ARE PRIVATE EQUITY OWNED
FIRMS BETTER MANAGED?
June 2008
PRELIMINARY
DO NOT QUOTE WITHOUT AUTHORS’ PERMISSION
Nick Bloom (Stanford)
Raffaella Sadun (LSE)
John Van Reenen (LSE)
MOTIVATION
Private equity (PE) ownership is common in the UK and US, and
increasingly so in Europe and Asia.
One view of this is that PE firms undertake financial engineering to
increase profits with no ‘real’ improvement - zero-sum gain
A second view is they do improve firm productivity, but only by
reducing employee numbers
A third view is they improve productivity also through better
management practices – ‘shared’ gains, with possible spillovers
We investigate the third claim using new survey evidence on 4000
manufacturing firms across Asia, Europe and the US
SUMMARY OF RESULTS
We find three main results:
1) PE owned firms are:
• better managed then those owned by government, families,
founders and private individuals
• as well managed as those owned by dispersed shareholders
2) PE owned firms have almost no tail of badly managed firms
3) PE owned firms are:
• good at people management (hiring, firing, pay and
promotions)
• even better at operations management (Lean, continuous
improvement, processes etc)
These results suggest PE ownership is associated with broad
based improvements in management practices
•
“Measuring” management practices
•
Evaluating the reliability of this measure
•
Describing management across ownership types
THE SURVEY METHODOLOGY
1) Developing management questions
• Scorecard for 18 monitoring, targets and incentives practices
• ≈45 minute phone interview of manufacturing plant managers
2) Obtaining unbiased comparable responses (“Double-blind”)
• Interviewers do not know the company’s performance
• Managers are not informed (in advance) they are scored
• Run from LSE, with same training and country rotation
3) Getting firms to participate in the interview
• Introduced as “Lean-manufacturing” interview, no financials
• Official Endorsement: Bundesbank, Treasury, CII & RBI, etc.
• Run by 51 MBAs types (loud, assertive & business experience)
MONITORING - i.e. “HOW IS PERFORMANCE TRACKED?”
Score (1): Measures
tracked do not
indicate directly
if overall
business
objectives are
being met.
Certain
processes aren’t
tracked at all
(3): Most key
performance
indicators
are tracked
formally.
Tracking is
overseen by
senior
management
(5): Performance is
continuously
tracked and
communicated,
both formally and
informally, to all
staff using a range
of visual
management tools
Note: All 18 dimensions and over 50 examples in Bloom & VanReenen (2006).
TARGETS - i.e. “HOW TOUGH ARE TARGETS?”
Score (1) Goals are
either too
easy or
impossible to
achieve;
managers
low-ball
estimates to
ensure easy
goals
(3) In most areas,
top management
pushes for
aggressive goals
based on solid
economic
rationale. There
are a few "sacred
cows" not held to
the same rigorous
standard
(5) Goals are
genuinely
demanding for all
divisions. They
are grounded in
solid, solid
economic
rational
Note: All 18 dimensions and over 50 examples in Bloom & VanReenen (2006).
INCENTIVES - i.e. “HOW DOES THE PROMOTION
SYSTEM WORK?”
Score (1) People are
promoted
primarily upon
the basis of
tenure
(3) People
are promoted
upon the
basis of
performance
(5) We actively
identify, develop
and promote our
top performers
Note: All 18 dimensions and over 50 examples in Bloom & VanReenen (2006).
SHOW DATA COLLECTION VIDEO
ADDITIONAL CONTROLS FOR BIAS & NOISE
8 INTERVIEWEE CONTROLS
• Gender, seniority, tenure in post, tenure in firm, countries
worked in, foreign, worked in US, plant location, reliability
score
3 INTERVIEWER CONTROLS
• Set of analyst dummies, cumulative interviews run, prior firm
contacts
5 TIME CONTROLS
• Day of the week, time of day (interviewer), time of the day
(interviewee), duration of interview, days from project start
MANAGEMENT SURVEY SAMPLE
•
•
Interviewed over 4,000 firms across US, Asia & Europe
Obtained 63% coverage rate from sampling frame (with
response rates uncorrelated with performance measures)
Medium sized manufacturing firms:
• Medium sized (100 - 5,000 employees, median ≈ 275)
because firm practices more homogeneous
• Manufacturing as easier to measure productivity (currently
piloting in Healthcare and retail)
COUNTRY LEVEL MANAGEMENT SCORES
US
Germany
Sweden
We also find US
owned firms located
abroad are also well
managed – implies
foreign PE may be a
way to transfer US
management
expertise abroad
Japan
Italy
UK
France
Poland
Portugal
Greece
China
India
2.4
2.6
2.8
3
mean of management
3.2
3.4
FIRM LEVEL MANAGEMENT SCORES BY COUNTRY
1. “Measuring” management practices
2. Evaluating the reliability of this measure
a) Internal/External validation
b) Measurement error/bias
3. Describing management across ownership types
INTERVAL VALIDATION OF THE SCORING
Re-interviewed 222 firms with different interviewers & managers
4
2
3
Firm-level
correlation
of 0.627
1
2nd interview
management_1
5
Firm average scores (over 18 question)
1
2
3
management_2
1st interview
4
5
EXTERNAL VALIDATION OF THE SCORING
Performance
measure
c
yi
=
country c
c
#MNGi
c c
+ " l li
management
(average z-scores)
+"
c
c
k ki
+"
c
c
m hi
+!
c
c
' xi
c
+ ui
ln(capital)
other controls
ln(labor)
ln(materials)
•
Use most recent cross-section of data (typically 2006)
•
Note – not a causal estimation, only an association
EXTERNAL VALIDATION: PRODUCTIVITY & PROFIT
Dependent
variable
Estimation1
Firms
ROCE
Sales Tobin Q
(in Ln)
growth
Sales
Sales
Sales
(in Ln)
(in Ln)
(in Ln)
OLS
OLS
OLS
OLS
OLS
All
All
All
All
All
0.300
0.213
0.198
1.880 0.032
Management (0.026) (0.025)
(0.028) (0.923) (0.013)
OLS
Quoted
Exit
Probit
All
0.250 -0.200
(0.075)- [0.026]
0.209
(0.109)
0.233
[0.045]
Ln(Capital)
0.438
0.415
(0.021) (0.013)
0.347 0.018
(0.505 (0.010)
-0.029
(0.086)
-0.158
[0.045]
Ln(Skills)
0.059
0.036
0.347 0.004
(0.013) (0.014) (0.505) (0.073)
0.130
(0.050)
-0.084
[0.231]
Ln(Labor)
0.956
0.471
0.485
-0.494 0.001
(0.024) (0.033) (0.021) (1.069) (0.015)
(% with degree)
Ind. dummies
No
No
Yes
Yes
Yes
Yes
Yes
Noise control
No
No
Yes
Yes
Yes
Yes
Yes
3529
2706
2706
1752
2145
374
709
Firms
Cross sectional regressions. All columns include country controls. Robust S.E.s
in ( ) below. For probit p-values in [ ] below
EXTERNAL VALIDATION – ROBUSTNESS
Productivity results significant in all main regions:
•
Anglo-Saxon (US and UK)
•
Northern Europe (France, Germany, Sweden & Poland)
•
Southern Europe (Portugal, Greece and Italy)
•
East Asia (China and Japan)
Suggests not just an “Anglo-Saxon” measure
OUTLINE
1. “Measuring” management practices
2. Evaluating the reliability of this measure
3. Describing management across ownership types
Figure 1: Private equity owned firms have the best
raw management practice scores on average
Management
Number
of firms
134
Management (same
ownership 3+ years)
635
Average score on 18 management practice questions
722
625
290
138
174
1357
137
20
Note: Sample of 4,221 medium-sized manufacturing firms. The bottom bar-chart only covers the 3696 firms which have been in the same ownership for the
last 3 years. The “Other” category includes venture capital, joint-ventures, charitable foundations and unknown ownership.
Private equity firms are well managed on average
Dependent Variable: Management
Private Equity Owned
Baseline
Baseline
Baseline
Baseline
Dispersed shareholders
-0.050
-0.004
-0.018
-0.046
Family owned, external CEO
-0.104
-0.079
-0.068
-0.149**
Managers
-0.197***
-0.158**
-0.145**
-0.110*
Private individuals
-0.377***
-0.269***
-0.263***
-0.202***
Family owned, family CEO
-0.521***
-0.449***
-0.420***
-0.336***
Founder ownership
-0.625***
-0.439***
-0.411***
-0.316***
Government ownership
-0.684***
-0.430***
-0.427***
-0.409***
Other
-0.221***
-0.140**
-0.143***
-0.158***
Country dummies
NO
YES
YES
YES
Industry dummies
NO
NO
YES
YES
Firm & plant size
NO
NO
NO
YES
Noise Controls
NO
NO
NO
YES
Observations
4211
4211
4211
4211
Note: Standard errors are robust
21
Figure 2: Private equity owned firms are still better
managed after controlling for country & industry
Average score on 18 management practice questions
Management
Management after
controlling for country
and industry
Number
of firms
134
635
722
625
290
138
174
1357
137
Note: Sample of 4,221 medium-sized manufacturing firms. Industry controls span 152 3-digit SIC manufacturing industry codes. Country controls22
span the
12 countries in the study (China, France, Germany, Greece, India, Italy, Japan, Poland, Portugal, Sweden, the UK and the US)
Figure 3: Private equity owned firms high average
scores reflect their small tail of badly managed firms
Distribution of firm management scores by ownership. Overlaid dashed line is the PE kernel density
23
Note: Sample of 4,221 medium-sized manufacturing firms.
Private Equity Ownership is Associated with
Particularly Strong Operations Management
Dependent var is:
(normalized to SD=1)
PE Ownership
Operations
Management
Targets
Management
People
Management
0.473***
0.203***
0.312***
0.128**
Country dummies
NO
YES
NO
YES
NO
YES
Industry dummies
NO
YES
NO
YES
NO
YES
Firm & plant size
NO
YES
NO
YES
NO
YES
Noise Controls
NO
YES
NO
YES
NO
YES
4211
4211
4211
4211
4211
4211
Observations
0.172*** 0.088*
Note: Baseline is non-PE ownership. Standard errors are robust. All dependent
variable management practice scores are normalized to have a standard error of 1
24
Practice level average scores for PE ownership
Practice Name
Type
PE ownership
Modern manufacturing, introduction
Operations
0.141*
Modern manufacturing, rationale
Operations
0.086
Process documentation
Operations
0.229***
Performance tracking
Operations
0.240***
Performance review
Operations
0.207***
Performance dialogue
Operations
0.274***
Target breadth
Targets
0.139*
Target interconnection
Targets
0.114
Target time horizon
Targets
0.152*
Targets are stretching
Targets
0.115
Performance clarity & comparability
Targets
0.057
Consequence management
People
0.151*
Managing human capital
People
0.035
Rewarding high performance
People
0.042
Removing poor performers
People
0.139**
Promoting high performers
People
0.069
Attracting human capital
People
0.032
Retaining human capital
People
0.090
25
TO SUMMARIZE
•
Robust methodology for measuring management practices
across firms and countries
•
Find three interesting results
•
PE firms are better managed than firms owned by
Government, family, founder and other private individuals
•
PE firms have almost no tail of badly managed firms
•
PE firms are particularly strong on operations
management
Quotes:
MY FAVOURITE QUOTES:
The traditional British Chat-Up
[Male manager speaking to an Australian female interviewer]
Production Manager: “Your accent is really cute and I love the
way you talk. Do you fancy meeting up near the factory?”
Interviewer “Sorry, but I’m washing my hair every night for the
next month….”
MY FAVOURITE QUOTES:
The traditional Indian Chat-Up
Production Manager: “Are you a Brahmin?’
Interviewer “Yes, why do you ask?”
Production manager “And are you married?”
Interviewer “No?”
Production manager “Excellent, excellent, my son is looking
for a bride and I think you could be perfect. I must contact
your parents to discuss this”
MY FAVOURITE QUOTES:
The difficulties of defining ownership in Europe
Production Manager: “We’re owned by the Mafia”
Interviewer: “I think that’s the “Other” category……..although I
guess I could put you down as an “Italian multinational” ?”
Americans on geography
Interviewer: “How many production sites do you have abroad?
Manager in Indiana, US: “Well…we have one in Texas…”
MY FAVOURITE QUOTES:
The bizarre
Interviewer: “[long silence]……hello, hello….are you still
there….hello”
Production Manager: “…….I’m sorry, I just got distracted by
a submarine surfacing in front of my window”
The unbelievable
[Male manager speaking to a female interviewer]
Production Manager: “I would like you to call me “Daddy” when
we talk”
[End of interview…]
BACKUP SLIDES
Figure 1b: PE owned firms better management also
appears linked with better performance (in our data)
Average score on 18 management practice questions. Sales per employee in logs, with country and
industry means removed
Number
of firms
Management
134
Sales per employee*
635
722
625
290
138
174
1357
137
Note: Sample of 4,221 medium-sized manufacturing firms. The bottom bar-chart only covers the 3505 firms for which we have sales and employment data.
The “Other” category includes venture capital, joint-ventures, charitable foundations and unknown ownership.
Figure 4: Private equity owned firms show the
least variation in management practices by group
Standard-deviation of average management scores across firms with ownership type
Note: Sample of 4,221 medium-sized manufacturing firms.
FIG 3. COUNTRY LEVEL RELATIVE SCORES
Sweden
France
Relatively better
at ‘operations’
management
Italy
Germany
Japan
Portugal
Greece
UK
Relatively better
at ‘people’
management
China
US
Poland
India
-.4
-.2
0
.2
.4
mean of people (human capital) – operations (physical capital) management
FIG 4. MULTINATIONALS TAKE THESE HOME
COUNTRY PRACTICES ABROAD
Sweden
Belgium
Japan
Switzerland
Denmark
Finland
France
Italy
Germany
Holland
Canada
UK
US
-.4
-.3
-.2
-.1
0
.1
mean of people (human capital) – operations (physical capital) management
Only source countries with 25+ subsidiaries in our data
FAMILY OWNERSHIP VARIES ACROSS COUNTRIES
• About 1/4 of Japanese, US and Northern
European firms family owned
• About 3/4 of Indian firms family owned
Poland
Sweden
China
Japan
France
US
UK
Germany
Italy
Portugal
Greece
India
0
.2
.4
.6
share family owned (2nd+ generation)
share founder owned (1st generation)
.8
MULTINATIONALS APPEAR ABLE TO TRANSPORT
GOOD MANAGEMENT AROUND THE WORLD
US
Japan
Germany
Sweden
UK
Italy
France
Poland
Portugal
China
India
Greece
2.4
2.6
2.8
mean of domestic firms
3
3.2
3.4
mean of multinationals
4
2
0
labp
6
8
Lowess smoother
1
2
3
4
Our management score - average across 18 questions
bandwidth = .8
5