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Study: CEO effect on firm performance could be mostly due to chance

143 points by sr_banksy 11y ago

Zigurd 11y ago
CEO compensation is as much voodoo as the compensation of managers of actively managed funds. They're all geniuses in up markets, but only a tiny minority beat the indices in the long haul, never mind being worth their fees.
- a3voices 11y ago
  I think the ones who use leverage do beat the indices over the long haul. Leveraged investments make more long term than stock indices.
npt4279 11y ago
Ha! This is the opposite of my hypothesis that I blogged about a few days ago: Founder-CEO's outperform non-founder CEO's. https://medium.com/nick-tommarello/my-strategy-for-investing-in-public-companies-805c323bd48d https://medium.com/nick-tommarello/my-strategy-for-investing...
- TTPrograms 11y ago
  They may both be true - this study was limited to the 1500 largest firms from 1993 to 2012. I'd guess the majority of those CEOs weren't founders. If you wanted to do an interesting followup, repeat this authors analysis but compare results between founder CEOs and non-founder CEOs!
  - npt4279 11y ago
    That would be a cool idea. But I'm not sure the numbers of founder-CEO companies are large enough to make any conclusive determination. If you are limiting it to tech, I'd think the outliers of Apple, Amazon, and Google would destroy the competition.
    - nabla9 11y ago
      Apple, Amazon, Google, Facebook, Berkshire Hathaway, FedEx, News Corp, Oracle, Microsoft under Gates, Intel under Moore and Grove, ...
    - eru 11y ago
      Perhaps you can do a similar study for owner-managed vs owners and managers being different persons (like in a public company).
- sr_banksy 11y ago
  Neat strategy. It would be interesting to actually browse through the study's data set and isolate Founder-CEO companies. If there's any conceivable link, then maybe that explains the 30%? However, I don't think there would be many founder CEOs within the dataset.
  - inopinatus 11y ago
    Difficult to correct for survivorship bias too (unless the study specifically did so - I couldn't get the full text)
- deleted 11y ago
  [deleted]
  - npt4279 11y ago
    I don't recall being a user of any .com companies that failed. But I might have been and forgot. I certainly used Paypal and Amazon though. Being a user of the product is a useful tool for separating hype from reality.
- ljw1001 11y ago
  Survival bias. Most founder CEOs go down with the ship before they get on your radar
erkaes 11y ago
How about right person at the right time?
- marcosdumay 11y ago
  Nope if I read that right. They made a simulation with random data. It explained 70% of the measured impact attributed to CEOs. A prove that it's random can not be explained by claiming that it depends on anything. But it still leaves those 30% to be explained by something else.
aNoob7000 11y ago
Well Duh!!!! Just like there are good and bad managers, there are also good and bad CEOs. The only difference I see between the two is that a bad manager when fired is basically given a meager severance package and a CEO walks away with millions.
TazeTSchnitzel 11y ago
A CEO is only as good as the people below them, and the people below them, and so on...
- damon_c 11y ago
  Well, they'd better hire the right people to be below them!
tfigueroa 11y ago
Large efforts have a momentum that few people can singlehandedly overcome. And at that level, the kinds of effect you can have are of a different order.
nickpsecurity 11y ago
Re headline https://www.youtube.com/watch?v=TGTKN0DaxzQ https://www.youtube.com/watch?v=TGTKN0DaxzQ Usually more about the team, culture, motivating employees, marketing, and operations. CEO had little to do with any of this in almost every place I've ever worked.
rdl 11y ago
Horrible CEOs absolutely can destroy value. Does anyone seriously question that? Some level of "good" is probably table stakes. There's a lot of randomness then, especially for non-founder CEOs.
- cpeterso 11y ago
  If bad CEOs are bad for company performance yet good CEOs have no effect on company performance, then is having a CEO all downside with no upside? What is the large company, public or private, that is run democratically without a CEO?
  - analog31 11y ago
    That's a possibility, if being a CEO is mainly a matter of not screwing up in some spectacular way, and not dipping your hand too deep into the cookie jar. Performance doesn't have to be a monotonic function passing through the origin. There are other jobs like this: Surgeons, airline pilots, and tympanists. Maybe the skilled trades in general. Sure, the good ones may show their brilliance on rare occasions, but those don't happen often enough to show up in a statistical study. Mainly they need the training, practice, and self discipline to follow the correct procedures and get it right every time. I'm thinking of an analogy, which virtually guarantees that it will be a bad one: A bad plumber would be bad for the performance of my house, but a good plumber can't really make my house perform any better. Yet I don't want plumbing to be run democratically in my house without a plumber. (Note: I'm the plumber in my house).
    - lm2s 11y ago
      I like your analogy and I think it's got its merit. A good plumber might be able to solve a problem faster than an average one, though.
      - analog31 11y ago
        Yes, definitely. I am amazed by how quick the pro's are. There have been some jobs in my house that absolutely had to be leak tight on the first try, e.g., where a fixture is above a drywall ceiling. I've hired a plumber for those jobs.
vonnik 11y ago
I spent about 12 years as an employee in companies of various sizes in different industries. Purely anecdotally, I can tell you that sh*t rolls downhill. Bad people at the top make for unhappy teams and poor performance. The opposite is also true. The CEOs I respected most also inspired their teams to achieve the fastest growth.
- fredkbloggs 11y ago
  I've worked for many companies large and small, and many CEOs in that time. There's not a single one of them I respected, at the time or upon reflection. Would you mind sharing a few names for the rest of us to study?
  - dboreham 11y ago
    Jim Barksdale
  - vonnik 11y ago
    i never worked for a startup i didn't like, which is lucky i suppose. i left futureadvisor earlier this year to found my own company, but if i hadn't felt that itch, i would have stayed working with bo lu and jon xu for many years. they built a highly competent and deeply considerate group of people around a very popular product. (as a pr guy, it was easy to pitch...) send me your email if you want more details: i'm at chris@skymind.io.
dschiptsov 11y ago
Most of success in business are due to chance, contrary to popular myths. But character matters also, it is, perhaps, second most important variable, but chance outweights everything. That's why people are saying that chance favours the prepared.
tonomics 11y ago
Many here are misuderstanding "firm performance" with employee quality of life( that's fair!). But, from the "shareholder value" perspective this might actually be true. Some despicable CEOs may actually be just as good as a friendly and passionate founding CEO
c3534l 11y ago
This is interesting, but there are so many things that can be at work that I'm not sure how much you can draw from this. For one, boards may elect CEOs that are good for what they need at that moment - when a company needs to handle a large merger, they may choose someone with experience in doing that for that industry and their talents may never be fully utilized after that. And a CEOs performance isn't likely to be homogeneous over time either - they may get better or worse over time. I guess your basic problem is that CEOs aren't selected by a random process. So if a board of directors always did a good job choosing the right CEO, why would you expect there to be big, statistical differences anyway? I'm not also terribly clear on what sort of strength of effect the authors are looking for. A lot of people work for a company, are they trying to attribute all of a company's earnings to a single person? Or are they looking for a difference that is not very proportionate to what CEOs actually do. I should also point out that "could be due to chance" isn't in itself very interesting. That means that with the methods and data the authors happened to use, they didn't happen to find a statistically significant effect, and while that could be because they don't have an effect it could also be that the tools used to look for one were simply not up to par. That said, it's my understanding (and some experience) that the upper echelons of a lot of companies can be... a bit incestuous, cliquey, who-you-happen-to-know.
- suneilp 11y ago
  The "who-you-happen-to-know" part is very true. It's a small world up there in the "upper" tier. While I generally agree to the implications of chance, has much to do with that inner circle and who gets picked to do the job. No one is perfect, and the upper tier do not seem to have a solid understanding of this fact. People get picked because they can talk the talk or had some success at some point and that automatically decides they are good. Even failing can increase your prestige for reasons such as learned from failure or the blame gets shifted. However, I feel that it's all too often that the CEO failed to adapt and shifted blame.
- bardworx 11y ago
  > I should also point out that "could be due to chance" isn't in itself very interesting. That means that with the methods and data the authors happened to use, they didn't happen to find a statistically significant effect, and while that could be because they don't have an effect it could also be that the tools used to look for one were simply not up to par. My wife wrote had an analytical project when she was working on her masters in accounting. The thesis was correlation between CEO compensation vs Stock market performance. After two months of crunching data, she came to the realization that there was absolutely NO cofrelation. She was distraught by her data thinking she made a mistake so we re-crunched the numbers, attempted to find better samples data (larger range of top tier and lower tier companies), excluding financial companies from the data because of 2008 market and stock price, etc. At the end, we realized that CEOs compensation has very little effect on stock market price over X amount of time. If you you can rationalize that stock price = CEO performance, then this would be agreeable with the article itself.
maerF0x0 11y ago
Then why is the CEO the highest paid person ?
- fredkbloggs 11y ago
  At the risk of sounding glib, they're paid the most because they're the best at convincing people who control money to pay them. Also, in no small part, because in most cases the people who control the money have little or no incentive to care what happens to it, and therefore are subject to every kind of conflict of interest and cognitive bias known to man.
- crdoconnor 11y ago
  Pay correlates with power not effectiveness. The highest paid in any organizations are those with the most power and the highest paid CEOs are those who run the biggest corporations.
  - maerF0x0 11y ago
    I dont understand how they get that power. I guess they convince those with lots more money to give them that much? I mean, if all the science is true, how does someone with so much money (say a board of directors) ever decide to pay someone that much? Clearly they're all ignoring the facts, but why? They dont seem to have anything to gain by paying someone too much, afterall their own stock/equity is at stake here.
    - dingaling 11y ago
      > how does someone with so much money (say a board of directors) ever decide to pay someone that much Most of the board will be executives in other companies; by voting high the salary of the CEO, they're nudging the average which benefits them when wearing their executive hat. In the UK I have money in two Building Societies ( mutual banks ) and each year the members vote on candidates for the Board. It's amazing how many of them hold three or more different board positions and a couple of executive slots.
    - sjg007 11y ago
zobzu 11y ago
surprise ratio: 0% its very RARE that CEOs make the company succeed or fail. some do, either way, from time to time, of course. most are just here gathering money and 'n attempting to figure out what their job is all about.
- Gibbon1 11y ago
  I remember someones comment that the people under the CEO, vice presidents etc, matter a lot more than is assumed. Especially since often CEO's get fired or quit fairly often. So it's the upper tier of management that provides longer term stability. (And those guys have an interest in keeping the CEO from wrecking things)
  - zobzu 11y ago
    thats probably true. the ceo is more the face of the company (has to talk nice) and make a choice when the VPs are undecided (as in he rolls a dice and gives a number really) Again im generalizing, but it is like that most of the time.
viahartdotcom 11y ago
Obviously wrong.
xivzgrev 11y ago
Number one, you need a growing market to have outstanding performance, either you are creating one out of another one or hitching a ride. Doesn't matter who is running it. After that though I think CEO has an incredible impact on the business. They set the vision and culture and hire the leaders. If CEOs were just chance, there wouldn't be so many companies with transition issues.
darkr 11y ago
So 400x pay ratios are the modern day equivalent of sacrificing a lamb in the hope the gods will bring good fortune?
- ZeroGravitas 11y ago
  My accounting professor explicitly compared auditing to this kind of primitive religion. Think of the "rainmaker" who brings the much needed rain for the tribes crops. You need to sacrifice an animal (that he eats) and do a big song and dance (to make it feel like you're doing something). If the ritual succeeds, then the rainmaker has done his job! If the ritual fails, then the sacrfice wasn't big enough, the dance wasn't long enough, people didn't believe enough. There's no allowance in the framework for the rainmaker to be blamed for being bad at his job. And even if there was, he'd just be replaced with someone who was equaly powerless. But who wants to admit that their entire existance is outside of their own control? I think of that lecture often, as a series of large companies collapses and no-one sees it coming.
  - mgkimsal 11y ago
    > and no-one sees it coming Perhaps no one at the top, or no one outside, but I'd be willing to bet a lot of lower-tier folks can often see the writing on the wall. I've been there myself a couple of times, and have had family members in similar situations.
fauigerzigerk 11y ago
There's one confounding factor I wonder about. If a company, at some point, has a great long serving CEO or founder, that person will have great influence on choosing their successor. They will also have influence on who is on the board of that company. So there may be a virtuous circle called "culture" at that company. Could that not make it look like the CEO statistically doesn't matter?
- jimsojim 11y ago
  In a way it would, if it's affecting the culture surely it would affect the company as a whole.
Rexxar 11y ago
Just a mathematical question : can we systematically distinguish randomly distributed luck from randomly distributed competence ‎?
- EliRivers 11y ago
  If someone is competent, we can expect them to continue showing competence into the future. If it's just luck, we can expect their future performance to revert.
  - Rexxar 11y ago
    I'm not sure if it's enough when you study a group, during a finite time, if you don't know a priori the relative impact of competence compared to luck. Example 1 : fictive world where everybody has 50% chance of success every year (success = 1 point). After 4 years the distribution looks like : 0pt -> 1/16 1pt -> 4/16 2pt -> 6/16 3pt -> 4/16 4pt -> 1/16 Example 2 : fictive world with 6 competence levels : group 1: always lose, population 1/16 group 2: win 1/4, population 4/16 group 3: win 1/2, population 6/16 group 4: win 3/4, population 4/16 group 5: always win, population 1/16 If the final distribution is not Gaussian, I think we can distinguish luck vs competence but if the observed curve is Gaussian I'm not sure we can distinguish luck vs competence.
    - EliRivers 11y ago
      If we repeat for another four years, resetting the scores to zero, the relative rankings of people in the first group have swapped around, but the relative rankings of the second group has not (or at least, has changed to a much smaller degree). We could run this experiment over and over (two periods of four years), showing me only the relative rankings of the participants in each paired period (i.e. I get to see the results of the two random trials together, and the results of the two competence-based trials together), and I'd have a very good record of identifying the luck based competition from the competence based competition. The real world is a mix of luck and competence, but if I see the same names coming out top in each periodic batch into the future, I can safely assume that they are not operating on luck. Given enough people there will always be someone who tosses heads twenty times in a row, but the majority of luck-based achievers will perform averagely in the future, while the competence based achievers will perform according to their competence.
bedhead 11y ago
I've long called this the "Dr. John Theory of CEO's" - I was in the right place, but it must have been the wrong time. Take McDonald's for example. Their stock was up a bunch yesterday on nice earnings, and everyone cheered that the new CEO's turnaround was seeing results. Yay! Except this is a global company with over 30,000 stores, and the new guy had only gotten the job in March. And magically, he gets 100% credit for the good news, even though all he can reasonably do as the CEO is tinker around (eg Egg McMuffins all day - yippee). Ditto Ruth Porat at Google, same thing. She had been on the job for all of seven weeks when Google reported great earnings, and when results were good everyone was like, "ZOMG RUTH IS INCREDIBLE!!" Or Marissa Mayer...the list is endless. It's almost comical how lazy people are at attributing success and failure to executives who simply showed up at the right time and took credit for the inevitable.
- JoeAltmaier 11y ago
  Well maybe not inevitable. But likely no result of their effort. It could be normal seasonal change, or lagging result of the previous administrations' changes, or products in the pipeline gaining maturity. So yeah, this 'CEO Hero Worship' thing is deplorable. It's not new; been going on since I first noticed in the 80's.
  - mgkimsal 11y ago
    As with anyone in leadership, supporters want to spread blame to predecessors. We see it in politics a lot, certainly.

143 points by sr_banksy 11y ago

CEO compensation is as much voodoo as the compensation of managers of actively managed funds. They're all geniuses in up markets, but only a tiny minority beat the indices in the long haul, never mind being worth their fees.

a3voices 11y ago
I think the ones who use leverage do beat the indices over the long haul. Leveraged investments make more long term than stock indices.

npt4279 11y ago

Ha! This is the opposite of my hypothesis that I blogged about a few days ago: Founder-CEO's outperform non-founder CEO's. https://medium.com/nick-tommarello/my-strategy-for-investing-in-public-companies-805c323bd48d https://medium.com/nick-tommarello/my-strategy-for-investing...

TTPrograms 11y ago
They may both be true - this study was limited to the 1500 largest firms from 1993 to 2012. I'd guess the majority of those CEOs weren't founders. If you wanted to do an interesting followup, repeat this authors analysis but compare results between founder CEOs and non-founder CEOs!
- npt4279 11y ago
  That would be a cool idea. But I'm not sure the numbers of founder-CEO companies are large enough to make any conclusive determination. If you are limiting it to tech, I'd think the outliers of Apple, Amazon, and Google would destroy the competition.
  - nabla9 11y ago
    Apple, Amazon, Google, Facebook, Berkshire Hathaway, FedEx, News Corp, Oracle, Microsoft under Gates, Intel under Moore and Grove, ...
  - eru 11y ago
    Perhaps you can do a similar study for owner-managed vs owners and managers being different persons (like in a public company).
sr_banksy 11y ago
Neat strategy. It would be interesting to actually browse through the study's data set and isolate Founder-CEO companies. If there's any conceivable link, then maybe that explains the 30%? However, I don't think there would be many founder CEOs within the dataset.
- inopinatus 11y ago
  Difficult to correct for survivorship bias too (unless the study specifically did so - I couldn't get the full text)
deleted 11y ago
[deleted]
- npt4279 11y ago
  I don't recall being a user of any .com companies that failed. But I might have been and forgot. I certainly used Paypal and Amazon though. Being a user of the product is a useful tool for separating hype from reality.
ljw1001 11y ago
Survival bias. Most founder CEOs go down with the ship before they get on your radar

erkaes 11y ago

How about right person at the right time?

marcosdumay 11y ago
Nope if I read that right. They made a simulation with random data. It explained 70% of the measured impact attributed to CEOs. A prove that it's random can not be explained by claiming that it depends on anything. But it still leaves those 30% to be explained by something else.

aNoob7000 11y ago

Well Duh!!!! Just like there are good and bad managers, there are also good and bad CEOs. The only difference I see between the two is that a bad manager when fired is basically given a meager severance package and a CEO walks away with millions.

TazeTSchnitzel 11y ago

A CEO is only as good as the people below them, and the people below them, and so on...

damon_c 11y ago
Well, they'd better hire the right people to be below them!

tfigueroa 11y ago

Large efforts have a momentum that few people can singlehandedly overcome. And at that level, the kinds of effect you can have are of a different order.

nickpsecurity 11y ago

Re headline https://www.youtube.com/watch?v=TGTKN0DaxzQ https://www.youtube.com/watch?v=TGTKN0DaxzQ Usually more about the team, culture, motivating employees, marketing, and operations. CEO had little to do with any of this in almost every place I've ever worked.

rdl 11y ago

Horrible CEOs absolutely can destroy value. Does anyone seriously question that? Some level of "good" is probably table stakes. There's a lot of randomness then, especially for non-founder CEOs.

cpeterso 11y ago
If bad CEOs are bad for company performance yet good CEOs have no effect on company performance, then is having a CEO all downside with no upside? What is the large company, public or private, that is run democratically without a CEO?
- analog31 11y ago
  That's a possibility, if being a CEO is mainly a matter of not screwing up in some spectacular way, and not dipping your hand too deep into the cookie jar. Performance doesn't have to be a monotonic function passing through the origin. There are other jobs like this: Surgeons, airline pilots, and tympanists. Maybe the skilled trades in general. Sure, the good ones may show their brilliance on rare occasions, but those don't happen often enough to show up in a statistical study. Mainly they need the training, practice, and self discipline to follow the correct procedures and get it right every time. I'm thinking of an analogy, which virtually guarantees that it will be a bad one: A bad plumber would be bad for the performance of my house, but a good plumber can't really make my house perform any better. Yet I don't want plumbing to be run democratically in my house without a plumber. (Note: I'm the plumber in my house).
  - lm2s 11y ago
    I like your analogy and I think it's got its merit. A good plumber might be able to solve a problem faster than an average one, though.
    - analog31 11y ago
      Yes, definitely. I am amazed by how quick the pro's are. There have been some jobs in my house that absolutely had to be leak tight on the first try, e.g., where a fixture is above a drywall ceiling. I've hired a plumber for those jobs.

vonnik 11y ago

I spent about 12 years as an employee in companies of various sizes in different industries. Purely anecdotally, I can tell you that sh*t rolls downhill. Bad people at the top make for unhappy teams and poor performance. The opposite is also true. The CEOs I respected most also inspired their teams to achieve the fastest growth.

fredkbloggs 11y ago
I've worked for many companies large and small, and many CEOs in that time. There's not a single one of them I respected, at the time or upon reflection. Would you mind sharing a few names for the rest of us to study?
- dboreham 11y ago
  Jim Barksdale
- vonnik 11y ago
  i never worked for a startup i didn't like, which is lucky i suppose. i left futureadvisor earlier this year to found my own company, but if i hadn't felt that itch, i would have stayed working with bo lu and jon xu for many years. they built a highly competent and deeply considerate group of people around a very popular product. (as a pr guy, it was easy to pitch...) send me your email if you want more details: i'm at chris@skymind.io.

dschiptsov 11y ago

Most of success in business are due to chance, contrary to popular myths. But character matters also, it is, perhaps, second most important variable, but chance outweights everything. That's why people are saying that chance favours the prepared.

tonomics 11y ago

Many here are misuderstanding "firm performance" with employee quality of life( that's fair!). But, from the "shareholder value" perspective this might actually be true. Some despicable CEOs may actually be just as good as a friendly and passionate founding CEO

c3534l 11y ago

This is interesting, but there are so many things that can be at work that I'm not sure how much you can draw from this. For one, boards may elect CEOs that are good for what they need at that moment - when a company needs to handle a large merger, they may choose someone with experience in doing that for that industry and their talents may never be fully utilized after that. And a CEOs performance isn't likely to be homogeneous over time either - they may get better or worse over time. I guess your basic problem is that CEOs aren't selected by a random process. So if a board of directors always did a good job choosing the right CEO, why would you expect there to be big, statistical differences anyway? I'm not also terribly clear on what sort of strength of effect the authors are looking for. A lot of people work for a company, are they trying to attribute all of a company's earnings to a single person? Or are they looking for a difference that is not very proportionate to what CEOs actually do. I should also point out that "could be due to chance" isn't in itself very interesting. That means that with the methods and data the authors happened to use, they didn't happen to find a statistically significant effect, and while that could be because they don't have an effect it could also be that the tools used to look for one were simply not up to par. That said, it's my understanding (and some experience) that the upper echelons of a lot of companies can be... a bit incestuous, cliquey, who-you-happen-to-know.

suneilp 11y ago
The "who-you-happen-to-know" part is very true. It's a small world up there in the "upper" tier. While I generally agree to the implications of chance, has much to do with that inner circle and who gets picked to do the job. No one is perfect, and the upper tier do not seem to have a solid understanding of this fact. People get picked because they can talk the talk or had some success at some point and that automatically decides they are good. Even failing can increase your prestige for reasons such as learned from failure or the blame gets shifted. However, I feel that it's all too often that the CEO failed to adapt and shifted blame.
bardworx 11y ago
> I should also point out that "could be due to chance" isn't in itself very interesting. That means that with the methods and data the authors happened to use, they didn't happen to find a statistically significant effect, and while that could be because they don't have an effect it could also be that the tools used to look for one were simply not up to par. My wife wrote had an analytical project when she was working on her masters in accounting. The thesis was correlation between CEO compensation vs Stock market performance. After two months of crunching data, she came to the realization that there was absolutely NO cofrelation. She was distraught by her data thinking she made a mistake so we re-crunched the numbers, attempted to find better samples data (larger range of top tier and lower tier companies), excluding financial companies from the data because of 2008 market and stock price, etc. At the end, we realized that CEOs compensation has very little effect on stock market price over X amount of time. If you you can rationalize that stock price = CEO performance, then this would be agreeable with the article itself.

maerF0x0 11y ago

Then why is the CEO the highest paid person ?

fredkbloggs 11y ago
At the risk of sounding glib, they're paid the most because they're the best at convincing people who control money to pay them. Also, in no small part, because in most cases the people who control the money have little or no incentive to care what happens to it, and therefore are subject to every kind of conflict of interest and cognitive bias known to man.
crdoconnor 11y ago
Pay correlates with power not effectiveness. The highest paid in any organizations are those with the most power and the highest paid CEOs are those who run the biggest corporations.
- maerF0x0 11y ago
  I dont understand how they get that power. I guess they convince those with lots more money to give them that much? I mean, if all the science is true, how does someone with so much money (say a board of directors) ever decide to pay someone that much? Clearly they're all ignoring the facts, but why? They dont seem to have anything to gain by paying someone too much, afterall their own stock/equity is at stake here.
  - dingaling 11y ago
    > how does someone with so much money (say a board of directors) ever decide to pay someone that much Most of the board will be executives in other companies; by voting high the salary of the CEO, they're nudging the average which benefits them when wearing their executive hat. In the UK I have money in two Building Societies ( mutual banks ) and each year the members vote on candidates for the Board. It's amazing how many of them hold three or more different board positions and a couple of executive slots.
  - sjg007 11y ago

zobzu 11y ago

surprise ratio: 0% its very RARE that CEOs make the company succeed or fail. some do, either way, from time to time, of course. most are just here gathering money and 'n attempting to figure out what their job is all about.

Gibbon1 11y ago
I remember someones comment that the people under the CEO, vice presidents etc, matter a lot more than is assumed. Especially since often CEO's get fired or quit fairly often. So it's the upper tier of management that provides longer term stability. (And those guys have an interest in keeping the CEO from wrecking things)
- zobzu 11y ago
  thats probably true. the ceo is more the face of the company (has to talk nice) and make a choice when the VPs are undecided (as in he rolls a dice and gives a number really) Again im generalizing, but it is like that most of the time.

viahartdotcom 11y ago

Obviously wrong.

xivzgrev 11y ago

Number one, you need a growing market to have outstanding performance, either you are creating one out of another one or hitching a ride. Doesn't matter who is running it. After that though I think CEO has an incredible impact on the business. They set the vision and culture and hire the leaders. If CEOs were just chance, there wouldn't be so many companies with transition issues.

darkr 11y ago

So 400x pay ratios are the modern day equivalent of sacrificing a lamb in the hope the gods will bring good fortune?

ZeroGravitas 11y ago
My accounting professor explicitly compared auditing to this kind of primitive religion. Think of the "rainmaker" who brings the much needed rain for the tribes crops. You need to sacrifice an animal (that he eats) and do a big song and dance (to make it feel like you're doing something). If the ritual succeeds, then the rainmaker has done his job! If the ritual fails, then the sacrfice wasn't big enough, the dance wasn't long enough, people didn't believe enough. There's no allowance in the framework for the rainmaker to be blamed for being bad at his job. And even if there was, he'd just be replaced with someone who was equaly powerless. But who wants to admit that their entire existance is outside of their own control? I think of that lecture often, as a series of large companies collapses and no-one sees it coming.
- mgkimsal 11y ago
  > and no-one sees it coming Perhaps no one at the top, or no one outside, but I'd be willing to bet a lot of lower-tier folks can often see the writing on the wall. I've been there myself a couple of times, and have had family members in similar situations.

fauigerzigerk 11y ago

There's one confounding factor I wonder about. If a company, at some point, has a great long serving CEO or founder, that person will have great influence on choosing their successor. They will also have influence on who is on the board of that company. So there may be a virtuous circle called "culture" at that company. Could that not make it look like the CEO statistically doesn't matter?

jimsojim 11y ago
In a way it would, if it's affecting the culture surely it would affect the company as a whole.

Rexxar 11y ago

Just a mathematical question : can we systematically distinguish randomly distributed luck from randomly distributed competence ‎?

EliRivers 11y ago
If someone is competent, we can expect them to continue showing competence into the future. If it's just luck, we can expect their future performance to revert.
- Rexxar 11y ago
  I'm not sure if it's enough when you study a group, during a finite time, if you don't know a priori the relative impact of competence compared to luck. Example 1 : fictive world where everybody has 50% chance of success every year (success = 1 point). After 4 years the distribution looks like : 0pt -> 1/16 1pt -> 4/16 2pt -> 6/16 3pt -> 4/16 4pt -> 1/16 Example 2 : fictive world with 6 competence levels : group 1: always lose, population 1/16 group 2: win 1/4, population 4/16 group 3: win 1/2, population 6/16 group 4: win 3/4, population 4/16 group 5: always win, population 1/16 If the final distribution is not Gaussian, I think we can distinguish luck vs competence but if the observed curve is Gaussian I'm not sure we can distinguish luck vs competence.
  - EliRivers 11y ago
    If we repeat for another four years, resetting the scores to zero, the relative rankings of people in the first group have swapped around, but the relative rankings of the second group has not (or at least, has changed to a much smaller degree). We could run this experiment over and over (two periods of four years), showing me only the relative rankings of the participants in each paired period (i.e. I get to see the results of the two random trials together, and the results of the two competence-based trials together), and I'd have a very good record of identifying the luck based competition from the competence based competition. The real world is a mix of luck and competence, but if I see the same names coming out top in each periodic batch into the future, I can safely assume that they are not operating on luck. Given enough people there will always be someone who tosses heads twenty times in a row, but the majority of luck-based achievers will perform averagely in the future, while the competence based achievers will perform according to their competence.

bedhead 11y ago

I've long called this the "Dr. John Theory of CEO's" - I was in the right place, but it must have been the wrong time. Take McDonald's for example. Their stock was up a bunch yesterday on nice earnings, and everyone cheered that the new CEO's turnaround was seeing results. Yay! Except this is a global company with over 30,000 stores, and the new guy had only gotten the job in March. And magically, he gets 100% credit for the good news, even though all he can reasonably do as the CEO is tinker around (eg Egg McMuffins all day - yippee). Ditto Ruth Porat at Google, same thing. She had been on the job for all of seven weeks when Google reported great earnings, and when results were good everyone was like, "ZOMG RUTH IS INCREDIBLE!!" Or Marissa Mayer...the list is endless. It's almost comical how lazy people are at attributing success and failure to executives who simply showed up at the right time and took credit for the inevitable.

JoeAltmaier 11y ago
Well maybe not inevitable. But likely no result of their effort. It could be normal seasonal change, or lagging result of the previous administrations' changes, or products in the pipeline gaining maturity. So yeah, this 'CEO Hero Worship' thing is deplorable. It's not new; been going on since I first noticed in the 80's.
- mgkimsal 11y ago
  As with anyone in leadership, supporters want to spread blame to predecessors. We see it in politics a lot, certainly.