Many theories around the productivity puzzle abound, but seemingly no silver bullets identified as to “why” and “what can be done about it”. It has been a feature of the UK economy since I have been tracking the data. That said, I read an interesting article this week commenting on the quality of UK business management and I wonder if that offers some kind of explanation. A recent ONS study has indicated a marked improvement in the average quality of UK management. Don’t ask me quite how this is measured. However, the study, published in May, found that the average quality of management improved from 0.49 to 0.55 between 2020 and 2023. This is on a scale of 0 - 1.0, with 1.0 representing the “full implementation” of structured management practices. It seems 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. My hunch is that as the post- pandemic jobs boom fizzled out, the balance of power in the jobs market shifted from workers to companies. With the labour market cooling, and the UK in recession in the second half of 2023, companies seem to have tightened up on performance management. Management quality has a huge effect on productivity, natch. (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. 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 appear to outperform
UK-owned businesses. Family-owned or managed businesses tend to underperform on management... So, the form of ownership apparently 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. Are you a UK owned UK business with a foreign owned UK business competitor? Does this ring true, anecdotally, to you? Furthermore, a working paper published by the UK’s The Productivity Institute earlier this year found that private equity ownership tends to raise productivity noting that, “active investors, such as Private Equity (PE) and venture capital, provide important boosts to managerial skill sets and effective governance”. This is interesting to me, as we see PE dipping its toe into the sector. 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 – seem to outperform in terms of management and productivity. Third, businesses can move quickly to sharpen management practices, as apparently happened in 2023. 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. Perhaps 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, and have hurt the sector in particular? 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. With a fairly anaemic macro-environment forecast for the coming years for the sector, sharpening management quality seems like a good place to start. We are working actively with clients on these sorts of projects, so let us know if you would like to discuss. Reach out to Luke or a member of the team by calling 0330 058 6559 or emailing hello@scruttonbland.co.uk
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