Is managerial talent or the adoption of good practices the key factor driving corporate success? (Kenta Kimura, Tokyo, Japan)

We find that management practices are certainly one of the key factors accounting for variations in firm performance, probably as important as other key factors like employee ability and technology. To quantify this, consider that when we rank firms according to management practices, moving from a firm in the bottom quarter to a firm in the top quarter of our sample is associated with increasing a firm’s share price by over 30%.

Managers of public companies are spurred by the carrot of stock options and the stick of market competition. In your opinion, is the US government doing a good job in regulating each of them?

Managers are kept in check by tough product market competition - if they fail to perform the market disciplines them with poor profits and eventually bankruptcy. So market forces provide an evolutionary force making sure only the best managed firms survive. The US has more competitive markets than Europe due to its large size and low levels of regulations. So successive US Governments have done a good job in spurring competition and free trade, although of course this can always be reversed so the gains need protecting!

Interestingly, in terms of stock-options we actually find no link between CEO pay and management practices - it could be CEO pay doesn’t matter, or that good CEOs are parachuted in to fix bad firms disguising any underlying positive relationship. Either way we certainly could not advocate more generous stock-options based on our results.

I read somewhere that there are fewer family-controlled listed firms in the United States than in the rest of the world. If true, why? (Ann Campbell, Oklahoma City, OK, USA)

We do find generation family ownership (defined as 2nd generation onwards) is less common in the US than in Europe. One reason is US firms are typically younger so there has been less time for these to be passed through families. Another is the US tax system does not provide as strong tax incentives for family ownership as the European tax systems does, meaning US family firms are more likely to be sold if family management no longer appears best.

And even history plays a role - the Founding Fathers of the US were almost all younger sons of English gentry who lost their inheritance to their elder brothers, so not surprisingly spurned the historical practices of passing ownership down to the first born son (primo geniture). This tends to mean family firms get broken up more quickly in the US as they are divided more equally.

I am a non-executive director of a fast-growing entrepreneurial company. What is the easiest way for me to realize whether the firm is following best management practices? (Jeff Del Vecchio, Geneva, Switzerland).

One very simple thing to do is look at the eighteen practices we list in the appendix of the paper (available as a PDF document) “Measuring and Explaining Management Practices Across Firms and Countries” and self-score your firm against these. In experiments we have done this summer it appears that managers who diligently self-score themselves against this grid can get a reasonable evaluation of their firm’s management practices. This grid was originally developed by McKinsey & Co based on their consulting experience of management practices in low and high performing firms, and in our empirical results does appear strongly linked to firm performance.

Nepotism and favoritism are major drawbacks to company’s success: who do you think is in the best position to fight them?

Historically free markets have been an important factor in fighting nepotism and favouritism. Competition makes it clear which firms are well managed and which firms are not - put simply there is nowhere to hide if your profits are heavily negative because of bad management. Other mechanisms are the public release of firm-performance data and the involvement of external shareholders, both of which are disciplines against the excesses of nepotism.

Since my grandfather created our mechanical tools company decades ago, my family maintained its full control and managerial responsibility with success. Reading SmartEconomist.com’s report on your study I was surprised by your conclusion that family firms are inferior to public companies. We are the backbone of the German economy, after all... (Roland Salzmann, Augsburg, Germany)

We find that primo geniture family firms - those that pass management on to the eldest son by birth right - are the ones that are badly managed. Family firms which appoint professional external managers or chose the best manager from within the family are as managed as any other firm. Germany is a good example of this - it has a high share of family firms but very little tradition of primo geniture so the firms are frequently run by external managers or competent professionals. Hence, its family firms are well run providing, as you say, the backbone of the German economy.

How important is education in a manager’s career path?

Education is empirically strongly correlated with good management across firms in our data. So firms with a high share of managers (and workers) with degrees tend to be much better managed. The share of managers with MBAs also display a strong correlation with good management. We have to be careful in interpreting the causality of these results as it could be that educated workers are better at selecting well managed firms as employers, but it certainly looks like education is linked with better management practices.

More generally it is almost impossible today to find any US CEO without a degree and most senior managers typically also have an MBAs, suggesting these are important for a successful managerial career.

Product markets, labor markets, credit markets: in your opinion, which should be the most deregulated? (Marc Friedrich, USA)

Product market deregulation drives competition which we find is strongly linked to good management and high productivity. Labor markets are also important for the efficient allocation of workers across firms - the poor performance of European firms is typically linked to excessive labor regulations which impede firms from reorganising sufficiently to take advantage of new technologies (see for example the work of ours and others cited in speeches by Ben Bernanke).

Credit market deregulation is generally perceived to be important for freeing up financial flows but typically all developed countries have sufficiently free credit markets that this is not seen as a major constraint. Recent research by Olivier Blanchard (one of the world’s top economists working at MIT) has actually worked directly on this topic finding broadly consistent results.

A recent study claims that competition will dramatically increase if governments shift the focus of deregulation away from manufacturing towards services. Would you agree? (Chapal Bhawan, Bangalore, India)

This is a tough question to answer and depends very much on the national environment. In Japan the key to reform is deregulation of services as manufacturing is already globally integrated. This is also true in continental Europe where heavy regulation of services (and the lack of a common market in services) is one factor holding back economic growth. On the other hand in many developing countries like China the initial deregulation of manufacturing is politically easier to achieve than for services, and can drive high growth rates in the initial stages of development.