CEO Pay no link in levels but issues over
  causation
• Ownership/Governance positive but insignificant
  for ownership
• concentration and board indepedence measures
• But sample only UK/US quoted firms ( 350)
• Leverage nothing with debt/equity but issues
  over causation

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Competition Models of Management Practices

• Exogenous managerial inefficiency positive
  impact
• Selection models Hopenhayn (1992) or Syverson
  (2004)
• Optimal choice model ambiguous impact
• In contracting models balance between opposing
  profit and market-size effects (Raith 2003, Vives
  2004).

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COMPETITION AND MANAGEMENT PRACTICES (TABLE 4)
3 competition proxies from Nickell (1996)
Aghion et al. (2005)
Competition proxies Dependent variable Management Dependent variable Management Dependent variable Management Dependent variable Management Dependent variable Management Dependent variable Management
Import penetration (SIC-3 industry,1995-1999) 0.144 (0.040) 0.156 (0.084)
1 - Lerner index1(SIC-3 industry except firm itself, 1995-1999) 1.515 (0.683) 1.318 (0.637)
of competitors (Firm level,2004) 0.142 (0.051) 0.145 (0.049)
Full controls2,3 No Yes No Yes No Yes
1 Lerner index (operating profit capital
costs)/sales rents2 Includes 108 SIC-3
industry, country, firm-size, public and
interview noise (analyst, time, date, and
manager characteristic) controls, 732 obs3
S.E.s in ( ) below, robust to heteroskedasticity,
clustered by country-industry
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FAMILY FIRMS MANAGEMENT AN OLD TOPIC
Alfred Chandler1 and David Landes2 both claimed
UK French industrial decline relative to US
Germany linked to family firms The Britain of
the late 19th Century basked complacently in the
sunset of economic hegemony. Now it was the turn
of the 3rd generationand the weakness of British
enterprise reflected their combination of
amateurism and complacency French enterprise
was family-owned and operated, security-orientated
rather than risk-taking, technologically
conservative and economically inefficient
1 Alfred Chandler, Scale and Scope The
Dynamics of Industrial Capitalism, (1994)2
David Landes, The Unbound Prometheus
Technological Change and Industrial Development
in Western Europe from 1750 to the Present,
(1969)
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WE DO FIND GREATER UK FRENCH FAMILY MANAGEMENT
IN OUR DATA (100 YEARS ON),
UK Fra Ger US
Family1 largest shareholder 30 32 30 10
Family1 largest shareholder and family CEO 23 22 12 7
Family1 largest shareholder, family CEO primo geniture2 15 14 3 3
1 Family defined as 2nd generation or beyond (so
not the founder). Shareholdings combined across
all family members. 2 Based on question How
was management of the firm passed down was it
to the eldest son or by some other way?. Non
primo geniture alternatives in frequency
order other sons, son in-laws, daughters,
brothers, wives, nephews and cousins.
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WHY DOES FAMILY INVOLVEMENT VARY ACROSS COUNTRIES?

• Historical differences
• UK French tradition of Primo Geniture
• Oxford English Dictionary, 2005 Feudal rule
  of inheritance introduced into England by the
  Norman Conquest. Replaced Teutonic gavelkind.
  Obligatory until the Statute of Wills 1540.
  Still common in many places
• US and German tradition of equal division
  (Menchik, 1980)
• Estate tax headline rates1 on family firms
• US 50 France 25
• UK 0 Germany 15

1 Rate on a 25m firm. In practice these taxes
are often reduced/avoided by advanced tax
planning, although this involves foresight,
financial costs and some control loss.
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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 CEOs
• Both effects will be worse with primo geniture
  (succession of eldest son to CEO position)

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FAMILY OWNERSHIP AND FAMILY MANAGEMENT (TABLE 5)
Dependent variable Management Dependent variable Management Dependent variable Management Dependent variable Management
Family1 largest shareholder -0.029(0.094) 0.304 (0.166)
Family1 largest shareholder family CEO -0.100(0.078) -0.175 (0.188)
Family1 largest shareholder, family CEO primo geniture -0.281(0.097) -0.382 (0.128
Observations2 732 732 732 732
1 Family defined as 2nd generation or later2
Note includes SIC-3 digit, country, skills, firm
size, firm age public controls
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• QUANTIFYING THESE EFFECTS
• ACROSS FIRMS
• ACROSS COUNTRIES

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MANY COMPETITORS AND NO (PG) FAMILY CEO
N317
2.7 firms in tail1
FEW COMPETITORS AND/OR (PG) FAMILY CEO
N415
9.0 firms in tail1
1 Tail defined as a score 2. In the whole
sample 6.9 of firms are in the tail. Sample
splits significantly different at 5, but not if
exclude firms with score 2
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ACCOUNTING FOR THE CROSS-COUNTRY SCORES
Dependent variable Management Management Management Management Management
Country is US Baseline Baseline Baseline Baseline Baseline
Country is Germany -0.045(0.064) -0.081(0.075) -0.090(0.075) -0.051(0.074) 0.010(0.076)
Country is France -0.202 (0.086) -0.183(0.104) -0. 131 (0.103) -0.075 (0.102) -0.028 (0.102)
Country is UK -0.276 (0.078) -0.276(0.093) -0.227 (0.091) -0.199 (0.091) -0.126 (0.079)
Family owned, family CEO primo geniture -0.638(0.101) -0.628(0.100) -0.584(0.098)
of competitors 0.142 (0.052) 0.161 (0.051)
Ln ( employees with a degree) 0.145(0.037)
Public size controls No Yes Yes Yes Yes
Observations 732 732 732 732 732
1 OLS on 732 observations. S.E.s in ( ) robust to
arbitrary heteroskedasticity
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TO SUMMARIZE

• Original methodology for measuring management
• Product market competition family management
  important
• Explain 50 of tail of badly managed firms
• Explain 2/3 of US-France gap 1/3 of US-UK gap
• Last summer ran 3500 firm survey on firms in
  Europe, US and Asia covering management and
  organisational structure
• Research design very flexible so any suggestions
  welcome
• Quotes

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BACK-UP
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MY FAVOURITE QUOTES
The British Chat-Up
Male manager speaking to an Australian female
interviewer Production Manager Your accent
is really cute and I love the way you talk. Do
you fancy meeting up near the factory? Interview
er Sorry, but Im washing my hair every night
for the next month.
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MY FAVOURITE QUOTES
The difficulties of defining ownership in Europe
Production Manager Were owned by the
Mafia Interviewer I think thats 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 Wellwe
have one in Texas
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MY FAVOURITE QUOTES
The bizarre
Interviewer long silencehello, hello.are
you still there.hello Production Manager
.Im 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
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INCENTIVES - i.e. HOW DOES THE PROMOTION SYSTEM
WORK?
Score (1) People are promoted primarily upon the basis of tenure (3) People are promoted upon the basis of performance (5) We actively identify, develop and promote our top performers
Note All 18 dimensions and over 50 examples in
Bloom VanReenen (2006).
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TARGETS - i.e. HOW TOUGH ARE TARGETS?
Score (1) Goals are either too easy or impossible to achieve managers low-ball estimates to ensure easy goals (3) In most areas, top management pushes for aggressive goals based on solid economic rationale. There are a few "sacred cows" not held to the same rigorous standard (5) Goals are genuinely demanding for all divisions. They are grounded in solid, solid economic rational
Note All 18 dimensions and over 50 examples in
Bloom VanReenen (2006).
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I.V. MANAGEMENT IN PRODUCTION FUNCTION
Dependent Var Ln (Sales) Ln (Sales) Ln (Sales) Ln (Sales) Ln (Sales)
Estimation1 Reduced form, OLS Reduced form, OLS Reduced form, OLS Full, OLS Full, IV
Management 0.042 (0.012) 0.216 (0.097)
Competition (Import penetr.) 0.089(0.032) 0.088 (0.032)
Family CEO primo geniture -0.060(0.030) -0.058 (0.030)
Instruments (F-test) Imports,Family (20.79)
Over-identifying restriction (p-val) 0.520
7525 TFP gap accounted for 12 63
1 Other variables include log(Labor),
log(Capital), log(Materials), country, year, SIC3
industry, skills, hours, firm-age, and
public/private. All 709 observationsS.E.s in ( )
below, robust to arbitrary heteroskedasticity
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AGE AND MANAGEMENT PRACTICES (KERNEL1)
Management score
10 years
75 years
Firm age (in logs)
1 Point-wise confidence intervals (in feint)
generated from 1000 bootstraps
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(No Transcript)
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FAMILY OWNERSHIP PROBIT
Dependent variable Family owned, family CEO primo geniture1
Country UK 0.1090.015
Country France 0. 0960.042
Country Germany 0.0580.303
Log (employees) -0.0220.012
Log (firm-age) 0.0520.017
Industry controls Yes
Observations 718
1 Marginal effects, p-values in brackets
underneath
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SOME LIMITED EVIDENCE FOR EFFORT EFFECTS?
Dependent variable Managerial Hours Worked Managerial Hours Worked Managerial Hours Worked Managerial Hours Worked Managerial Hours Worked Managerial Hours Worked
Lerner index(5-yr lagged) 6.660(4.129) 1.809(5.869)
Import penetration (5-yr lagged) -0.230 (0.444) 1.082(0.948)
Number of competitors 1.155 (0.509) 0.935 (0.623)
Firms 727 727 733 733 733 733
Observations 727 727 733 733 733 733
Full controls No Yes No Yes No Yes
Includes 108 SIC-3 digit dummies, country
dummies, firm size and type S.E.s robust to
arbitrary heteroskedasticity, clustered by
country-industry