Britain’s management problem

UK Commission for Education and Skills (UKCES) recently published a wide-ranging report on the state of the UK labour market. It noted that, while the UK has been good at keeping people in work, it has not grown as fast as other countries and its productivity has fallen. Some other countries, though, seem to have managed to grow, keep people employed and maintain productivity

While acknowledging that there are a number of reasons for this, UKCES has some sharp words for Britain’s managers.

International comparisons of UK management capability are typically unfavourable, and suggest that poor management hinders UK competitiveness. Recent evidence shows that while we have many good managers, UK management capability is on average weaker than in countries such as the US, Germany, Japan and Sweden, and is likely to be a substantial factor in the productivity gap with these countries.

This is based on the findings of the World Management Survey (see previous post) which placed Britain at the top of the middling group but falling short of those countries with top quality management.

Average score across 18 management practices by country

 A quick glance at this reveals a few anomalies. Japan has the second highest management score but its productivity is worse than ours. That said, its economy has bounced back more quickly than ours. France’s productivity is better than ours but its management is, apparently, worse. Clearly there are other factors at work here. Good management is not the only thing that differentiates economies. That said, though, the more prosperous and better performing countries tend to be higher up the list.

Measuring management and its effectiveness is fiendishly difficult but the World Management Survey (WMS) is probably the most comprehensive attempt so far. It has tracked thousands of companies across the world over the last decade and found strong correlations between good company performance and 18 management practices. Its methodology is explained in this recent paper.

The UK’s position in the league table does not mean that all UK organisations are badly managed. In fact, the WMS studies found little difference between the top performing companies in most countries. What dragged a country’s score down was the long tail of poorly performing companies. As Rebecca Homkes explains in this LSE article::

Cross-country differences account for less than 10% of the diverging management scores: the biggest management differences occur across firms within the same country. The distribution of scores highlights the fact that much of what drags certain countries down is a persistent ‘tail’ of underperforming firms, those that score less than a two on our five point scale. While this tail is largely absent in the United States, it is evident in the UK and especially pronounced in developing countries such as Brazil and India.

Our research shows that large and persistent gaps in management quality remain across countries, mainly driven by the tail of underperforming firms. The UK clearly has a deficit in management quality, and this deficit is likely to be a key factor explaining the persistent productivity gap with other countries such as the United States and Germany.

So the poorly managed firms drag a country’s score down and Britain has more than its fair share of them.

Given the spectacular rise in senior executive pay in the UK, and the fact that our managers are among some of the most highly paid in the world, you might wonder why our economy is a laggard when it comes to growth and productivity.

We already know that there is little relationship between management pay and firm performance. The UKCES and WMS evidence suggests that, in terms of value for salary, our managers don’t compare very well internationally either.

UKCES cites skills shortages and lack of management training as two factors accounting for the UK’s relative lack of management capability. This set me thinking. From what I have seen over the years, when a company is trying to beef up its management, it usually tries to recruit externally. Buy not build is the default response to skill shortages. I couldn’t  find any data on this but I’d be interested to see a country comparison on the amount typically spent on management development. Is the preference for recruitment over development worse in Britain, or is it simply the choice of harassed managers everywhere?

If most companies choose to recruit skilled managers from outside, though, rather than develop their own staff, they will end up chasing a limited pool of people and bid up the price. Having poor quality management on a national basis could therefore be consistent with a lot of executives being highly paid.

Duncan Weldon suggested last year that high pay could be a result of the focus on shareholder value, which has been stronger in the US and Uk than elsewhere. I discussed this in a previous post. Could it be, as Andrew Smithers says, that managers’ short-term focus has led to them taking more cash out of their companies, thereby starving them of investment? If so, American management seems not to have suffered as much as its British counterpart. US managers may be the most highly paid in the world but, going by the WMS and the country’s productivity figures, it is the most effective too. Britain, on the other hand, has relatively well-paid managers who seem to achieve relatively poor results.

Earlier this year, CIPD Chief Executive Peter Cheese warned that the UK is becoming a low skill economy, taking the low road of reduced cost rather than the high road of better skills and high value work. Our expensive managers, it seems, are happy to lead us down this road.

Much of the government’s response to low growth and productivity has been to make life more comfortable for less competent managers. By making it easier to sack people and get away with it, the government has made it less likely that managers will tackle the root causes of underperformance. If managers can simply blame an employee and recruit someone else, they have less incentive to find out what’s really going on. Having a pool of casual workers and cheap freelancers to throw at the problem makes the messy business of performance management even easier to avoid.

British managers need to be more ambitious, says UKCES:

Well-managed firms tend to have better performance on a wide range of measures: they are larger, more productive, grow faster, and have a higher survival rate. Skilled managers are more likely to innovate and launch new products and services and adopt higher, quality-based product market strategies. Raising management ambition is fundamental to helping the UK develop high value added innovative products and services, and achieve its global economic potential.

That means not relying on cheap casual labour, not banking on just being able to boot people out when they annoy you and taking on the long hard slog of raising performance and building skills for the future. Or, as Peter Cheese might say, taking the high road, not the low road.

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