Management mostly determine productivity levels

Of all these drivers, management is the most important – by far

Large extracts from Ian Stewart’s recent article follow

• The UK has plenty of problems, above all a low rate of productivity growth.
• Even on this troubled front, we’ve had positive news.
• A recent study from the Office for National Statistics (ONS) shows a marked improvement in the average quality of UK management:
  • The study found that the average quality of management improved between 2020 and 2023.
  • Firms have become better at managing staff performance and promotion and, in particular, more effective in dealing with underperformance.
• The ONS does not offer reasons for the improvement.
• Our hunch is that as the post-pandemic jobs boom fizzled out, the balance of power in the jobs market shifted from workers to companies.
• Unsurprisingly, management quality has a huge effect on productivity – this helps explain the surge in a company’s share price when a new, highly rated CEO is appointed – and the depressant effect of the loss of a well-regarded CEO.
• Research by Professors Bloom, Van Reenen and Sadun found that management practices explain 55% of the difference in levels of productivity in the UK and the US, countries that lead on productivity and management quality.
• In the UK, management scores vary enormously across different types of business.
  • The ONS finds that larger businesses do better than smaller ones in terms of management quality.
  • Foreign-owned companies outperform UK-owned businesses.
  • Family-owned or managed businesses tend to underperform on management.
• So the form of ownership has a huge effect on productivity.
• Previous ONS research found that in the same sector and region and with companies of the same size, foreign-owned businesses were 74% more productive than UK-owned businesses.
• A working paper published by the UK’s The Productivity Institute (TPI) earlier this year found that private equity ownership tends to raise productivity noting that, “active investors, such as PE and venture capital, provide important boosts to managerial skill sets and effective governance”.
• Some important messages come out of all of this.
  • First, and obviously, management quality is a crucial driver of productivity.
  • Second, operating in the same environment some types of businesses – larger, foreign or PE-owned businesses – outperform in terms of management and productivity.
  • Third, businesses can move quickly to sharpen management practices.
• Unlike so many of the solutions touted for Britain’s productivity problem, management practices can be improved quickly, at relatively low cost and by the owners and senior management of the business.
• There is no need to wait until the UK sorts out its infrastructure, vocational training or any of the myriad of other factors that have been blamed for Britain’s low productivity growth.
• The fact that foreign-owned firms get this right or that active investors can drive improved management quality, shows that this is a “portable” advantage.
• The rise in the UK’s ranking in the ONS survey last year demonstrates that change can happen quickly.
• UK management does quite well by international standards.
• The World Management Survey has been mapping management practices since 2003 and puts the UK in sixth place in a field of 35 countries – the UK comes ahead of France, Australia and Singapore but way below the US and Germany.
• The ONS survey shows the UK’s quality of management score rising on a scale of ‘structured management practices’.
• The long and agonised debate about Britain’s productivity problem has produced many theories but no quick, low-cost solutions.
• Sharpening management quality seems like a good place to start.