Basic question.. but how is productivity measured and how consistent is that across industry and region? I always feel like some significant nuance that is missed the measurement. I'm surprised about the founder run business conclusion.. it's a tempting conclusion that founders are less professional/ruthless.. but it doesn't fit with my experience.
Productivity can be measured in two ways. Labour productivity is defined as output per hour worked. In the case of a business that means profits per hours worked. In the case of a sector it is GDP contribution per hour worked.
Then there is total factor productivity which accounts for the use of labour and capital and is based on a regression analysis that looks at the GDP contribution of a company or sector, its capital use and its labour input and then compares different businesses in the same sector with each other.
“Germany has a rather rigid labour market and still boasts very high people management quality.”
The influence of Trade Unions: In the early 1970s I worked for a company where:
(1) the management never came near the workers - they even worked on a separated floor so they would not have to mingle with us.
(2) there was a TU recognized by the company but hated or feared by the workers. The 2 shop stewards literally never did any work - they sat reading or drinking tea looking at us with contempt.
Over the decades this has changed for better in both cases. recently the largest TU Unite appointed a new General Secretary (Sharon Graham) to replace Len McCluskey: chalk & cheese with SG working on agreement with companies rather than playing politics and investing in hotels.
Most employers play fair but TUs can still be needed to hold bad employers to account. It need not be an antagonistic relationship - together how can company & employees make it better for all of us?
I suspect Germany tends to this approach. Is that so?
Yes, Germany's unions have historically been much less antagonistic and more compromising than labour unions in the UK. In Switzerland it is even more extreme in that there are hardly ay strikes ever because unions and business leaders work so well together.
"Businesses that are controlled by the founder or the family of the founder tend to have lower management quality than businesses that are controlled by a diverse shareholder base or private equity."
Now that was surprising. I have this preconceived notion that one is always better off as a shareholder in founder-led companies, because skin in the game is a huge incentive to run the company efficiently for the long-term. I think I'm not alone with this preconceived notion, so maybe if you want to someday post on founder-led vs. non-founder-led companies, I would certainly find most interesting reading it.
I think this may be because "Businesses that are controlled by the founder or the family of the founder" believe that they are running the company efficiently, while they are not, because of the lack of competition when it comes to oversight.
Founding a business, which will usually be small, and nurturing it past the high-risk-of-failure initial period of growth needs a very differnt skill set to running a complex and mature company.
Founder-led businesses tend to do better than the average business as long as they are small and growth is their main key to success. As Pipsaid, once the company becomes large and complex, family-run and founder-run businesses tend to do no better than average. Just look at Tesla a decade ago vs. Tesla today.
Joachim, I understand the reasoning intuitively, but are there studies for that? Because the skin-in-the-game reasoning has also intuitive appeal to me. Actually, as you mention Tesla, I'm not sure if they would be in a better place now without Elon Musk. And when it comes to anecdotal evidence, we also have Microsoft, Amazon, Nvidia, Meta, Tencent, BlackRock, Airbnb, Berkshire Hathaway (just to mention the names that come instantly to my mind) that were wildly successful both in their start-up and global player phases.
It's hard to study this empirically, because there are other factors at play that are probably impossible to disentangle. For instance, founders tend to have a longer time horizon than your typical shareholder which we know is associated with outperformance in the stock market. So, two things are moving against each other and could swing the pendulum in either direction.
But for what it's worth, studies of fund managers clearly show that it is important to have skin in the game. Fund managers that have large shares of their own wealth in their funds tend to systematically do better than fund managers who don't. If that translates into the corporate world (which I find a reasonable assumption), then founders-led businesses should do better on average. But then again, I have not seen any studies that differentiate between small and large companies or between young and old companies, just like I know of no study that measures if fund managers with skin in the game lose their edge when the fund gets too large.
Basic question.. but how is productivity measured and how consistent is that across industry and region? I always feel like some significant nuance that is missed the measurement. I'm surprised about the founder run business conclusion.. it's a tempting conclusion that founders are less professional/ruthless.. but it doesn't fit with my experience.
Productivity can be measured in two ways. Labour productivity is defined as output per hour worked. In the case of a business that means profits per hours worked. In the case of a sector it is GDP contribution per hour worked.
Then there is total factor productivity which accounts for the use of labour and capital and is based on a regression analysis that looks at the GDP contribution of a company or sector, its capital use and its labour input and then compares different businesses in the same sector with each other.
“Germany has a rather rigid labour market and still boasts very high people management quality.”
The influence of Trade Unions: In the early 1970s I worked for a company where:
(1) the management never came near the workers - they even worked on a separated floor so they would not have to mingle with us.
(2) there was a TU recognized by the company but hated or feared by the workers. The 2 shop stewards literally never did any work - they sat reading or drinking tea looking at us with contempt.
Over the decades this has changed for better in both cases. recently the largest TU Unite appointed a new General Secretary (Sharon Graham) to replace Len McCluskey: chalk & cheese with SG working on agreement with companies rather than playing politics and investing in hotels.
Most employers play fair but TUs can still be needed to hold bad employers to account. It need not be an antagonistic relationship - together how can company & employees make it better for all of us?
I suspect Germany tends to this approach. Is that so?
Yes, Germany's unions have historically been much less antagonistic and more compromising than labour unions in the UK. In Switzerland it is even more extreme in that there are hardly ay strikes ever because unions and business leaders work so well together.
Thanks, Mr K. No wonder (normally) Germany does better.
"Businesses that are controlled by the founder or the family of the founder tend to have lower management quality than businesses that are controlled by a diverse shareholder base or private equity."
Now that was surprising. I have this preconceived notion that one is always better off as a shareholder in founder-led companies, because skin in the game is a huge incentive to run the company efficiently for the long-term. I think I'm not alone with this preconceived notion, so maybe if you want to someday post on founder-led vs. non-founder-led companies, I would certainly find most interesting reading it.
I think this may be because "Businesses that are controlled by the founder or the family of the founder" believe that they are running the company efficiently, while they are not, because of the lack of competition when it comes to oversight.
Founding a business, which will usually be small, and nurturing it past the high-risk-of-failure initial period of growth needs a very differnt skill set to running a complex and mature company.
Founder-led businesses tend to do better than the average business as long as they are small and growth is their main key to success. As Pipsaid, once the company becomes large and complex, family-run and founder-run businesses tend to do no better than average. Just look at Tesla a decade ago vs. Tesla today.
Joachim, I understand the reasoning intuitively, but are there studies for that? Because the skin-in-the-game reasoning has also intuitive appeal to me. Actually, as you mention Tesla, I'm not sure if they would be in a better place now without Elon Musk. And when it comes to anecdotal evidence, we also have Microsoft, Amazon, Nvidia, Meta, Tencent, BlackRock, Airbnb, Berkshire Hathaway (just to mention the names that come instantly to my mind) that were wildly successful both in their start-up and global player phases.
It's hard to study this empirically, because there are other factors at play that are probably impossible to disentangle. For instance, founders tend to have a longer time horizon than your typical shareholder which we know is associated with outperformance in the stock market. So, two things are moving against each other and could swing the pendulum in either direction.
But for what it's worth, studies of fund managers clearly show that it is important to have skin in the game. Fund managers that have large shares of their own wealth in their funds tend to systematically do better than fund managers who don't. If that translates into the corporate world (which I find a reasonable assumption), then founders-led businesses should do better on average. But then again, I have not seen any studies that differentiate between small and large companies or between young and old companies, just like I know of no study that measures if fund managers with skin in the game lose their edge when the fund gets too large.
Ok, thanks for sharing your thoughts!
Very good article. It confirms one of the most fundamental rules of our world: competition is key. Everywhere.