Why Hire an MBA-wielding CEO?

Posted on 14/09/2010

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The conventional wisdom today regarding the hiring of senior management, particularly in the USA, is that aside from extensive experience in across a firm/industry, it is advantageous if the hiree also holds advanced academic qualifications, of which the MBA is the most favoured. This study from 2005 shows that 62% of S&P 500 company chief executives held an advanced degree (with 39% holding an MBA).

In a working paper entitled “CEO Education, CEO Turnover, and Firm Performance” Sanjai Bhagat (Leeds School of Business, University of Colorado at Boulder), Brian Bolton (Whittemore School of Business & Economics, University of New Hampshire) and Ajay Subramanian (J. Mack Robinson College of Business, Georgia State University) have attempted to measure the impact of of CEO education levels upon firm performance. To do this they have analysed “more than 14,500 CEO-years and more than 2,600 cases of CEO turnover from 1993-2007.”

They find that 34% of CEO turnover occurs for disciplinary reasons and this is more likely to occur when “the firm has performed poorly, when the industry has performed well, when the CEO is older, when the CEO is less tenured, and when the CEO owns less stock.” They find that adding CEO education to the model makes absolutely no impact on the results, ie. CEOs with advanced degrees such as MBAs are just as likely to get fired for poor performance. However, independent of firm performance, they note that CEOs with MBAs from top-20 schools are slightly less likely to get fired than the average CEO. They go on the find that:

following cases of disciplinary turnover, hiring a CEO with an MBA or an MBA from a Top-20 business school leads to superior improvements in operating performance in the year following CEO replacement. However, while there is some consistent evidence that having an MBA from a Top-20 program is positively associated with firm performance, this evidence is statistically weak. Our findings, therefore, lead to the puzzling implication that, while education does play an important role in CEO hiring decisions, it does not affect long-term firm performance.

They then ask: “If CEO education does lead to superior firm performance, then why would boards consider it all in their evaluation processes?” They go on to answer:

It is perhaps due to the fact that they have few other identifiable and measurable criteria to use. All else being equal, they rely on what they believe to be the observable pedigrees of the executive. Of course, all else is rarely equal, especially when dealing with something as nebulous and potentially unobservable as managerial talent. Interpersonal skills, leadership ability and strategic vision are among the traits that CEOs should possess; these can be difficult to identify and even more difficult to measure. As a result, boards rely on those characteristics which they may be able to observe: work experience, track record, and education.

Given the lack of correlation between education and CEO performance, Cautious Bull thinks that company boards should pay more attention to work experience and track record, and less attention to education.

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