Monday, February 22, 2010

Corporate management and efficiency

This was a fascinating set of conclusions (original report here:
Firstly, the US has the best quality-of-corporate-management scores by a significant margin. Germany is second, Sweden is third, Japan is fourth, and down the line it goes.
Robin Hanson interprets:
  1. Firms with "better" management practices tend to have better performance on a wide range of dimensions: they are larger, more productive, grow faster, and have higher survival rates.
  2. Management practices vary tremendously across fi rms and countries. Most of the difference in the average management score of a country is due to the size of the "long tail" of very badly managed firms. For example, relatively few U.S. firms are very badly managed, while Brazil and India have many firms in that category.
  3. Countries and firms specialize in different styles of management. For example, American firms score much higher than Swedish firms in incentives but are worse than Swedish firms in monitoring.
  4. Strong product market competition appears to boost average management practices through a combination of eliminating the tail of badly managed firms and pushing incumbents to improve their practices.
  5. Multinationals are generally well managed in every country. They also transplant their management styles abroad. For example, U.S. multinationals located in the United Kingdom are better at incentives and worse at monitoring than Swedish multinationals in the United Kingdom.
  6. Firms that export (but do not produce) overseas are better-managed than domestic non-exporters, but are worse-managed than multinationals.
  7. Inherited family-owned firms who appoint a family member (especially the eldest son) as chief executive officer are very badly managed on average.
  8. Government-owned firms are typically managed extremely badly. Firms with publicly quoted share prices or owned by private-equity firms are typically well managed.
  9. Firms that more intensively use human capital, as measured by more educated workers, tend to have much better management practices.
  10. At the country level, a relatively light touch in labor market regulation is associated with better use of incentives by management.
This may explain a number of things:
Firstly, this may explain why corporate compensation is so much higher in the US - when all of your competitors are well managed, you had better be well-managed, too.

Secondly, this should make everyone very skeptical of top-down management, and somewhat concerned for the well-being of US banks. (More concerning points on this come from the Economist, with a hat tip to Mankiw: The Obama administration labor policy as it concerns the stimulus has meant that the infrastructure portions have cost about 15% more than they would have, which means that the tax payer is getting 15% fewer jobs for the money and 15% fewer roads, bridges and schools for the money. This goes along with a bunch of other irrational but popular union-favoring policies). One Australian (former NZ treasury official, current hedge fund manager) believes that Fannie and Freddie could fully repay the government within 5 to 8 years, with interest, if the government stays out of their way (, but it's possible Congress could call for their liquidation. You get the idea.
Finally, we need to strengthen corporate boards of directors and align them with non-majority public shareholders, at least for deciding "who gets to be the CEO". Nepotism is well known as a major efficiency drain, and just because it tends to be less of a problem in America than anywhere else doesn't mean we should stand still on it.

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