Is New Zealand management up to scratch? Are managers as good as their counterparts abroad? Could a lack of management capability be holding back business and the economy? What might be done to improve management performance?

These are legitimate and important questions. How can we get a fix on them? Casual, anecdotal observations can't amount to a general picture. Opinion surveys are necessarily subjective. Any rigorous investigation must proceed by examining relevant theory and evidence.

Those who believe New Zealand management is not up to scratch must explain how this could be so in a competitive environment. A plausible hypothesis is that competition will force firms to continuously upskill, innovate and adopt best practices, and weed out poorly performing firms and managers. Firms will make mistakes but they won't do so systematically or they won't survive. Underperforming firms will fail to attract capital and other resources. Outperformance is unlikely to be sustained for long periods either: competition is likely to force returns back to normal levels. This is how competitive markets work.

What does this analysis tell us about the likely quality of management in New Zealand today?

Clearly a large swathe of the economy is now open to competition. Firms producing internationally traded goods and services have to compete on world markets and withstand competition in domestic markets with little protection. Most markets are open to entry – there is nothing to stop new firms setting up and taking business from existing ones if they are doing a poor job. New competition can come from anywhere in the world – there are few restrictions on foreign investment. New Zealand management should no longer be thought of as comprising just New Zealand-born managers or New Zealand-owned firms. And even though our takeover laws have been made unnecessarily restrictive, underperforming companies can be taken over and management teams replaced.

Is empirical evidence consistent with the hypothesis that, in competitive parts of the economy, management performance measures up? Yes. The bottom line test is profitability. On average New Zealand firms create value on a par with overseas counterparts.

The quality of management will also be related to pay – highly competent managers will be worth more to shareholders than less competent ones, and competition for their services will typically mean they are remunerated accordingly. In a small economy there will be limits to the level of competence that it is economic to hire, but companies have incentives to go for the ‘right' mix of pay and competence for their circumstances.

Critics of New Zealand business management who linked it to a period of underperformance of the sharemarket have fallen strangely silent as our market has outperformed many others in recent years. Neither period demonstrated either inferior or superior management – the link is spurious.

Likewise, the link critics have made between management and the overall performance of the economy is specious. It would be absurd to suggest Japan 's world-beating performance in the 1980s was due to the quality of its business management and that its stagnation in the 1990s was due to a sudden loss of skills. No recognised economic theory attributes differences in countries' economic performance to differences in innate management capabilities. Research has confirmed the earliest insights of economics that differences in the wealth of nations are primarily due to the policies and institutions (such as the rule of law and security of property rights) they adopt. Rod Oram's claim ( Boardroom , February 2004) that “good companies thrive in spite of poor government policies” is simply nonsense as a general proposition: How many Microsofts did the Soviet Union produce? A good environment breeds good business people, not the other way round.

Economics teaches that people respond to incentives. The quality of New Zealand management has improved in response to the new competitive environment. To make further improvements we need to particularly focus on areas where competitive disciplines are weak, such as the state-owned enterprise, education and health sectors, and the public sector in general. We also need to eliminate obstacles to better management performance, such as employment legislation which makes it difficult and costly to remove non-performing managers.

Does this mean we can be complacent about the quality of New Zealand management? Of course not. Firms, business schools and organisations should constantly strive to upgrade it. But it does mean we should analyse issues of management capability competently and look for remedies in the right places.

By contrast, we should ignore the drivel about management failures from people who have never run a major business in their lives. If, as Rod Oram and others keep telling us, New Zealand managers are “failing” “short-termist”, “inept”, “do-nothing” and “oblivious to the imperative of strategic leadership”, there must be opportunities for smart people like them to make fortunes.

Curiously, however, the ‘rich lists' never seem to contain their names. I wonder why?

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

David Young
Communications Advisor
Ph: 04 494 9101
Email: dyoung@nzbr.org.nz

Web: www.nzbr.org.nz