Whether or not a company’s CEO holds a degree from a top school has no bearing on the firm’s long-term performance
Whether or not a companyís CEO holds a degree from a top school has no bearing on the firmís long-term performance. And, when it comes to getting canned for poor performance, CEOs with degrees from the nationís most prestigious schools are no safer than the average CEO.
These findings come from new research conducted by Brian Bolton, assistant professor of finance at the Whittemore School of Business and Economics at the University of New Hampshire. The research findings were co-authored by Sanjai Bhagat of the Leeds School of Business at University of Colorado at Boulder, and Ajay Subramanian of the J. Mack Robinson College of Business at Georgia State University.
ìThese findings suggest that both boards and researchers should use caution in placing too much emphasis on an individualís education when trying to assess their ability to lead the company and maximize shareholder value,î Bolton says.
The research analyzes the relationship between CEO education, CEO turnover, and firm performance. The researchers were interested primarily in the role that CEO education plays in a firmís decision to replace its current CEO, the role that it plays in selecting a new CEO, and whether CEO education significantly affects performance. They used six main measures of CEO education: whether the CEO attended a top 20 undergraduate school; whether the CEO has an MBA, law or masterís degree; and whether the MBA or law degree is from a top 20 program. The study includes nearly 15,000 years of CEO experience data and more than 2,600 cases of CEO turnover from 1992 to 2007.
The researchers found that CEO education does not play a large role in the decision by a firm to replace its current CEO; poorly performing CEOs are replaced, regardless of their education. Education, however, does play a significant role in the selection of the replacement CEO; there is a significant positive correlation between the education levels of new CEOs and those of the CEOs they replace. For example, even after a CEO with an MBA degree gets fired for poor performance, the board still looks to replace him or her with new CEO who also has an MBA.
Hiring new CEOs with MBA degrees does lead to short-term improvements in operating performance. However, the researchers did not find a significant systematic relationship between CEO education and long-term firm performance. CEO education does not seem to be an appropriate proxy for CEO ability.
ìEven though CEO education does not lead to superior performance by firms, firms may rely on CEO education in hiring decisions because they have few other identifiable and measurable criteria to use,î Bolton says. "All else being equal, they rely on what they believe to be the observable pedigrees of the executive.
ìOf 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 they may be able to observe: work experience, track record, and education.î