Carlos da Silva Costa: The quality of management
Address by Mr Carlos da Silva Costa, Governor of the Bank of Portugal, at the Conference
organised by the Economic and Social Council (CES) "The Quality of Management, Lisbon, 10
May 2019.
* * *
As prepared for delivery.
I would like to thank the President of the Economic and Social Council, António Correia de
Campos, for the kind invitation to join you today. I am delighted to be here.
The subject of management quality is of paramount importance for the sustained economic
development of our country and I believe it is very relevant that we also discuss it in the context of
social dialogue.
This is a subject that concerns not only investors but also workers, suppliers and creditors and
the customers of a firm, as well as the community the firm is a part of. All social partners depend
upon and determine the quality of the firm's management. They have a role to play in promoting
the quality of management. They are also creditors and beneficiaries of the gains resulting from
our firms' management quality.
The civic and institutional environment determines the principles and values that guide the
management of organisations, in as much as the legal framework determines such
management and, in particular, how sustainably it performs.
This reflection is all the more pressing given that any society is living in a constant state of
tension between the aspirations for consumption and well-being of the population and the ability
of its firms and organisations to generate income in order to meet such aspirations.
This is the case of Portuguese society. Today, we are living in a phase of economic growth that
is already distant from the emergency situation we experienced at the beginning of the decade.
However, Portuguese society's aspirations to individual well-being and social equity exceed the
production capacity of the economy. And this misalignment between aspirations and possibilities,
which is dynamic, can only be addressed with more and better economic growth.
Over the last two decades, Portuguese GDP per capita has remained 30-40% below the
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European Union average , a gap that was not overcome by the convergence observed in the
most recent past. This shows how much leeway there is for us to make up.
It is therefore important to identify and implement conditions that promote the sustainable growth
of the potential output - that is to make the Portuguese economy structurally able to grow at
higher rates in the medium and long term, regardless of cyclical oscillations.
We know that what separates the Portuguese economy from the best performing economies in
terms of per capita output are the productivity differences for every hour worked, rather
than the number of hours worked. The solution to achieving sustainable growth of our GDP
per capita should therefore focus on activating the 'levers' that determine the productivity of our
workers.
From among the main productivity 'levers', it is usual to highlight the following four:
1. Employee skills;
2. Capital levels per worker;
3. The innovation ecosystem; and
4. The attractiveness of the business environment.
Two 'levers' are often ignored, which are decisive if all others are to achieve their maximum
potential: these are, on the one hand, the entrepreneurial capacity (I would call it the
'entrepreneurial drive' of a given community) and, on the other hand, the
nature, robustness
and quality of the management models.
For the combination of capital and labour to result in the production that is desired by the market,
a firm needs an entrepreneur, an organisation and a management model.
I will focus today on the importance of the model and the quality of management for firms and
organisations' sustainable development and, consequently,
For potential output growth;
For the capacity of a given community to strike a balance between aspirations and
possibilities;
And, through redistribution, for safeguarding social cohesion, or containing causal factors of
conflict or social disharmony.
The management model reflects the way in which the manager coordinates environment,
organisation and strategy. That is, the management model defines an organisation, which
designs a strategy in such a way as to take the best advantage and even influence the
environment that surrounds it.
This coordination can lead to a differentiation of the firm's performance from that it would
naturally have had, if it had only passively adjusted to its environment.
One example of this differentiation can be seen in the comparison between the evolution of large
textile manufacturers in Vale do Ave and Galicia in the last few decades. The differences in
performance are not found in the sectoral category, which is identical, or in the workers, who
come from the same social stratum, or in their geographical location, as they are close to each
other. The differences arise precisely from the management models used.
Widely known academic studies, written namely by Professor John Van Reenen, estimate that
approximately 30% of the productivity differences between countries are explained by differences
in management quality. For the specific case of the Portuguese economy, this estimate is not
very different:
27 % of the productivity gap between Portugal and the most productive
economy under analysis - that of the US - is related to the difference in management
quality.
As evidenced in the latest edition of the Global Competitiveness Index published by the World
Economic Forum, there are 15 European Union economies ahead of Portugal. In the list of
indicators where our country is worst classified, some are intimately connected to
entrepreneurship and management models, namely:
Attitude towards risk, in which we are 80th in 140 economies;
Willingness to delegate authority - position 70 out of 140;
And integration of disruptive ideas - position 46 out of 140.
While these international comparisons point to an important margin for progress in our country,
national data also show a significant potential to promote productivity through improved
management.
Statistics Portugal launched the first edition of the Management Practice Survey in 2017. This
survey was targeted at senior managers of firms based in Portugal and aimed to gather
qualitative information on their management practices, in a variety of areas, from strategy to
organisation, monitoring of objectives and decision making.
This is a means for assessing the impact of management practices on productivity and on other
performance indicators of Portuguese firms.
Based on the results of this survey, Statistics Portugal has constructed a composite indicator
allowing the sample of firms to be divided into two groups, depending on the quality of their
management practices. Compared to others, the firms with the best practices have,
Higher returns,
Higher turnover and gross value added growth rates;
Higher investment rates;
A greater increase in the number of employees with higher education levels;
And a greater use of information and communication technologies.
In addition, firms with better management practices also have higher gross value added per
worker, i.e.
they have higher levels of productivity per worker.
The promising nature of these first results certainly merits further development and
consolidation. That said, they suggest that improving our management models could make our
economy more productive.
I would like to draw attention to three ways in which the management models of the Portuguese
business fabric can progress.
The first of these is the quality of the organisation. A well-conceived organisation adapted to
the challenges faced by the firm can trigger the functions and competences most relevant to its
success. Empirical research shows that in
when Portuguese firms are reorganised
response to an external shock, adding a new hierarchical level of managers, their
productivity accelerates.
A second vector that promotes management quality is the Today,
size of the organisation. any
firm with ambition is facing global, complex, extensive and constantly changing markets.
Responding to such challenges requires large organisations, able to capitalise on and mobilise
quality resources. There are already empirical studies that confirm this positive link between
company size and management quality.
With a productive fabric like ours, largely made up of family-run businesses transitioning to the
3rd generation, the increase in the size of the organisations is closely linked to the business view
of the families holding the equity.
This leads the way to the third vector which I would like to draw your attention to: the
relationship between ownership and management.
Empirical research has also found evidence that firms where there is share capital from outside
the founding family are associated with best management practices.
Data also suggest that the mere separation of ownership and management is beneficial:
as a
general rule, the quality of the management is higher when it is entrusted to people
outside the family that owns the firm.
Professionalisation of management is therefore a necessary condition to ensure the survival and
long-term sustainability of family businesses and thus preserve their share capital.
In addition, the separation of ownership and management makes it possible to strike the right
balance between the legitimate interests of the different stakeholders in the firm, thereby also
contributing to its sustainability.
Meaning that, in a context where family businesses are predominant and where a large number
is transitioning to the 3rd generation, or is already controlled by the 3rd generation, serious
consideration needs to be given to the separation of entrepreneurial, ownership and managerial
functions. Specifically with regard to firms in the stage of generational transition, it is important to
ensure that the ownership function is not only distinct from the management function but also
exercised through decision-making mechanisms established in the firm's articles, with a view to
the sustainability of the organisation and the empowerment of the management. Firms should
prevent the decision-making mechanisms coming to a standstill owing to lack of interest or
differences between heirs, rendering management powerless and calling into question the
continuity of viable firms.
In addition, public policy should favour the segregation of these functions so as to ensure that
there is room for management professionalisation and thus improve the quality of management.
In fact, public policy can encourage management professionalisation in family-run firms in
different ways:
First, by re-analysing the tax treatment of profit distribution to encourage differentiation
between ownership and management, and to foster a suitable balance between profit
distribution and reinvestment;
Second, making the requirement for firms to present audited accounts widespread in order
to give the manager the necessary leeway to balance the various legitimate interests -
stakeholders - in the most beneficial way for the firm;
And third, by developing and providing a new figure or "legal entity" that congregates the
shareholdings of a given family and awards the function of ownership of a given firm to an
institution, i.e. creating the "family holding" figure, through the legal classification of a
centralised management model of the holdings of the members of one family; this model
should be optional, supplemental and adjusted to the specific features of family businesses,
with a statutory and tax treatment that:
- promotes the holding company's commitment towards its holdings and their locations;
- guarantees the necessary legal certainty;
- is simple and easy to access by smaller firms.
Finally, economic policy actors can make an important contribution by fostering widespread
knowledge and open discussion on the impact of the quality of management on business
productivity and the well-being of society. This contribution is being made today by the
Economic and Social Council. The same contribution is also made by Banco de Portugal,
- through the inclusion of the topic of management quality in its research agenda;
- through the production, publishing and analysis of quality statistical information that can
support the study of the topic; and
- by raising the banking system's awareness of the strategic importance of considering
management models, in addition to the actual collateral, in the risk assessment of firms and
their projects.
In short, there is no doubt that the quality of management is central to the challenge of promoting
productivity. The good news is that Portugal still has much to gain from activating this 'lever'. In
our day and age, marked by such a strong heterogeneity and weak overall productivity, it is
imperative that we do not miss this strategic opportunity.
Finally, let me thank you again for the invitation to be with you at this conference. I will be
available should you wish to comment or ask any questions.
References
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Incentives, Journal of Labor Economics 33, no. 3 (Part 1): 623-681
Bloom, N., Eifert, B., Mahajan, A., McKenzie, D. and Roberts, J. (2013), Does Management
Matter? Evidence from India, The Quarterly Journal of Economics, Oxford University Press, vol.
128(1), pages 1-51
Bloom, N., R. Sadun and J. Van Reenen (2016), Management as a Technology?, NBER
Working Paper No. 22327, Revised in October 2017
Bloom, N., R. Sadun, and J. Van Reenen (2015), Do Private Equity Owned Firms Have Better
Management Practices?, American Economic Review, 105 (5): 442-46
Caliendo, Mion, Opromolla and Rossi-Hansberg (2015), Productivity and organization in
Portuguese firms, NBER Working Paper 21811
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better economic performance, more qualified employees and higher ICT usage - 2016, Press
Release
Lemos, R. and Scur, D. (2018), All in the family? CEO choice and firm organization. CEP
Discussion Papers (CEPDP1528). Centre for Economic Performance, London School of
Economics and Political Science, London, UK.
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British production and services industries - initial results from the Management and Expectations
Survey: 2016
1Nominal data (Source: Eurostat).