CEOs: An MBA helps long-term company performance
MBA News Barbara Bierach / 10-28-2010
“Let’s be brutally honest,” suggest Morten T. Hansen, a management professor at the University of California’s School of Information, and Herminia Ibarra, professor for organizational behaviour at Insead. The joint idea of these professors is to do away with the usual rankings of top CEOs - who’s the most respected, the best paid, the most popular.
In their view these rankings measure the wrong things, tend to be short term or subjective, focusing only on results from the most recent year or relying on opinion polls. "And if there's one lesson we learned from the current financial crisis, it's that short-term, subjective performance measures give rise to a culture of greed. We need to do better at judging who the truly great leaders of business are, rather than celebrating fleeting popularity," write the professors in chiefexecutive.net
To fix the problem, they created a ranking of CEO performance based on a long-term measure: how well the CEOs performed for shareholders during their entire time in office, from the day they started to the day they left, or until recently, if still in office. The usual suspects such as Apple's Steve Jobs, Amazon's Jeff Bezos, eBay's Meg Whitman and Google's Eric Schmidt do indeed show up in the top 10. Others, however, also conventionally regarded as high-flyers, fail to make it even into the top 200: step forward Nissan's Carlos Ghosn, GE's Jeffrey Immelt and IBM's Sam Palmisano for instance.
Find the method and math behind the ranking and entire list of CEOs here: http://tinyurl.com/23rks2j
More interesting than the names as such are the trends. No particular geography has a monopoly on excellence. CEO's of US-based companies fill 91, or 45 percent, of the slots, but then they also account for 42 percent of the original sample of 1,999. In the same way, industry doesn't offer a strong indication of who will perform best. Even if some sectors are more prominent than others like energy, telco, healthcare, real estate and retail, these aren't all high-growth industries. The prominence of retailing should reassure CEO's that they can perform exceptionally even when their sector hits a mediocre patch.
Should a company seeking such excellence look inside or outside for its next CEO? According to the research by Hansen and Ibarra, insiders have the edge over outsiders. Those who have risen to the top through the ranks generally tend to be better performers than those parachuted in. In fact, insiders ranked on average 57 places better than outsiders.
As business-school professors you'd probably expect Hansen and Ibarra to say that an MBA boosts CEO performance. "In the wake of the financial crisis, when MBA programs were accused of fostering greed-enhancing, value-destroying behaviour and worse we approached this part of our analysis with some trepidation," they say.
Information about qualifications isn't readily available in some countries so the pair had to limit their data to a subset of CEO's based in Germany, Britain, France and the U.S.: 1,109 altogether. Of these, 32 percent had an MBA. But members of this minority ranked, on average, a full 40 places higher than their colleagues in the non-MBA majority. That's interesting, since researchers from the University of Colorado at Boulder, the University of New Hampshire and Georgia State University just found that "hiring new CEOs with MBA degrees leads to short-term improvements in operating performance. We, however, do not find a significant systematic relationship between CEO education and long-term firm performance." (See MBA Channel)
The key word here seems to be 'new'. Hiring a new CEO with an MBA degree does not trump a CEO with the same qualifications but who has risen through the ranks.
The study also seems to show that the scope for improvement in a poorly performing firm is much greater than in one that's doing well. The professors scanned the sample for CEO's who had inherited weak organizations - and found that two consecutive years of bad results immediately prior to taking the helm created a great runway for turning around the company and delivering value to shareholders. This group of CEO's ranked on average 96 places higher than those who had taken over previously high-performing firms.
"The need to question conventional thinking is in fact the overall message that we take away from our foray into the rankings game," conclude the professors. "If business really is to learn from the mistakes that led to the recent crisis, then it has to start measuring CEO success against longer-term criteria."
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