Welcome to boss-onomics

22nd January, 2011

“What upsets me about the job? Wasted talent. People could come to me, and they could go, ‘Excuse me, David, but you’ve been in the business 12 years. Can you just spare us a moment to tell us how to run a team, how to keep them task-orientated as well as happy?’ But they don’t. That’s the tragedy.”

The Office’s David Brent understood that management mattered – and he proved it every day. Yet the academic discipline of economics has surprisingly little to say about the practical discipline of management.

John Van Reenen is an economist who wants to change that. Professor Van Reenen, director of the Centre for Economic Policy at the London School of Economics, recently delivered the Royal Economic Society’s annual public lecture in Manchester and London. It carried the title “Boss-onomics”; its message that management quality can be measured and does make a difference to the performance of a country’s economy.

Van Reenen and his colleagues have been using a double-blind interview methodology to evaluate the quality of managers. MBA students will call middle-managers on behalf of the research team and have a 45-minute chat about “lean manufacturing”, with open-ended questions such as, “say that a worker had been with you for a year, how would you go about considering his or her promotion?” The managers are unaware that the discussion is being marked on a variety of criteria; the MBA students doing the marking have no prior knowledge about the financial performance of the company in question.

The team has now completed more than 8,000 of these interviews across the world. Low scores are awarded to businesses with poor inventory management, nonexistent performance tracking, tenure-based promotion and other management practices from the dark ages.

The headline finding is that the average management quality of a country’s manufacturing businesses is closely correlated with labour productivity – output per worker per hour. Labour productivity itself explains much of the gap between rich and poor countries. As Van Reenen put it, the typical Tanzanian worker produces in a month what the typical American worker produces in a day, even given the same equipment.

The UK, despite progress since 1997, is not home to the best-managed companies – it heads the chasing pack behind clear leaders in the US, Japan, Germany, Sweden and Canada. Van Reenen has some ideas to fix that.

Competition policy is one obvious lever: the UK doesn’t lag behind the US because it has fewer excellent firms, but because it has more terrible firms. Such terrible businesses can only thrive if competition is weak – a theoretical result that Van Reenen has also shown to be true in practice.

Another weak spot in the UK is the prevalence of family-managed firms. It is still quite common to hand the chief executive’s role to the oldest son in the UK, and management quality tends to suffer as a result. Van Reenen argues that family firms should not be exempt from inheritance tax, because the government shouldn’t be offering tax breaks which encourage badly managed firms.

There is also the possibility that the government could try to improve management quality directly. Britain needs better apprenticeship schemes, and the scrapping of the Education Maintenance Allowance looks insane.

But civil servants themselves should refrain from handing out management advice: government-run companies rank right at the bottom of management-quality tables. David Brent is alive and working in Whitehall.

Also published at ft.com.

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