Tag Archives: management

China’s Firms Among Worst Managed

Chinese firms are among the world’s worst managed, according to a new working paper* published by the Harvard Business School. In that they are in the managerial company of those from fellow Brics, Brazil and India. Ownership, the study’s authors find, is a key determinant:

Government, family, and founder owned firms are usually poorly managed, while multinational, dispersed shareholder and private-equity owned firms are typically well managed.

Competition in product markets and higher worker skills also tend to be associated with better management.

What it means to be best managed is an open question. The authors, all Europeans, define best  management practices as “those that continuously collect and analyze performance information, that set challenging and interlinked short and long run targets, and that reward high performers and retrain or fire low performers”. That is a process-based view of management. As anyone who has run a company knows, there is more to it than that, though operational practices provide a solid core for good management.

The authors have been tracking measures of their definition across multiple countries for a decade. U.S. firms generally come out top. In manufacturing, those from Canada, Germany, Japan and Sweden also score well.

The authors find that there is a wide spread of manufacturing management quality in every country. Among developing countries, Brazil and India have a fat tail of very badly managed firms, but China does not. Instead, it has a fat cluster of just below averagely managed firms, as the chart below from the study shows.

Source: HBS Working Paper 12-052

The authors say that could be due to the fact that “Chinese firms are relatively young, so there is less variation in managerial ‘vintages’”. We would hazard that, given the dominance of state-owned enterprises in the economy, the explanation may lie in another of the authors’ findings about the sub-par performance of government-owned firms everywhere: “They are particularly weak at incentives: promotion is more likely to be based on tenure (rather than performance), and persistent low-performers are much less likely to be retrained or moved.”

The study finds that one area where U.S. management is below international averages is in the management of secondary schools. These, in the U.S., are overwhelmingly state-run. By comparison, American hospitals, mostly privately owned, score well above average.

The study raises the questions of whether management styles are culturally based and whether there are distinct local styles? Yet the authors find that there is universal applicability to their best practices. “Firms adopting these practices,” they say, “are more profitable, more productive, grow faster and survive longer” regardless of where in the world they are based. They also tend to be more energy-efficient and to provide better working conditions for employees. It is short step from there to suggesting that management practices should be viewed as part of the determinants of national productivity.

The study also holds warnings for China’s new generation of successful company founders. What makes for a good start-up entrepreneur doesn’t necessarily make for a good chief executive once the company has grown large; while first-born sons who inherit the chief executive’s job make for some of the worst managers on average.

All of which suggests there is substantial national and enterprise benefit to be gained from Chinese firms, state-owned and private, improving their management practices and engaging in some non-hereditary succession planning. Now is an opportune time. As the authors also found that firms were more likely to try to upgrade their management practices “when facing tough times”.

*Management Practices Across Firms and Countries by Nicholas Bloom, Christos Genakos, Raffaella Sadun and John Van Reenen, HBS Working Paper 12-052, Dec. 19. 2011.

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Improving China’s Accounting Standards: Progress Report

Financial and accounting standards in China need to converge with global practices as the country becomes increasingly integrated with the world economy. Regulatory agencies are working on just that but there is mighty long way to go, both in bringing China’s accounting standards more in line with international financial reporting standards and with management practices for internal company controls and financial reporting. China’s version of generally accepted accounting principles (GAAP, but not the same as U.S. GAAP) is being replaced by a new code, known as CAS, based on international principle-based standards, and a version of America’s Sarbanes-Oxley internal financial controls for companies, known as C-Sox, being introduced.

The work, a massive undertaking, was started formally with new accounting standards legislation in 2007, although that, in the nature of Chinese legislation, was mostly an outline of the new system. A new report, Opportunities to improve financial reporting and internal controls in China CAS and C-SOX, by the management consultancy PricewaterhouseCoopers reviews progress so far on both fronts, with a look at the impact on the car industry in particular.

China’s old accounting rules and practices were a hangover from the days of a centrally planned economy, not fit for the country’s more mixed market economy and certainly not useful as a management tool for corporations involved in world trade and international capital markets. And, as we have seen with a succession of U.S. listed Chinese companies, they have embedded bad habits, such as not having to account for debt, that makes accounting fraud too easily become second nature.

One important caveat from the PwC report:

It is…important to recognize that these actions taken by the Chinese government are not intended to provide immediate and complete alignment with their equivalent global standards. Rather, they should be viewed as steps by the Chinese government to gradually establish a high quality financial management infrastructure that can support its rapidly growing economy—with consideration of its own unique set of circumstances.

Footnote: The U.S. Securities and Exchange Commission is investigating some accounting firms over their audits of Chinese companies whose shares trade in the U.S., and the inquiry is expected to lead to enforcement cases, the Wall Street Journal reports. Since February, about 40 Chinese companies have either acknowledged accounting problems or seen the SEC or U.S. exchanges halt trading in their stocks because of accounting questions.

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