How widespread is bad management? The Dyson report on Martin Bashir’s interview with the Princess of Wales and Dominic Cummings' claim that the government’s handling of the pandemic “fell disastrously short” have pointed to big failures in the country’s two most prominent organisations. Which prompts the question: if they are mismanaged, how many companies are as well?
Maybe plenty. Nick Bloom and John Van Reenen have found a “long tail of extremely badly managed firms” not just in the UK but in many countries. OECD economists estimate that labour productivity in the UK is 15 per cent lower than in the US and significantly lower than in France, Germany or the Netherlands, suggesting that inefficiency is widespread. And Paul Ormerod and Bridget Rosewell at Volterra Consulting have found that the pattern of corporate failures is very similar to that of the extinction of species. This, they say, suggests that “firms have very limited capacities to acquire knowledge about the true impact of their strategies.” As the screenwriter William Goldman said, nobody knows anything.
Perhaps, then, companies succeed for the same reason that some species do – not because they have a great strategy but simply because they are lucky that the environment has selected for them.
Not that it selects very vigorously. In the short term – by which I mean a few years – the wheels of competition and creative destruction do not grind so finely as to eliminate badly managed firms – hence Bloom and Van Reenen’s long tail. As Adam Smith said, “there is a great deal of ruin in a nation”. A degree of mismanagement is not fatal for a company. Which is just as well.
This is not to say that management doesn’t matter. Other work by Bloom and Van Reenen shows that it does. But investors should not rely upon good management, not least because we cannot reliably identify it. Fred Goodwin, author of the most catastrophic of corporate failures, was, remember, knighted for services to business. Which vindicates Elber Hubbard’s point: “There is something that is much more scarce, something finer far, something rarer than ability. It is the ability to recognize ability.”
Instead, investors should do two things.
First, they should think less about management quality and more about matches. Harvard Business School’s Boris Groysberg studied the careers of former General Electric managers who left to run other companies. He found that despite having similarly impressive CVs their performance as CEOs varied wildly. This, he showed, was because it was the match of specific abilities to the needs of the job that matter. If you have a good firm that needs growing, hiring a cost-cutter doesn’t work but if you need to cut costs hiring a growth manager doesn’t.
More importantly, what matters is the business itself. If it has a reliable source of monopoly power then it is resilient to all but the most egregiously incompetent management. As Peter Lynch said: "invest in businesses any idiot could run because someday one will.” We should pay less attention to people and more to environments, structures and selection mechanisms, because it is these that determine success and failure not just in business but in politics too.
