Are better managed firms more pandemic-resilient?

The COVID-19 crisis is forcing firms to explore survival strategies to deal with the unprecedented disruption. Global consulting firms have been asked to advise on what practices can help business leaders navigate effectively in times of crisis. Research shows that management practices go hand-in-hand with better performance during normal times. The question is whether better-managed firms are also more adept in responding to surprises such as the coronavirus pandemic. If this is the case, it would also be useful to know which management practices matter more.

We tried to answer these questions in a recent World Bank study of approximately 4,000 firms in 16 countries, collected by the World Bank’s Enterprise Survey initiative. The surveys document firm performance before and after the pandemic using multiple measures related to resilience: change in sales, status of business operations, employment changes (furloughs and layoffs), product mix changes, and a shift to remote work arrangements. The data include pre-COVID-19 measures of four broad areas of management practice for each firm: operations, target-setting, monitoring, and incentives. These measures can also be combined into a single management score for each firm.

Most firms suffered during 2020, but well-managed ones lost less

To illustrate our results, consider two manufacturing firms, Firm A and Firm B. Our results indicate that if Firm A’s pre-crisis management score is one standard deviation higher than Firm B’s, then the drop in Firm A’s sales post-COVID-19 is lower by 3.6 percentage points. This implies that Firm A is also less likely to shut down. In fact, we also see remarkable increases in firm A’s ability to pivot their product mix in response to the changing demands of the pandemic and a shifts to remote work, relative to Firm B. These outcomes may be related: Pivoting and remote work arrangements may have helped manufacturing firms remain open and fare better during the pandemic.

Do services firms show a similar pattern? Services generally require more face-to-face interactions and hence service providers are more vulnerable to lockdowns. In fact, some service firms—notably restaurants and hotels—were categorically required to shut down in many countries. We were interested in finding out whether given this attribute of services, mandatory closures made structured management practices less relevant for firm resilience in services. Our research suggests that in services, altered product mix and shifts to remote work arrangements are the only resilience outcomes that are significantly associated with better structured management practices.

Figure 1. Firms with higher management practice scores did better during the COVID-19 crisis
Estimates with bands not crossing the zero line show significant relationship with management practices

Source: Authors
Notes: Sales change is the difference in post-COVID-19 sales compared to the same month in 2019. “Temp. closure” is an indicator for the firm being temporarily closed. “Pivot” is an indicator measuring whether a firm changed the main product or service offered. “Remote work” is also an indicator variable suggesting whether a firm started or increased remote work arrangement. All regressions, except on sales, are Probit regressions. Specifications control for pre-COVID-19 sales, size of the firm, age, export dummy, 3-digit sector and country fixed effects, and number of days from lockdown to interview. The figure presents rope ladder charts with coefficient estimates—the estimates for manufacturing for all illustrated firm outcomes are significant at 1% level, while for services only those relating to pivot product and remote work are significant. CL stands for 5% confidence limit.

What matters most is how firms treat their workers

Among the management practices that we considered in our work, incentive-related practices—those related to the hiring and retention of good workers—were most strongly correlated with resilience outcomes. Good practices in hiring and retention may reassure employees during a crisis that the firm’s management will continue to reward high performance, that they will do their best to not lay off workers, and/or that they will work harder or more cooperatively in order to respond to the emergency. The findings for the other categories of structured practices—operations, target-setting, and monitoring—were not nearly as robust.

In sum, how firms treat their employees during COVID-19 will not only be remembered for years to come but is also likely to improve resilience to future crises. Rules that reward high performers and encourage laggards to exit do enhance overall productivity. Our results also suggest that efforts to strengthen management capabilities may pay off most in firms not categorically affected by lockdowns and stay-at-home orders, such as manufacturing businesses. In particular, human resource practices that provide workers with the reassurance and motivation needed to adapt in the face of uncertainty may emerge stronger than other practices. One concern is that the COVID-19 crisis is shifting the focus of firm support services towards digital upgrading programs at the expense of other firm capabilities.

The policy implications for governments are less precise, but our results do suggest that regulations and firm support interventions aimed at enabling well-managed firms to survive and thrive also help to strengthen economic resilience.