Do managers matter? - Economics Observatory

The productivity of UK firms depends on them being well managed. This makes improving management practices a critically important issue both for business leaders and for policy-makers seeking to boost the country’s overall economic performance.

Large corporations in the United States went through a managerial revolution in the first few decades of the 20^th century. This was highlighted in 1941 by an American political scientist by the name of James Burnham in a book entitled The Managerial Revolution.

That revolution occurred thanks to the increasing scale and complexity of production, which made it necessary to develop a cadre of managers to organise, guide and administer the entire process of production.

Thus, managers became the subject of academic investigation, with the likes of management scholar Peter Drucker (1954) being among the first to argue that managers matter for business performance.

Economists have only become interested in the question of whether managers matter relatively recently. Those working on this important topic have sought to ascertain both the determinants of good management and the ways in which management affects firms’ performance (Bloom and Van Reenen, 2007, 2010; Bloom et al, 2014; Scur et al, 2021).

How can management practices be measured?

Assessing whether management is good or bad is not straightforward. The main approach used is to assess the extent to which structured management practices are embedded or encoded into a firm. In other words, even though individual managers come and go, do the structured management practices of the business change?

One framework of 18 structured management practices can be broken down into four principal components (Bloom and Van Reenen, 2007). These are:

Continuous improvement practices, which focus on the proactive monitoring and improvement of processes through innovation.
The use of key performance indicators (KPIs) in decision-making by firms.
The use of targets that are stretching, tracked and reviewed.
Employment practices that cover managing, identifying, rewarding, attracting and retaining talented people.

In Great Britain, the Office for National Statistics (ONS) has run four surveys of businesses (in 2016, 2019, 2020 and 2023) to ascertain their management practices. Based on the answers provided by the senior executives of the businesses, the ONS then applies the above framework to develop a management practices score for each firm (Bloom and Van Reenen, 2007).

Each of the 18 management practices is scored between zero and one depending on the extent to which the practice is embedded into the firm. An average is then generated to create an overall score for management practices.

Using the distribution of management scores in Great Britain, we observe that management practices improved between 2016 and 2023 (see Figure 1). This was chiefly driven by the disappearance of poorly managed small firms. Despite this improvement, there remains a long tail of poorly managed businesses.

Figure 1: Distribution of management practices score in Great Britain

Source: Office for National Statistics, 2024

Most firms have adopted the continuous improvement component of the management practices score (see Figure 2). Targets have also been adopted by many firms, while the KPIs component of the management practices score is the weakest.

Figure 2: Average management practices scores by components of management practices, 2020 and 2023

Source: Office for National Statistics, 2024

Figure 3 shows that differences in management scores across industries are driven by the long tail of underperformers. The upper tails of the distribution of management scores are similar, but the share of firms in the lower tails of the distribution varies substantially.

The size of this lower portion of less well-managed firms pulls down the average score in industries such as construction and property.

Figure 3: Management practices score by industry, 2023

Source: Office for National Statistics, 2024

What are the determinants of management practices?

Management practices vary across firms for a variety of reasons. Firm size is an important factor – specifically, smaller firms have inferior management practices scores (Forth and Bryson, 2019). The cost of introducing management practices for small firms may outweigh the benefit in terms of productivity gains.

A second factor that affects management practices is competition (Bloom and Van Reenen, 2007, 2010; Bloom et al, 2019). Poorly managed firms operating in competitive environments will be outcompeted by better-managed peers. Competition forces firms to adopt good management practices.

Whether a firm is a multinational or an exporter also has an effect on management practices (Bloom et al, 2021). Exporting firms and multinationals are more likely to operate in more competitive environments, and this pushes them to have good management practices. Multinationals also tend to have consistently good management practices across their business, irrespective of the country in which they are operating.

A fourth determinant is the knowledge and skills (or human capital) of both managers and workers (Feng and Valero, 2020). Those with higher human capital are important for the implementation of complex management practices. Formal management training makes managers better placed to implement good management practices (Bloom et al, 2013).

Lastly, ownership matters. Family-owned firms typically have relatively poor management practices (Bloom and Van Reenen, 2007). One of the chief reasons for this is that family firms appoint chief executive officers (CEOs) based on primogeniture (when the oldest child of the owner or current boss is set up to take over) rather than managerial talent.

What effect do management practices have on business performance?

Firms with better management practices have higher labour productivity and profitability. This is shown by evidence from around the globe (Bloom and Van Reenen, 2007; Bloom et al, 2013; Jordan et al, 2023).

Firm size moderates the impact of management practices on performance because some practices may be costly for small businesses. In addition, informal relationships in small businesses make monitoring processes and employee incentives less costly, which means that less structured management practices do not affect firm performance.

How much of an effect do management practices have on labour productivity? An ONS study finds that on a scale from zero to one, a 0.1 increase in the management practices score corresponds to an 8.6% increase in productivity. Put another way, if a firm were to move from the median to the 75^th percentile of the distribution of management practices scores, its productivity would increase by 11.1%.

Good management practices stimulate firm-level innovation (Custódio et al, 2019; Bloom et al, 2019). First, continuous process improvement (that is, innovation) is a key part of good management practices. Second, firms with good management practices attract and retain high-skilled employees and reward innovation by employees. Third, innovations in management practices and technological innovations usually complement one another (Hervas-Oliver et al, 2016; Giorcelli, 2019; Jordan et al, 2023; ONS, 2024).

Since the Covid-19 pandemic, managers have faced the challenge of the working from home (WFH) revolution (Bloom et al, 2023). Better-managed firms were better able to make the transition to WFH during the pandemic (ONS, 2021). There is also some evidence to suggest that better-managed firms have more post-pandemic home-working for managerial level staff than their peers.

What can policy-makers do to improve management practices?

Policy-makers should be interested in the management of individual firms because better-managed businesses are more productive. If every business in the UK were to improve its management, then the aggregate effect on the country’s productivity would be substantial.

To overcome its weak productivity, UK firms need to be much better-managed. So, what can policy-makers do?

One of the less-discussed aspects of Brexit in the public debate is that UK businesses now face reduced competition. This could result in complacency, the survival of poorly managed firms and declining productivity. As competition is a very important determinant of good management, the UK government should focus on competition policy to promote well-managed businesses.

Policy-makers should also offer tax breaks or subsidies to provide management training, which is a key driver of good management practices (Jordan et al, 2023). The Help to Grow scheme is one example of a government programme designed to improve the productivity of businesses.

Finally, because the skills of managers and workers are an important driver of management practices, governments should be working with businesses, and with institutions of further and higher education, to identify and then provide the skills needed to lead and manage in the 21^st century economy.

Where can I find out more?

Management, productivity and scientific progress: Nicholas Bloom on the Conversations with Tyler podcast.
Why management matters for productivity: John Dowdy and John Van Reenen in the McKinsey Quarterly.
Do managers matter? A report on management practices in Northern Ireland for the Productivity Institute.