We might think innovation is the key to our nation’s sluggish productivity levels, but it actually has more to do with poor management capabilities.

When considering solutions to Australia’s lagging productivity levels, our minds often turn to innovation growth, optimising workforces to operate in a streamlined manner and upskilling workers with critical skill sets. 

While these factors are all important and will play a part in getting Australia to meet its OECD counterparts’ productivity levels, there’s a more impactful lever that needs to be pulled which we often ignore.

“We should think about productivity as a concept that’s much more dispersed. Every person, everywhere, in every organisation, every day, plays a significant role,” says Christina Boedker, Professor at the University of Newcastle, who has researched the impacts of poor management practices via the Australian Workplace Index.

The Index found that in the past five years, Australia’s productivity growth has dropped to half of its 25-year average. The impact this is having on our economy reaches into the billions of dollars. For example, staff turnover alone is leading to a $3.8 billion-dollar loss to productivity.

Professor Boedker says when we think of productivity as more than just an innovation agenda, that gives us much more opportunity to intervene at an organisational level – and it positions HR leaders to design capability uplift programs that will have an impact.

How to measure management

In 2004, John Van Reenen, academic at London School of Economics and MIT, and Nicholas Bloom, Professor of Economics at Stanford, were among the first researchers to offer robust evidence on management quality’s effect on an organisation’s bottom line, when they established the World Management Survey (WMS). 

For nearly 20 years, the WMS team – which now also includes Raffaella Sadun (Harvard), Daniela Scur (Cornell) and Renata Lemos (Senior Economist at the World Bank) – has collected and measured management practice information from hundreds of medium-sized firms around the world.

They’ve found that managerial practice is strongly associated with productivity, profitability, stock market valuation and organisational survival. Following a wave of surveys in 2023, with data that spans 20,000 interviews across 35 countries, the key takeaway from nearly two decades’ worth of research was that around a third of global productivity gaps can be attributed to poor management.

“What’s stunning is how consistent the patterns are across industries and nations, and over time,” says Van Reenen, who is Ronald Coase School Professor at the London School of Economics and Digital Fellow at the Initiative for the Digital Economy at MIT.

“We’re starting to call some of these patterns ‘the natural laws of management’.”

Crucially, management scores are also strongly correlated with the wider economy and GDP per capita. For example, Van Reenen attributes management, or lack thereof, to around half of the gap between the UK and the US. 

“Given that low productivity is probably the number-one economic problem in the UK, this shows you how much could be gained from moving the dial on management.”

Kieron Meagher, economist and Professor at the Australian National University, who also contributed to the Australian Workplace Index, says the WMS is one of the most realistic measurements of management’s impacts on productivity.

Often public discourse around management’s impacts on productivity is solely focused on labour productivity data – the output per worker, he says.

“That’s because total factor productivity, which is how much you get for all the inputs you use, is very hard to measure, especially in service industries which [account for] about 80 per cent of the economy,” he says.

“[Management training] is usually something we do when things have gone wrong. It’s not something that all organisations will proactively invest in. Then they don’t understand why people are leaving or why they have low productivity.” –  Christina Boedker, Professor at the University of Newcastle

“But the thing is, labour productivity goes up with more capital regardless of whether it’s a good idea for the business to invest in the capital… because if you’re not counting the capital as an input, you get more output, then labour productivity has to go up even if you’re wasting those resources.”

But that’s not what the WMS has done; its researchers have encapsulated labour productivity as well as labour inputs, skill levels of the managers (based on those who’ve secured an MBA) and the capital investment of the organisations.

However, the WMS measures of management are mainly focused on management practices such as setting goals, monitoring people, providing them with incentives, holding employees accountable and hiring good people.

“They don’t really measure the psychological side of management. If you consider that, the productivity impacts could potentially be even larger. So I would view their numbers as somewhat conservative in that regard.”

Van Reenen’s 2017 research also shows Australia’s management scores lag behind those of most other developed nations.

Good management is directly correlated with improved business performance, says Van Reenen. This is why he believes management training should be a top priority for businesses in 2024 and beyond. 

“As an economist, I am flabbergasted at just how many badly managed firms there are. For example, businesses failing to collect sensible data on what they’re doing, setting impossible goals and promoting based on connections rather than ability and effort.

“There are some clear drivers of better management practices, so the good news is that there are many ways that business leaders can up their game.”

But how can HR help them get there?

Leadership empowerment

HR leaders have a role to play in addressing these challenges via targeted training programs fit for the modern-day worker, which need to account for the fact that work is becoming less routine, says Professor Meagher.

“People often think of this production-line type of economy, but we left that behind a long time ago. We now have a large proportion of people who are knowledge workers doing complex jobs.

“As a supervisor, you’re not just looking over people’s shoulders to see how fast they’re screwing the wheels on in the Ford production line. You can’t even tell what they’re doing because it’s all in their heads.”

Professor Boedker says part of the solution lies in moving away from prescriptive leadership styles and empowering employees to “be the custodians of their own productivity”.

“[Australia] is still far off in terms of the attitudes that most supervisors take. Scandinavia, for example, has been a lot more progressive in institutionalising and bringing into leadership this idea that people can think and act independently,” she says.

People management 101 needs to be the foundational skill set that we develop in future leaders and managers, she says, but we often just promote those who are technically accomplished and think of people skills as a secondary training element – and that’s if we consider them at all.

“[Management training] is usually something we do when things have gone wrong. It’s not something that all organisations will proactively invest in. Then they don’t understand why people are leaving or why they have low productivity.”

Empowering leadership styles are the answer, she says. The Australian Workplace Index found that if all Australian managers and leaders adopted an empowering mindset, we could reduce Australia’s work-related mental health costs by $1.7 billion, increase staff productivity by 10 per cent and reduce employee turnover by 25 per cent.

On a smaller scale, Professor Boedker says just a 10 per cent increase in empowering leadership translates to:

• A seven per cent increase in job satisfaction
• A 10 per cent reduction in employee turnover intentions
• A 6.5 per cent reduction in emotional exhaustion
• A six per cent boost to emotional wellbeing.

Putting insights into action

Professors Boedker and Meagher share key areas to focus on, both from a training perspective and in order to set the right conditions for managers to thrive in. These include:

Helping employees find meaning in their work

Employees who feel their work is meaningful have improved energy, health, resilience and satisfaction in their work, according to research.

“If you can see the point in your work in a moral sense or derive personal satisfaction from it, then that can make your job easier to do. You feel like there’s less drudgery,” says Meagher.

Action: Read this HRM article about how to help employees search for meaning in their work.

Set long-term KPIs for managers

“When managers are given short-term goals to meet… they might sacrifice the long-term interest of the workers in order to achieve their short-term goals,” says Professor Meagher.

“We hear about CEOs doing that stuff all the time, right? Like stock price manipulation by doing something with the books. But middle managers can do that kind of stuff too.”

Action: Review management KPIs with the leadership team and consider adding in people-centric goals, such as ‘How many employees received a promotion in your team?’ Or ‘How many new skills have you introduced to the company via your coaching efforts?’

Make work less difficult for people

By removing friction points and ensuring employees have the resources, skills and information they need, employees are enabled to work in more streamlined ways. 

Action: Encourage managers to include a recurring agenda item in their one-on-ones to check that employees have the information they need to do their work for the week ahead and help them to remove any roadblocks that are in their way, such as excessive meetings or technology challenges.

Facilitate discretionary effort

Discretionary efforts are dipping in Australia. Gartner found that change fatigue paired with cost-of-living pressures could be contributing to this. We also know that engagement levels are currently low as employees continue to wrangle increased workloads, uncertain economic circumstances and more complex work tasks, among other things.

“Consider what motivates us to put in that discretionary effort,” says Professor Boedker. “It’s the relationships we build, right? Yes, there’s a job to be done, but people come to work because they have good relationships and feelings of being supported and recognised.

“We can’t underestimate the relational elements, and I think some managers tend to forget that.”

Action: Sign your managers up to AHRI’s Leadership and Management short course to help them learn the fundamental skills required to be an effective manager in 2024.

Weed out the bad apples

We know that the negative impacts of a bad apple in the workplace can be far-reaching, and it’s even worse when that bad apple is in management.

“The side of management that we don’t talk about enough is the negative sides of [managers’] behaviour. The ‘Dark Triad’ is psychopaths, Machiavellian behaviour and narcissistic behaviour.”

These personalities are huge productivity detractors. Rather than just adding more ‘good leaders’ into the mix, it’s more effective to either weed out toxic players or put in the work and structures to change their behaviours, as organisational psychologist Adam Grant pointed out in this article on ‘givers’ and ‘takers’ in the workplace.

Action: Read HRM’s article ‘How to turn a bad boss into a strong leader’ and ‘The three types of narcissist you might encounter at work‘.

“These are all skills that some people might be born with, but for most of us it might require training, so I think there’s a role for HR to help managers to be thinking about those,” says Professor Meagher. “These [factors] aren’t peripheral extras. They’re key to modern management.”