15 ms·

The MBA Myth and the Cult of the CEO

375 points by vinnyglennon 8y ago

lordnacho 8y ago
This is great work. It's a real job gathering and analysing all that CEO performance data. My guess is that most people were suspecting this anyway. The fact is the CEO is there for a few years making a few key decisions, a large company is like an oil tanker, and markets are quite hard to predict. Taleb has cooked a fair bit of soup on the fooled by randomness idea, but in this case his observations are correct. It is very very hard to show that CEO performance is something other than random. That's not to say that everyone's performance is pure chance. Sports generates a lot of reproducible data about its performers, and we can tell from the numbers which players are better. This is why it's not such a big deal for most people that Ronaldo or Messi get paid a lot more than their teammates, and the rest of society. What does bother people, including myself, is that people are given far more credit for outcomes than is credible. Why should there be a many-multiples reward for being slightly up the senior management ladder at each step? Is it not most plausible that the leaders just under CEO also understand the firm's situation, and can make sensible decisions? And the step under them? Is it really so hard to find a CEO that you have to pay hundreds of grunt salaries to get one? The other issue is MBAs. I don't think anyone is surprised that it doesn't help at all. I went to a well known business school too, and it's not like they tell you how to run a company. It's really just a kind of brainstorming exercise where you have bit of a think about what a company might do to be successful. What it does seem to be is a kind of stamp of ambition. People who go to business schools are keen to work hard to reach the top of the business world. This might seem fine, but you have to wonder whether the best managers are ambitious people who want to be managers, or people in the line of business who want to compete for the same jobs. I know who I'd pick.
- pacala 8y ago
  To play devil's advocate: The primary function of a manager is to say "No". As one goes higher and higher up the hierarchy, one has to say "No" to pushier and pushier subordinates, and the cost of every misplaced "Yes" is higher and higher. While leaders just under the CEO may understand the firm situation just fine, they may also be unable to say "No" to enough bad ideas for a myriad reasons, including lack of political clout with other leaders, with investors or with peer CEOs.
  - lordnacho 8y ago
    > The primary function of a manager is to say "No". I'm a manager, and I can't really see this being the key job description. But if it was, why would that have gotten harder in the last few decades?
    - UncleMeat 8y ago
      Lots of people come to my team asking for work on X. If I said yes to everything my team would collapse from being spread too thinly. Being able to say that X is lower priority than what I am currently working on and leave the door open for re-evaluating priorities if needed is a key part of my job. My team also frequently comes to me with ideas for interesting work that also isn't contributing to our vision. If we just did everything that came to mind we'd also fall apart.
      - deleted 8y ago
        [deleted]
      - Gibbon1 8y ago
        My experience after 35 years is nothing scares me more than when a team of out of control developers are adding more and more features to the spec. Most baffling is it's obvious they think they are accomplishing something and you're a meanie for trying to rein them in. It always ends the same way. A lot of things can go wrong in a project. But that's that one 100% guaranteed to sink it.
        deleted 8y ago
        [deleted]
        com2kid 8y ago
        On the flip side, a team of developers who aren't even interested in adding anything of their own volition is also a bad sign. There has to be a balance.
        8y ago
- marktangotango 8y ago
  Well, poor outcomes can certainly be attributed to poor direction from a CEO. Many of us have experienced that. My example is a new ceo who came in making a lot of noise about cleaning house and righting the ship. His intention was the sales org, but effectively scared off the best developers. He did also gut the sales org, and sales never recovered. So objectively it’s not out of the question the reverse could be true, that a ceo could influence a positive outcome, maybe just harder to measure?
  - lordnacho 8y ago
    But this doesn't test what another CEO would have done in the same situation. All we can do is make a guess about how the average CEO would have performed. There's no way to really test it.
    - deleted 8y ago
      [deleted]
- twic 8y ago
  > What it does seem to be is a kind of stamp of ambition. People who go to business schools are keen to work hard to reach the top of the business world. Same as most degree credentialism. People don't hire Harvard graduates because of all the valuable stuff they learned at Harvard, they hire them because they were smart and driven enough to get in to Harvard.
  - hexane360 8y ago
    Or they hire them because they went to Harvard as well.
- di3sd 8y ago
  We don't need Presidents and Popes either. The world is a much more complicated place today, than during the time of kings, and the accumulating data is going to keep revealing the complexity is too much for one man or woman to be responsible for it all. But when a Deepwater Horizon type event happens and the whole herd starts baying for blood, are we sophisticated enough to say hey look at the data whats the point of lynching one person? Of late the US seems to have attained that level of maturity, given how they have dealt up with Wall St after 2008, or the Pentagon for the 20 year war or dear Mark Zuckerberg. So maybe it's time. I don't see older firms changing but newer firms might turn less hierarchical.
  - tsunamifury 8y ago
    It's an interesting thought. Object oriented responsibility is as archiac as object oriented data analysis because since the rise of ML we know that the larger objects were just mental models for human decision making. However they erred by covering through averaging of more granular inputs that had conflicting information. I.e. if I'm a CEO and 3 of my VPs are good but one is terrible is it my fault that only one has become a risk. Under current object oriented thinking, yes but with granular analysis no it's the VPs fault.
  - maxxxxx 8y ago
    :Of late the US seems to have attained that level of maturity, given how they have dealt up with Wall St after 2008, or the Pentagon for the 20 year war or dear Mark Zuckerberg. So maybe it's time." I don't think 2008 was a sign of maturity when the people who caused and benefitted from the meltdown got bailed out and could keep their money. Maturity would have been that the people who ran the banks before the crash would have lost all their money since it turned out that their contribution was overall negative. We have reached a point where the people who make the most money can hide behind big faceless corporations. They reap most of the profits while the losses go to the rest.
  - sonnyblarney 8y ago
    Neither the President nor the Pope have a considerable amount of power. The office of the pres. was specifically designed to 'not be a king' and he's highly constrained by the other wings of government. The US was supposed to mostly about the states. The Catholic Church generally gives a very wide berth as to the operational artifacts of Parishes. He's also to some extent a figurehead. CEO means such different things at different scale, at different organizations, it's really hard to compare. I suggest the issues may have a lot to do with short-term vs. long-term incentives. Also - 'average' pay isn't so helpful when there are a few with massive, massive pay packages that skew all of the data.
- mbesto 8y ago
  > I don't think anyone is surprised that it doesn't help at all. I know you're purposely being sensationalist, but there is pretty incredible value in the networking by doing an MBA...which IMHO is actually what makes good CEOs - having strong networks of people around you.
  - alexpetralia 8y ago
    Right, clearly this makes strongly networked CEO, but not a "good" CEO in terms of subsequent period share returns, as the research demonstrates.
- 75dvtwin 8y ago
  What most long-term investors would prefer is a cult of a 'process', rather than a cult of 'personality'. A process' is a combination of know-how + culture + rules + compliance. Every business goes through cycles (eg startup, growth, pivot, then repeat) At every cycle, different personal qualities of a CEO would be more beneficial. However, a property of a company with a cult of 'process', is that the process will organically select and retain a right CEO at a right cycle. So two outcomes of the above position: a) recognizing a company with a good process, is a very important and powerful skill to have (likely Warren Buffet has it). b) averaging CEO performance without recognizing what cycle the company is at, compared to CEOs skills, is not by itself a measure of CEO performance. It is more of a proxy measure to whether the company has a sustainable and investment-ready process or not. -- By the way, with regards to > This is why it's not such a big deal for most people that Ronaldo or Messi get paid a lot more than their teammates, and the rest of society. I would challenge that, and say that it is quite abnormal, historically, for entertainers to get paid this much. The development of multiplicative technologies (radio, TV, internet), and lack of wars between the 'super-nations' -- is really what made entertainers into exceptionally wealthy profession. So, yes it reasonable to assume better performing sportman will get paid more than their team mates. But it is not reasonable that they get paid this much... that bothers me.
  - gotocake 8y ago
    Athletes and entertainers being paid insane amounts isn’t as new as you might think, although fashions do wax and wane. https://en.m.wikipedia.org/wiki/Gaius_Appuleius_Diocles https://en.m.wikipedia.org/wiki/Gaius_Appuleius_Diocles Gaius Appuleius Diocles was born in approximately 104 A.D in Lamecum... Diocles is believed to have started racing at the age of 18 in Ilerda... Records show that he won 1,462 out of the 4,257 four-horse races he competed in and was placed in an additional 1,438 races (mostly finishing in second place). The ‘champion of charioteers’ is one of the best-documented ancient athletes, most likely because he was such a star at the famous Roman Circus Maximus. [1] Being the best in the field also seems to have allowed Diocles to perfect his showmanship. Many of his victories took the form of a ‘come from behind’ crossing of the finish line at the last possible moment. The crowds loved it. Any race with Diocles quickly became the ‘featured event’ of the day. This naturally helped Diocles make even more money. His winnings reportedly totaled 35,863,120 sesterces, equivalent to 358,631.20 gold aureus or 2,600 kg of gold, allegedly, over $15 billion in today’s dollars, an amount which could provide a year's supply of grain to the entire city of Rome, or pay the Roman army at its height for a fifth of a year. Classics professor Peter Struck describes him as "the best paid athlete of all time".
- skookumchuck 8y ago
  The CEO's decisions matter. For the most obvious example, see Apple. A series of CEOs drove Apple to near bankruptcy, then Jobs became CEO. With the same employees, plant, equipment, culture, etc., he turned it into the largest company in the world. He did something similar to Pixar. Microsoft is another example. Same company, same staff, same products, 3 CEOs, stark difference in results.
  - kochikame 8y ago
    Your examples show that CEOs "can" matter, but not that they "do" matter. I think anyone would agree that there are plenty of CEOs who happened to get their jobs just as pipelines come through, the economy rebalances in their favor, long-term HRD plans come to fruition etc. but they get all the credit anyway
    - skookumchuck 8y ago
      The man in charge always gets the credit. I have some AMZN stock. I wouldn't trade Bezos for someone cheaper. Would you?
      - ALittleLight 8y ago
        To my knowledge Bezos gets paid only 80 grand a year - so no.
        skookumchuck 8y ago
        That's salary, not compensation.
        Pharmakon 8y ago
        It’s pretty much both. https://www.marketwatch.com/story/the-typical-amazon-worker-made-less-than-30000-in-2017-2018-04-18 https://www.marketwatch.com/story/the-typical-amazon-worker-... Companies this year are reporting their CEO pay in relation to the compensation of a median worker for the first time as a result of a 2015 rule mandated by the Dodd-Frank act. Amazon Chief Executive Jeff Bezos recorded total compensation of $1,681,840 in 2017, almost all of which is money paid for personal security — Bezos drew a salary of $81,840 and received no additional stock. Bezos’s compensation is 59 times the median Amazon worker’s. He doesn’t need to draw a fat salary or get more stock, he already owns more than $110,000,000,000 in stock.
- megablast 8y ago
  > This is why it's not such a big deal for most people that Ronaldo or Messi get paid a lot more than their teammates, and the rest of society. This is not why, and has nothing to do with it. Players get huge wages, because they are the best on their teams, and the sports generate a lot of money. If it wasn't going to the players, it would go to the owners.
- salty_biscuits 8y ago
  "Why should there be a many-multiples reward for being slightly up the senior management ladder at each step?" Really suggests some sort of a ponzi scheme...
gallerdude 8y ago
The basic unit of information for a human being is a story, not a number or a fact. So it doesn't surprise me that we're obsessed with something as trivial as how Elon Musk's $1/day diet shaped him into an entrepreneur[1]. I don't think it's a bad thing to have a vague awareness of the things that make people successful: unafraid of failure, hard work & dedication, true passion about what you're creating. But I think it does actively hurt you if you overfit what causes success, because you focus way to much on getting the little things right that you miss the big picture. [1] https://www.independent.co.uk/life-style/gadgets-and-tech/news/tesla-spacex-elon-musk-latest-zip2-technology-entrepreneurship-business-queens-university-a8274186.html https://www.independent.co.uk/life-style/gadgets-and-tech/ne...
- zeroname 8y ago
  > unafraid of failure, hard work & dedication, true passion about what you're creating I would say those are in equal measure things that make people unsuccessful. You better be afraid to fail or you will follow too many stupid ideas. You can burn yourself out working too hard on the wrong thing. You can be really passionate about something that basically nobody except you wants or needs. Conversely, a lot of things that nobody really is passionate about can make a lot of money. I will also say that Elon Musk has not been successful in real business terms (creating a sustainable, profitable company) except that one time with PayPal and that could be down to good luck and timing. Nowadays, there's too much cheap and dumb money chasing too many "next big things", so it's hard to tell fact from fiction. In my estimation, success really comes down to: 1) showing up 2) timing 3) luck There's lots of people that are almost Elon Musk or almost Mark Zuckerberg or almost Steve Jobs. It's a gamble, but at least you get to choose which table to play on.
sys_64738 8y ago
I always figured to be an effective leader requires knowing your product. For software companies that means working in their field so you understand the tech or problem area then can make better decisions. You can complement your leadership by getting an MBA which rounds out the rough edges of business. Career MBAs who have no experience of the area of the business are red flags in my experience. It's like a manager who isn't technical. They make wrong decisions by themselves or listen to the wrong people.
- JamesBarney 8y ago
  What edges does the MBA rough out? I've always been skeptical of them, and my friends with MBAs haven't helped. They were all optimistic about how much they were going to learn, but by the end thought "at least I got a network and a degree on my resume". I don't think anyone would get an MBA if you couldn't see it on their resume.
  - crazygringo 8y ago
    Whichever edges are rough for you personally, that's the point. Like if you're great at finances but terrible at understanding sales and marketing, then the sales and marketing part of the MBA will be most valuable for you. And vice-versa, and all the other combinations. MBA's ensure you have at least a minimal competence in each classic area of running a business, and aren't going to make bone-headed decisions that might otherwise seem logically plausible. That's one of the reasons MBA programs tend to be centered around case-studies: so you're exposed to a ton of ideas that seemed reasonable but then turned out to be disastrous. As long as you've done the MBA, you're unlikely to repeat those. If you don't have an MBA, you might not know any better.
    - hopler 8y ago
      A Master of Business Administration does for the business what the System Administrator does for IT systems. MBA is a fine discipline. The problem is when MBA gets equated with SVP/CEO.
- 8y ago
crazygringo 8y ago
I'm not sure this proves anything at all. To play devil's advocate: what if top CEO's (whether by school or by track record) look for harder challenges? Someone once said Dara Khosrowshahi took the CEO job of Uber not to make money, but because anyone willing to take that job is somehow who wants to play the CEO game on "hard mode". If everyone's taking a job where there's a 50% chance of failure for their personal skill level -- which means the more skilled CEO's are taking the harder jobs, and the less skilled CEO's are taking the "safer" harder-to-mess-up jobs -- then statistics will look like CEO skills don't make a difference... even though they do. And since employment markets (in general) tend to funnel higher performers to harder jobs (because that's economically efficient), this doesn't seem implausible.
- pithymaxim 8y ago
  Yep. Also this is all based on stock price data, so it could be that businesses typically hire the person that the market "expects"...which would predict zero alpha even if counterfactually hiring a bad CEO would've tanked the stock price.
- azhenley 8y ago
  I definitely think you are right. But then again, there are so many confounding factors at play that this all becomes so difficult to detangle. I posted this in a separate comment too: Freakonomics Radio had a series called "The Secret Life of a CEO" that covered CEO performance and many other topics. I highly recommend it! http://freakonomics.com/ceos/ http://freakonomics.com/ceos/
- supercanuck 8y ago
  >Over the past year, we set out to answer these questions. We created a database of approximately 8,500 CEOs and their characteristics, each individually mapped to their respective companies for the duration of their tenure, and pulled company fundamentals from Compustat, stock returns from the University of Chicago's Center for Research in Security Prices (CRSP), CEO tenure and education from BoardEx, and long-form CEO biographies from Capital IQ. We then ran a battery of tests on the new data set, looking for correlation, persistence, and predictive power. ...Nevermind that, I heard that some guy took the job because he liked challenges. Maybe Dara was already wealthy and the marginal utility of the money at Uber wasn't a factor? Maybe this would lead him to beleive that his own decision making an knowledge would be superior and he wouldnt listen to his peers. Soooo many variables. It never ceases to amaze me we can dismiss data driven ideas in a blink of an eye because it doesn't fit a narrative we've developed through anecdotes.
pembrook 8y ago
One of the best things to come out of so-called “big data” is the slow destruction of the human ego. I read an interesting joke few months back (not sure where, might have been in Capital Minded), the gist of it was basically: If 99% of people who buy corporations for a living can't beat a monkey throwing darts over time...why do we believe people who run corporations for a living are any smarter? They're both looking at the same corporate balance sheets and industry trends! I mean, it makes intuitive sense. For a fully scaled company in a legacy industry, what would really change if we removed the CEO and replaced him with the Janitor? The business will still be subject to the greater trends of the market and its industry. It doesn't take a Harvard MBA to take a data input like: electric cars are the fastest growing automotive segment therefore...my auto company should probably invest in electric cars? Edit: where I think this could fall apart is in frontier industries like tech. The decisions require much more specialized expertise and the industries are much less mature (ie. Say ridesharing).
- cm2012 8y ago
  Warren Buffet famously says he likes to invest in businesses that could be run by a ham sandwich.
  - onlyrealcuzzo 8y ago
    No wonder he's doubling down on Apple.
  - sokoloff 8y ago
    "I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will." --Warren Buffett
    - thisisit 8y ago
      I think the quote is by Peter Lynch from the book - One Up on Wall Street.
      - 8y ago
hjk05 8y ago
The success of a company rests on thousands of factors one of which is the CEO. Even the best CEO can’t ensure success when all other factors are against it, but a mediocre CEO will sometimes fail when all favors are in their favor. Which is to say. When trying to figure out if a CEO is ‘worth it’ don’t like at company success as a metric. You need to look across the industry and find “big obviusly avoidable but extremely costly mistakes” and see how much they cost, and ask: is it worth it if they can avoid all thoses issues.
azhenley 8y ago
Freakonomics Radio had a nice podcast series, The Secret Life of a CEO, that looked into the effect of CEOs on companies among other interesting stuff like how is a CEO chosen, what happens when they are fired, etc. http://freakonomics.com/ceos/ http://freakonomics.com/ceos/
whack 8y ago
The rise in CEO pay, and tying CEO pay to stock performance, are entirely orthogonal issues. The fact that the article doesn't seem to realize this distinction, makes me question how much of the rest of the article is similarly flawed.
- jdavis703 8y ago
  Can you elaborate on why they’re “entirely orthogonal?” Since this increased compensation is stock, aren’t they at least somewhat related?
  - whack 8y ago
    You can pay someone the exact same target-compensation, while still shifting it away from cash, and towards stock. For example, giving someone a stock grant of 1000 shares of GOOG, instead of paying them $1.1M in cash.
    - yowlingcat 8y ago
      There are still issues with this approach, although they're a bit more subtle. Think about Valeant circa 2015 -- definitely taking a short term approach of acquiring and stripping pharma companies, which did positively impact their stock price. But, they did it in an unsustainable manner.
bitL 8y ago
I am thinking about starting MBA in the fall (having MS in CS from a Top 10 US school), just because I can and it could be helpful for running my own companies. Talk me out of it please! (I might do a PhD in ML in parallel if I feel crazy enough)
- gautamdivgi 8y ago
  How would the MBA help in "starting & running a company"? I think the PhD may provide a better launchpad to starting something up. You may want to correlate startup founders to MBA degrees at the time of founding if you need hard data.
  - bitL 8y ago
    That's why I am asking because I have some doubts. But there are specific entrepreneur/innovation oriented MBAs oriented in dealing with VCs, negotiation, strategy from initial state etc. Of course those are just guidelines, but I was thinking it's good to have all things on the radar instead of trying to invent all business processes myself alongside all the tech that needs to be developed.
- sk5t 8y ago
  If you have the time and money to spend (or it's otherwise paid-for) and a spot at a top 5 program--why not?
  - bloomer 8y ago
    Opportunity cost
    - sk5t 8y ago
      Thus "_time_ and money to spend." Studying for a year or two at Stanford would probably come out on top of most opportunity cost comparisons, absent a pretty compelling plan in some other direction.
- fheld 8y ago
rdiddly 8y ago
Just to throw yet another caveat into an already delicious stew, stock price is an imperfect proxy for what we would really be trying to measure, which is the creation of value.
kevinventullo 8y ago
Even if "firm performance is not predicted by the educational background of the CEOs", it does not follow that an MBA is worthless. To draw a parallel, I work with many software engineers both with and without CS degrees, and there seems to be no correlation (or even a slight negative correlation) between performance and those with a degree. That does not mean CS degrees are worthless! It means once you have already selected for folks with a successful career in software, the degree has less predictive capability.
- ghaff 8y ago
  Bingo. If you look at successful people you’re probably going to find a pretty diverse set of backgrounds in addition to the developers with CS majors from top schools. But doesn’t mean that spending your 20s as a ski bum is actually a recommended path for most professional careers—even if it does make for a cool story if you get to the point people are writing magazine articles about you.
venantius 8y ago
I don't find changes to share price to be the most convincing indicators of performance, though I agree you'd probably be hard pressed to find a better "generalizable" statistic. Fundamentally, I think measuring talent is an astonishingly hard problem.
darawk 8y ago
I've done these same analyses before as well, and more. This is the correct analysis to do if you're looking to build an alpha-generative trading strategy. It is not necessarily the correct analysis to do if you want to measure actual CEO performance. If you want to measure CEO performance, you need to look at growth in fundamentals, not share price. The share price is going to reflect the market's beliefs about the CEOs. Which, if the market is efficient (as it seems to be for these variables), should show exactly no effect. If there were an effect here manifest in share price returns, we could all read this article and arbitrage it away. This would mean that the next person who looked for this effect would conclude "CEO performance has no correlation to share price returns!". I'm kind of surprised they would do all of this statistical work and not be aware of this gaping hole in their reasoning. Now they do make the point at the end that they're arguing against stock-based compensation here, which is a good point. If the market prices in your value as a CEO the moment you're hired, you don't want to have share-price based compensation. You want comp tied to growth in fundamentals.
- lordnacho 8y ago
  > You want comp tied to growth in fundamentals. This has the same problem as tying it to the market. You don't know what the baseline is. Would a good CEO always grow the fundamentals? What if it's a declining industry? And vice versa.
  - darawk 8y ago
    It is a problem, but it's not the same problem. You can try to address the issue of secular trends in the industry by looking at say, performance relative to industry peers. How you define industry peers of course is a bit tricky. Another option is to look at share price returns from the day before the new CEO was announced. That would incorporate the market pricing in the new CEO. However, I don't think this analysis did that.
  - starcraft 8y ago
    It's not the same problem because expectations of CEO outperformance can be internalised into the price at time 0.
achow 8y ago
> Headhunters and corporate boards often look for CEOs with a track record of creating value at another company when choosing whom to hire. But if past performance doesn’t predict future results, then they might be looking at an irrelevant variable. I don't understand this. I would imagine there is lot of accumulated knowledge, connections, network, skills etc. that are involved in taking day to day or strategic decisions. Not irrelevant at all if my money was at stake.
victor106 8y ago
When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. - Warren Buffett The business that the company is in matters much more than any individual CEO or their background.
bkohlmann 8y ago
The lead author is a friend of mine. The beautiful thing is that he got an...MBA from Stanford. I’m consistently intrigued by his observations about the world. He doesn’t let his own background get in the way of questioning established wisdom. The fund he runs now is based on a belief that private equity is seriously flawed...which he discovered by working as an analyst for one of the top firms. He hosts a fantastic weekly newsletter with a lot of quantitative insights - can discover his strategy and sign up here: http://verdadcap.com/strategy/ http://verdadcap.com/strategy/
- chasely 8y ago
  And the management team is...all MBAs :)
- dbalbright 8y ago
  >This email list is only open to accredited investors. By clicking "subscribe to this list," you are representing that you are an accredited investor. Is that for his own protection? People aren't going to drop from helicopters into my home, are they?
blunte 8y ago
Not only might there be issues with choosing CEOs based on pedigree and past performance (related to share value), but even the measurement of share value is arguably a weak indicator of company health and profitability. Many institutions and media organizations are focused on quarterly or annual share price, but those numbers can be temporarily inflated if the company is willing to take actions that would damage itself longer term. And when I say "would", I actually mean "usually do". Also, global and industry factors can push a whole sector up or down for months or years.
- pembrook 8y ago
  I would argue the efficiency of the market produces an excellent correlation between company health and stock valuation over long periods. But even if you disagree, isn't that just another way of arriving to the authors same conclusion? If share price is a terrible proxy for company health, then why are we paying CEOs based on it? And if it is a good proxy for company performance, then it's proving that CEOs are being grossly overpaid for what are essentially random outcomes. Under both scenarios, something is terribly wrong.
solatic 8y ago
Author is ignoring factors which are inconvenient due to the difficulty of measuring them. Let's take a famous example - Steve Jobs. Booted from his own company, then NeXT was a middling success (because of its acquisition), and Pixar was a much larger success but much more because of John Lasseter than anything Jobs did. Was there anything there to suggest that Jobs was going to be as successful as he was with turn-of-the-century Apple? How could somebody who was that successful at the helm not have similarly suceeded in his previous ventures? At the same time, can any sane person say that Apple was destined to take off like a rocket, that Jobs was merely lucky to be in the CEO role when it happened and take all the credit, that therefore anybody else could've been CEO and Apple still would've turned out to be wildly successful? That is patently ridiculous. People are not islands. People can be more than the sum of their circles. Jobs was as successful as he was because he was in the right company plus at the right time plus with the right people around him (Jony Ive present, John Sculley absent, etc.). Now, the author doesn't mention this because the author has no way of quantifying the, for lack of a better encompassing term, "cultural fit" of any given CEO candidate with any given corporate setting. But just because the author does not understand the relationship does not mean that the relationship does not exist. That the economy fails to judge CEOs properly and offer the correct opportunities to the correct candidates does not mean that all candidates are appropriate in all roles with their performance more or less in the hands of fate. Getting a random result for non-random inputs is not evidence of randomness but evidence of misunderstanding the inputs or of a poor metric. Postscript: boards are completely justified in firing CEOs for poor performance ostensibly due to external, macroeconomic factors. The captain's job is to weather storms, not return to Spain with naught but an excuse for why the King's colonial riches have sunk to the bottom of the Atlantic. Maybe the captain hired the wrong sailors who would've fared better in fairer weather. Maybe the captain was brought aboard a boat with a hole in the hull. But part of the captain's job is to make sure the ship is properly staffed and that holes are plugged. If they're not, then the captain doesn't get to cry foul for a storm exposing his incompetence. Jobs had his storms - the dot-com bust and the 2008 recession. So what?
thecleaner 8y ago
Does anybody know what Figure 2a and 2b are trying to show ?
- chasely 8y ago
  Don't know why they included two figures when two numbers would do (it appears the first graph in each is showing the definition of median and quartile). If the top quartile of performers were consistently the top quartile, then the plots in Fig. 2B would be the same because their performance is persistent over two three-year periods. Same thing can be said of Fig. 2A but with the median. The simpler and more intuitive way to show this would be a some way to display "skill performance", "chance performance", and "observed performance". | -------------- | Skilled | Chance | Observed | |---------------+------+-----+-------| | Median------ | 50% | 25% | 25% | | Top quartile | 25% | 6.25% | 7% |
subjectHarold 8y ago
This is kind of crazy. Presumably, there is a correlation between going to a good business school and getting a job with a good business (which generates market-beating returns). So you would expect some kind of correlation just because people think MBAs are valuable...but no. In particular, "Elite MBAs did perform relatively well as CEOs in healthcare and consumer staples". Not significant statistically but the reason this is true is because both healthcare and staples (until recently) have had a killer run. So I don't think share price performance is the best metric but...even then...you would still expect to see something totally different to the actual results. The stuff that looks at the portfolios of bankers is more understandable...but this has been shown elsewhere (generally, poor fund managers do better).
hacknat 8y ago
I love to hate on MBA types just as much as the next engineer, but this article contains a distracting logical fallacy right away: That CEO pay increased because of a trend in aligning incentives (the analysis of the CEOs performance says nothing about this). The article spends no time on this and is at best an ancillary point, it should have started with a general statement of how crazy CEO pay is and if it’s worth it without dealing with the incentive nonsense at the beginning. Otherwise good article.
- tonypace 8y ago
  But this was the justification in countless think pieces in the Economist, the NYT, and so on. Align the incentives of the CEO with the shareholders and magic will occur. The author is dueling with a ghost that you never saw.
jedberg 8y ago
My biggest takeaway from this is to invest in a company right when the CEO changes if they CEO came from a failed company. Assuming "strong track record" is priced into the stock of a company picking up a new CEO that's good, I also assume "weak track record" is priced in to the opposite. Since success afterwards is basically chance, it would be a discount.
vasilipupkin 8y ago
I just want to point out to those who are excited about confirming their preconceived bias that MBAs don’t matter: according to this result, MBA CEOs outperformed non MBA CEOs by 0.04% per month. That’s quite a bit of alpha. EDIT: yes, the individual means are not statistically significant but given the large effect a) where is the p-value b) there is no statistical significance reported of the difference between MBA and non-MBA performance, only of individual means
- Sebguer 8y ago
  Except... the study also points out that this is not a statistically significant difference. How do you miss that?
  - vasilipupkin 8y ago
    I didn’t. Statistical significance is complicated. In a noisy data set, you have to also look at the magnitude of the effect - and its huge here. Note that they don’t report p-value magnitude, which matters. They also don’t report statistical significance of difference, only of individual effects.
galaxyLogic 8y ago
I believe, just my belief, that a "good CEO" can install a great spirit in the company, which trickles down through management to all employees.
starcraft 8y ago
I see a few critical problems with this research. The first in the section "Do MBAs Make Better CEOs?". If the labour market is efficient we would NOT expect CEOs with MBAs to outperform CEOs without MBAs due to selection effects. We may expect them to outperform if we sample randomly from the general population that has MBAs versus that which does not, but this is not the sampling scheme in effect. If boards are able to accurately select non-MBA CEOs whose other characteristics compensate for the lack of an MBA, then we would expect a zero within-group correlation in the selected population. It is like if I was to hire a quantitative researcher for a machine learning research team. I could pick a PhD from a top school, or I could allow a non-PhD into my team as long as their other characteristics are sufficiently great (e.g. competition math in high school), but after appropriate selection effects there is no within-group correlation between holding a PhD and not holding one. If I looked at the average PhD versus the average non-PhD in the general population though, then an effect becomes apparent, but that's not the sampling scheme I've used. The second problem is in the section "Is CEO Performance Persistent?". They used stock market returns which is flawed as expected CEO performance should be baked into the stock price from the beginning, meaning we expect zero excess return in the second sample even if the CEO was truly exceptional. This section would unlikely pass peer review into a top finance journal. The only valid thing I can see is research about "Share Price Performance for CEOs Who Ran Multiple Companies", since nobody knows the second company ahead of time so the information shouldn't be baked into the price. But a lot of details are missing. Skewness and kurtosis of returns will impact the way they've quantized the data, among other things. All in all, unpersuasive.
crb002 8y ago
Seems like they could just do a 15 year annuity that did X times the market avg price every two weeks. Make it transferable so CEOs could liquidate some for higher up front salary.
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leakyvalve 8y ago
The design is interesting but the test itself is kinda pointless. Fama-French explains about 30% of stock return variation at best so by using stock performance as a measurement you are mostly testing signal (highly credited CEOs) against noise (residual returns). Another thing is you have to specify your position on EMH here. If you believe the semi-strong form then everything about the CEO should be priced-in immediately after the announcement, which means it will not have a persistent impact on stock return when you slice and dice time periods. IMO the CEO is just one input out of thousands that influence a stock's performance, which is implied by a lot of asset pricing studies already. Also managing a public company is an unbelievably complicated job. You have to be one of the "best and the brightest" just to keep the boat bearly afloat sometimes.
yowlingcat 8y ago
Here's my question: how do you create incentive structures towards sustainable operation? Is this even possible or feasible inside of a company, or is it the market's job to operate such structures, using corporate formation, dissolution, aggregation and division? It seems very hard to create an incentive structure that won't be gamed.

375 points by vinnyglennon 8y ago

This is great work. It's a real job gathering and analysing all that CEO performance data. My guess is that most people were suspecting this anyway. The fact is the CEO is there for a few years making a few key decisions, a large company is like an oil tanker, and markets are quite hard to predict. Taleb has cooked a fair bit of soup on the fooled by randomness idea, but in this case his observations are correct. It is very very hard to show that CEO performance is something other than random. That's not to say that everyone's performance is pure chance. Sports generates a lot of reproducible data about its performers, and we can tell from the numbers which players are better. This is why it's not such a big deal for most people that Ronaldo or Messi get paid a lot more than their teammates, and the rest of society. What does bother people, including myself, is that people are given far more credit for outcomes than is credible. Why should there be a many-multiples reward for being slightly up the senior management ladder at each step? Is it not most plausible that the leaders just under CEO also understand the firm's situation, and can make sensible decisions? And the step under them? Is it really so hard to find a CEO that you have to pay hundreds of grunt salaries to get one? The other issue is MBAs. I don't think anyone is surprised that it doesn't help at all. I went to a well known business school too, and it's not like they tell you how to run a company. It's really just a kind of brainstorming exercise where you have bit of a think about what a company might do to be successful. What it does seem to be is a kind of stamp of ambition. People who go to business schools are keen to work hard to reach the top of the business world. This might seem fine, but you have to wonder whether the best managers are ambitious people who want to be managers, or people in the line of business who want to compete for the same jobs. I know who I'd pick.

pacala 8y ago
To play devil's advocate: The primary function of a manager is to say "No". As one goes higher and higher up the hierarchy, one has to say "No" to pushier and pushier subordinates, and the cost of every misplaced "Yes" is higher and higher. While leaders just under the CEO may understand the firm situation just fine, they may also be unable to say "No" to enough bad ideas for a myriad reasons, including lack of political clout with other leaders, with investors or with peer CEOs.
- lordnacho 8y ago
  > The primary function of a manager is to say "No". I'm a manager, and I can't really see this being the key job description. But if it was, why would that have gotten harder in the last few decades?
  - UncleMeat 8y ago
    Lots of people come to my team asking for work on X. If I said yes to everything my team would collapse from being spread too thinly. Being able to say that X is lower priority than what I am currently working on and leave the door open for re-evaluating priorities if needed is a key part of my job. My team also frequently comes to me with ideas for interesting work that also isn't contributing to our vision. If we just did everything that came to mind we'd also fall apart.
    - deleted 8y ago
      [deleted]
    - Gibbon1 8y ago
      My experience after 35 years is nothing scares me more than when a team of out of control developers are adding more and more features to the spec. Most baffling is it's obvious they think they are accomplishing something and you're a meanie for trying to rein them in. It always ends the same way. A lot of things can go wrong in a project. But that's that one 100% guaranteed to sink it.
      - deleted 8y ago
        [deleted]
      - com2kid 8y ago
        On the flip side, a team of developers who aren't even interested in adding anything of their own volition is also a bad sign. There has to be a balance.
        8y ago
marktangotango 8y ago
Well, poor outcomes can certainly be attributed to poor direction from a CEO. Many of us have experienced that. My example is a new ceo who came in making a lot of noise about cleaning house and righting the ship. His intention was the sales org, but effectively scared off the best developers. He did also gut the sales org, and sales never recovered. So objectively it’s not out of the question the reverse could be true, that a ceo could influence a positive outcome, maybe just harder to measure?
- lordnacho 8y ago
  But this doesn't test what another CEO would have done in the same situation. All we can do is make a guess about how the average CEO would have performed. There's no way to really test it.
  - deleted 8y ago
    [deleted]
twic 8y ago
> What it does seem to be is a kind of stamp of ambition. People who go to business schools are keen to work hard to reach the top of the business world. Same as most degree credentialism. People don't hire Harvard graduates because of all the valuable stuff they learned at Harvard, they hire them because they were smart and driven enough to get in to Harvard.
- hexane360 8y ago
  Or they hire them because they went to Harvard as well.
di3sd 8y ago
We don't need Presidents and Popes either. The world is a much more complicated place today, than during the time of kings, and the accumulating data is going to keep revealing the complexity is too much for one man or woman to be responsible for it all. But when a Deepwater Horizon type event happens and the whole herd starts baying for blood, are we sophisticated enough to say hey look at the data whats the point of lynching one person? Of late the US seems to have attained that level of maturity, given how they have dealt up with Wall St after 2008, or the Pentagon for the 20 year war or dear Mark Zuckerberg. So maybe it's time. I don't see older firms changing but newer firms might turn less hierarchical.
- tsunamifury 8y ago
  It's an interesting thought. Object oriented responsibility is as archiac as object oriented data analysis because since the rise of ML we know that the larger objects were just mental models for human decision making. However they erred by covering through averaging of more granular inputs that had conflicting information. I.e. if I'm a CEO and 3 of my VPs are good but one is terrible is it my fault that only one has become a risk. Under current object oriented thinking, yes but with granular analysis no it's the VPs fault.
- maxxxxx 8y ago
  :Of late the US seems to have attained that level of maturity, given how they have dealt up with Wall St after 2008, or the Pentagon for the 20 year war or dear Mark Zuckerberg. So maybe it's time." I don't think 2008 was a sign of maturity when the people who caused and benefitted from the meltdown got bailed out and could keep their money. Maturity would have been that the people who ran the banks before the crash would have lost all their money since it turned out that their contribution was overall negative. We have reached a point where the people who make the most money can hide behind big faceless corporations. They reap most of the profits while the losses go to the rest.
- sonnyblarney 8y ago
  Neither the President nor the Pope have a considerable amount of power. The office of the pres. was specifically designed to 'not be a king' and he's highly constrained by the other wings of government. The US was supposed to mostly about the states. The Catholic Church generally gives a very wide berth as to the operational artifacts of Parishes. He's also to some extent a figurehead. CEO means such different things at different scale, at different organizations, it's really hard to compare. I suggest the issues may have a lot to do with short-term vs. long-term incentives. Also - 'average' pay isn't so helpful when there are a few with massive, massive pay packages that skew all of the data.
mbesto 8y ago
> I don't think anyone is surprised that it doesn't help at all. I know you're purposely being sensationalist, but there is pretty incredible value in the networking by doing an MBA...which IMHO is actually what makes good CEOs - having strong networks of people around you.
- alexpetralia 8y ago
  Right, clearly this makes strongly networked CEO, but not a "good" CEO in terms of subsequent period share returns, as the research demonstrates.
75dvtwin 8y ago
What most long-term investors would prefer is a cult of a 'process', rather than a cult of 'personality'. A process' is a combination of know-how + culture + rules + compliance. Every business goes through cycles (eg startup, growth, pivot, then repeat) At every cycle, different personal qualities of a CEO would be more beneficial. However, a property of a company with a cult of 'process', is that the process will organically select and retain a right CEO at a right cycle. So two outcomes of the above position: a) recognizing a company with a good process, is a very important and powerful skill to have (likely Warren Buffet has it). b) averaging CEO performance without recognizing what cycle the company is at, compared to CEOs skills, is not by itself a measure of CEO performance. It is more of a proxy measure to whether the company has a sustainable and investment-ready process or not. -- By the way, with regards to > This is why it's not such a big deal for most people that Ronaldo or Messi get paid a lot more than their teammates, and the rest of society. I would challenge that, and say that it is quite abnormal, historically, for entertainers to get paid this much. The development of multiplicative technologies (radio, TV, internet), and lack of wars between the 'super-nations' -- is really what made entertainers into exceptionally wealthy profession. So, yes it reasonable to assume better performing sportman will get paid more than their team mates. But it is not reasonable that they get paid this much... that bothers me.
- gotocake 8y ago
  Athletes and entertainers being paid insane amounts isn’t as new as you might think, although fashions do wax and wane. https://en.m.wikipedia.org/wiki/Gaius_Appuleius_Diocles https://en.m.wikipedia.org/wiki/Gaius_Appuleius_Diocles Gaius Appuleius Diocles was born in approximately 104 A.D in Lamecum... Diocles is believed to have started racing at the age of 18 in Ilerda... Records show that he won 1,462 out of the 4,257 four-horse races he competed in and was placed in an additional 1,438 races (mostly finishing in second place). The ‘champion of charioteers’ is one of the best-documented ancient athletes, most likely because he was such a star at the famous Roman Circus Maximus. [1] Being the best in the field also seems to have allowed Diocles to perfect his showmanship. Many of his victories took the form of a ‘come from behind’ crossing of the finish line at the last possible moment. The crowds loved it. Any race with Diocles quickly became the ‘featured event’ of the day. This naturally helped Diocles make even more money. His winnings reportedly totaled 35,863,120 sesterces, equivalent to 358,631.20 gold aureus or 2,600 kg of gold, allegedly, over $15 billion in today’s dollars, an amount which could provide a year's supply of grain to the entire city of Rome, or pay the Roman army at its height for a fifth of a year. Classics professor Peter Struck describes him as "the best paid athlete of all time".
skookumchuck 8y ago
The CEO's decisions matter. For the most obvious example, see Apple. A series of CEOs drove Apple to near bankruptcy, then Jobs became CEO. With the same employees, plant, equipment, culture, etc., he turned it into the largest company in the world. He did something similar to Pixar. Microsoft is another example. Same company, same staff, same products, 3 CEOs, stark difference in results.
- kochikame 8y ago
  Your examples show that CEOs "can" matter, but not that they "do" matter. I think anyone would agree that there are plenty of CEOs who happened to get their jobs just as pipelines come through, the economy rebalances in their favor, long-term HRD plans come to fruition etc. but they get all the credit anyway
  - skookumchuck 8y ago
    The man in charge always gets the credit. I have some AMZN stock. I wouldn't trade Bezos for someone cheaper. Would you?
    - ALittleLight 8y ago
      To my knowledge Bezos gets paid only 80 grand a year - so no.
      - skookumchuck 8y ago
        That's salary, not compensation.
        Pharmakon 8y ago
        It’s pretty much both. https://www.marketwatch.com/story/the-typical-amazon-worker-made-less-than-30000-in-2017-2018-04-18 https://www.marketwatch.com/story/the-typical-amazon-worker-... Companies this year are reporting their CEO pay in relation to the compensation of a median worker for the first time as a result of a 2015 rule mandated by the Dodd-Frank act. Amazon Chief Executive Jeff Bezos recorded total compensation of $1,681,840 in 2017, almost all of which is money paid for personal security — Bezos drew a salary of $81,840 and received no additional stock. Bezos’s compensation is 59 times the median Amazon worker’s. He doesn’t need to draw a fat salary or get more stock, he already owns more than $110,000,000,000 in stock.
megablast 8y ago
> This is why it's not such a big deal for most people that Ronaldo or Messi get paid a lot more than their teammates, and the rest of society. This is not why, and has nothing to do with it. Players get huge wages, because they are the best on their teams, and the sports generate a lot of money. If it wasn't going to the players, it would go to the owners.
salty_biscuits 8y ago
"Why should there be a many-multiples reward for being slightly up the senior management ladder at each step?" Really suggests some sort of a ponzi scheme...

gallerdude 8y ago

The basic unit of information for a human being is a story, not a number or a fact. So it doesn't surprise me that we're obsessed with something as trivial as how Elon Musk's $1/day diet shaped him into an entrepreneur[1]. I don't think it's a bad thing to have a vague awareness of the things that make people successful: unafraid of failure, hard work & dedication, true passion about what you're creating. But I think it does actively hurt you if you overfit what causes success, because you focus way to much on getting the little things right that you miss the big picture. [1] https://www.independent.co.uk/life-style/gadgets-and-tech/news/tesla-spacex-elon-musk-latest-zip2-technology-entrepreneurship-business-queens-university-a8274186.html https://www.independent.co.uk/life-style/gadgets-and-tech/ne...

zeroname 8y ago
> unafraid of failure, hard work & dedication, true passion about what you're creating I would say those are in equal measure things that make people unsuccessful. You better be afraid to fail or you will follow too many stupid ideas. You can burn yourself out working too hard on the wrong thing. You can be really passionate about something that basically nobody except you wants or needs. Conversely, a lot of things that nobody really is passionate about can make a lot of money. I will also say that Elon Musk has not been successful in real business terms (creating a sustainable, profitable company) except that one time with PayPal and that could be down to good luck and timing. Nowadays, there's too much cheap and dumb money chasing too many "next big things", so it's hard to tell fact from fiction. In my estimation, success really comes down to: 1) showing up 2) timing 3) luck There's lots of people that are almost Elon Musk or almost Mark Zuckerberg or almost Steve Jobs. It's a gamble, but at least you get to choose which table to play on.

sys_64738 8y ago

I always figured to be an effective leader requires knowing your product. For software companies that means working in their field so you understand the tech or problem area then can make better decisions. You can complement your leadership by getting an MBA which rounds out the rough edges of business. Career MBAs who have no experience of the area of the business are red flags in my experience. It's like a manager who isn't technical. They make wrong decisions by themselves or listen to the wrong people.

JamesBarney 8y ago
What edges does the MBA rough out? I've always been skeptical of them, and my friends with MBAs haven't helped. They were all optimistic about how much they were going to learn, but by the end thought "at least I got a network and a degree on my resume". I don't think anyone would get an MBA if you couldn't see it on their resume.
- crazygringo 8y ago
  Whichever edges are rough for you personally, that's the point. Like if you're great at finances but terrible at understanding sales and marketing, then the sales and marketing part of the MBA will be most valuable for you. And vice-versa, and all the other combinations. MBA's ensure you have at least a minimal competence in each classic area of running a business, and aren't going to make bone-headed decisions that might otherwise seem logically plausible. That's one of the reasons MBA programs tend to be centered around case-studies: so you're exposed to a ton of ideas that seemed reasonable but then turned out to be disastrous. As long as you've done the MBA, you're unlikely to repeat those. If you don't have an MBA, you might not know any better.
  - hopler 8y ago
    A Master of Business Administration does for the business what the System Administrator does for IT systems. MBA is a fine discipline. The problem is when MBA gets equated with SVP/CEO.
8y ago

crazygringo 8y ago

I'm not sure this proves anything at all. To play devil's advocate: what if top CEO's (whether by school or by track record) look for harder challenges? Someone once said Dara Khosrowshahi took the CEO job of Uber not to make money, but because anyone willing to take that job is somehow who wants to play the CEO game on "hard mode". If everyone's taking a job where there's a 50% chance of failure for their personal skill level -- which means the more skilled CEO's are taking the harder jobs, and the less skilled CEO's are taking the "safer" harder-to-mess-up jobs -- then statistics will look like CEO skills don't make a difference... even though they do. And since employment markets (in general) tend to funnel higher performers to harder jobs (because that's economically efficient), this doesn't seem implausible.

pithymaxim 8y ago
Yep. Also this is all based on stock price data, so it could be that businesses typically hire the person that the market "expects"...which would predict zero alpha even if counterfactually hiring a bad CEO would've tanked the stock price.
azhenley 8y ago
I definitely think you are right. But then again, there are so many confounding factors at play that this all becomes so difficult to detangle. I posted this in a separate comment too: Freakonomics Radio had a series called "The Secret Life of a CEO" that covered CEO performance and many other topics. I highly recommend it! http://freakonomics.com/ceos/ http://freakonomics.com/ceos/
supercanuck 8y ago
>Over the past year, we set out to answer these questions. We created a database of approximately 8,500 CEOs and their characteristics, each individually mapped to their respective companies for the duration of their tenure, and pulled company fundamentals from Compustat, stock returns from the University of Chicago's Center for Research in Security Prices (CRSP), CEO tenure and education from BoardEx, and long-form CEO biographies from Capital IQ. We then ran a battery of tests on the new data set, looking for correlation, persistence, and predictive power. ...Nevermind that, I heard that some guy took the job because he liked challenges. Maybe Dara was already wealthy and the marginal utility of the money at Uber wasn't a factor? Maybe this would lead him to beleive that his own decision making an knowledge would be superior and he wouldnt listen to his peers. Soooo many variables. It never ceases to amaze me we can dismiss data driven ideas in a blink of an eye because it doesn't fit a narrative we've developed through anecdotes.

pembrook 8y ago

One of the best things to come out of so-called “big data” is the slow destruction of the human ego. I read an interesting joke few months back (not sure where, might have been in Capital Minded), the gist of it was basically: If 99% of people who buy corporations for a living can't beat a monkey throwing darts over time...why do we believe people who run corporations for a living are any smarter? They're both looking at the same corporate balance sheets and industry trends! I mean, it makes intuitive sense. For a fully scaled company in a legacy industry, what would really change if we removed the CEO and replaced him with the Janitor? The business will still be subject to the greater trends of the market and its industry. It doesn't take a Harvard MBA to take a data input like: electric cars are the fastest growing automotive segment therefore...my auto company should probably invest in electric cars? Edit: where I think this could fall apart is in frontier industries like tech. The decisions require much more specialized expertise and the industries are much less mature (ie. Say ridesharing).

cm2012 8y ago
Warren Buffet famously says he likes to invest in businesses that could be run by a ham sandwich.
- onlyrealcuzzo 8y ago
  No wonder he's doubling down on Apple.
- sokoloff 8y ago
  "I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will." --Warren Buffett
  - thisisit 8y ago
    I think the quote is by Peter Lynch from the book - One Up on Wall Street.
    - 8y ago

hjk05 8y ago

The success of a company rests on thousands of factors one of which is the CEO. Even the best CEO can’t ensure success when all other factors are against it, but a mediocre CEO will sometimes fail when all favors are in their favor. Which is to say. When trying to figure out if a CEO is ‘worth it’ don’t like at company success as a metric. You need to look across the industry and find “big obviusly avoidable but extremely costly mistakes” and see how much they cost, and ask: is it worth it if they can avoid all thoses issues.

azhenley 8y ago

Freakonomics Radio had a nice podcast series, The Secret Life of a CEO, that looked into the effect of CEOs on companies among other interesting stuff like how is a CEO chosen, what happens when they are fired, etc. http://freakonomics.com/ceos/ http://freakonomics.com/ceos/

whack 8y ago

The rise in CEO pay, and tying CEO pay to stock performance, are entirely orthogonal issues. The fact that the article doesn't seem to realize this distinction, makes me question how much of the rest of the article is similarly flawed.

jdavis703 8y ago
Can you elaborate on why they’re “entirely orthogonal?” Since this increased compensation is stock, aren’t they at least somewhat related?
- whack 8y ago
  You can pay someone the exact same target-compensation, while still shifting it away from cash, and towards stock. For example, giving someone a stock grant of 1000 shares of GOOG, instead of paying them $1.1M in cash.
  - yowlingcat 8y ago
    There are still issues with this approach, although they're a bit more subtle. Think about Valeant circa 2015 -- definitely taking a short term approach of acquiring and stripping pharma companies, which did positively impact their stock price. But, they did it in an unsustainable manner.

bitL 8y ago

I am thinking about starting MBA in the fall (having MS in CS from a Top 10 US school), just because I can and it could be helpful for running my own companies. Talk me out of it please! (I might do a PhD in ML in parallel if I feel crazy enough)

gautamdivgi 8y ago
How would the MBA help in "starting & running a company"? I think the PhD may provide a better launchpad to starting something up. You may want to correlate startup founders to MBA degrees at the time of founding if you need hard data.
- bitL 8y ago
  That's why I am asking because I have some doubts. But there are specific entrepreneur/innovation oriented MBAs oriented in dealing with VCs, negotiation, strategy from initial state etc. Of course those are just guidelines, but I was thinking it's good to have all things on the radar instead of trying to invent all business processes myself alongside all the tech that needs to be developed.
sk5t 8y ago
If you have the time and money to spend (or it's otherwise paid-for) and a spot at a top 5 program--why not?
- bloomer 8y ago
  Opportunity cost
  - sk5t 8y ago
    Thus "_time_ and money to spend." Studying for a year or two at Stanford would probably come out on top of most opportunity cost comparisons, absent a pretty compelling plan in some other direction.
fheld 8y ago

rdiddly 8y ago

Just to throw yet another caveat into an already delicious stew, stock price is an imperfect proxy for what we would really be trying to measure, which is the creation of value.

kevinventullo 8y ago

Even if "firm performance is not predicted by the educational background of the CEOs", it does not follow that an MBA is worthless. To draw a parallel, I work with many software engineers both with and without CS degrees, and there seems to be no correlation (or even a slight negative correlation) between performance and those with a degree. That does not mean CS degrees are worthless! It means once you have already selected for folks with a successful career in software, the degree has less predictive capability.

ghaff 8y ago
Bingo. If you look at successful people you’re probably going to find a pretty diverse set of backgrounds in addition to the developers with CS majors from top schools. But doesn’t mean that spending your 20s as a ski bum is actually a recommended path for most professional careers—even if it does make for a cool story if you get to the point people are writing magazine articles about you.

venantius 8y ago

I don't find changes to share price to be the most convincing indicators of performance, though I agree you'd probably be hard pressed to find a better "generalizable" statistic. Fundamentally, I think measuring talent is an astonishingly hard problem.

darawk 8y ago

I've done these same analyses before as well, and more. This is the correct analysis to do if you're looking to build an alpha-generative trading strategy. It is not necessarily the correct analysis to do if you want to measure actual CEO performance. If you want to measure CEO performance, you need to look at growth in fundamentals, not share price. The share price is going to reflect the market's beliefs about the CEOs. Which, if the market is efficient (as it seems to be for these variables), should show exactly no effect. If there were an effect here manifest in share price returns, we could all read this article and arbitrage it away. This would mean that the next person who looked for this effect would conclude "CEO performance has no correlation to share price returns!". I'm kind of surprised they would do all of this statistical work and not be aware of this gaping hole in their reasoning. Now they do make the point at the end that they're arguing against stock-based compensation here, which is a good point. If the market prices in your value as a CEO the moment you're hired, you don't want to have share-price based compensation. You want comp tied to growth in fundamentals.

lordnacho 8y ago
> You want comp tied to growth in fundamentals. This has the same problem as tying it to the market. You don't know what the baseline is. Would a good CEO always grow the fundamentals? What if it's a declining industry? And vice versa.
- darawk 8y ago
  It is a problem, but it's not the same problem. You can try to address the issue of secular trends in the industry by looking at say, performance relative to industry peers. How you define industry peers of course is a bit tricky. Another option is to look at share price returns from the day before the new CEO was announced. That would incorporate the market pricing in the new CEO. However, I don't think this analysis did that.
- starcraft 8y ago
  It's not the same problem because expectations of CEO outperformance can be internalised into the price at time 0.

achow 8y ago

> Headhunters and corporate boards often look for CEOs with a track record of creating value at another company when choosing whom to hire. But if past performance doesn’t predict future results, then they might be looking at an irrelevant variable. I don't understand this. I would imagine there is lot of accumulated knowledge, connections, network, skills etc. that are involved in taking day to day or strategic decisions. Not irrelevant at all if my money was at stake.

victor106 8y ago

When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. - Warren Buffett The business that the company is in matters much more than any individual CEO or their background.

bkohlmann 8y ago

The lead author is a friend of mine. The beautiful thing is that he got an...MBA from Stanford. I’m consistently intrigued by his observations about the world. He doesn’t let his own background get in the way of questioning established wisdom. The fund he runs now is based on a belief that private equity is seriously flawed...which he discovered by working as an analyst for one of the top firms. He hosts a fantastic weekly newsletter with a lot of quantitative insights - can discover his strategy and sign up here: http://verdadcap.com/strategy/ http://verdadcap.com/strategy/

chasely 8y ago
And the management team is...all MBAs :)
dbalbright 8y ago
>This email list is only open to accredited investors. By clicking "subscribe to this list," you are representing that you are an accredited investor. Is that for his own protection? People aren't going to drop from helicopters into my home, are they?

blunte 8y ago

Not only might there be issues with choosing CEOs based on pedigree and past performance (related to share value), but even the measurement of share value is arguably a weak indicator of company health and profitability. Many institutions and media organizations are focused on quarterly or annual share price, but those numbers can be temporarily inflated if the company is willing to take actions that would damage itself longer term. And when I say "would", I actually mean "usually do". Also, global and industry factors can push a whole sector up or down for months or years.

pembrook 8y ago
I would argue the efficiency of the market produces an excellent correlation between company health and stock valuation over long periods. But even if you disagree, isn't that just another way of arriving to the authors same conclusion? If share price is a terrible proxy for company health, then why are we paying CEOs based on it? And if it is a good proxy for company performance, then it's proving that CEOs are being grossly overpaid for what are essentially random outcomes. Under both scenarios, something is terribly wrong.

solatic 8y ago

Author is ignoring factors which are inconvenient due to the difficulty of measuring them. Let's take a famous example - Steve Jobs. Booted from his own company, then NeXT was a middling success (because of its acquisition), and Pixar was a much larger success but much more because of John Lasseter than anything Jobs did. Was there anything there to suggest that Jobs was going to be as successful as he was with turn-of-the-century Apple? How could somebody who was that successful at the helm not have similarly suceeded in his previous ventures? At the same time, can any sane person say that Apple was destined to take off like a rocket, that Jobs was merely lucky to be in the CEO role when it happened and take all the credit, that therefore anybody else could've been CEO and Apple still would've turned out to be wildly successful? That is patently ridiculous. People are not islands. People can be more than the sum of their circles. Jobs was as successful as he was because he was in the right company plus at the right time plus with the right people around him (Jony Ive present, John Sculley absent, etc.). Now, the author doesn't mention this because the author has no way of quantifying the, for lack of a better encompassing term, "cultural fit" of any given CEO candidate with any given corporate setting. But just because the author does not understand the relationship does not mean that the relationship does not exist. That the economy fails to judge CEOs properly and offer the correct opportunities to the correct candidates does not mean that all candidates are appropriate in all roles with their performance more or less in the hands of fate. Getting a random result for non-random inputs is not evidence of randomness but evidence of misunderstanding the inputs or of a poor metric. Postscript: boards are completely justified in firing CEOs for poor performance ostensibly due to external, macroeconomic factors. The captain's job is to weather storms, not return to Spain with naught but an excuse for why the King's colonial riches have sunk to the bottom of the Atlantic. Maybe the captain hired the wrong sailors who would've fared better in fairer weather. Maybe the captain was brought aboard a boat with a hole in the hull. But part of the captain's job is to make sure the ship is properly staffed and that holes are plugged. If they're not, then the captain doesn't get to cry foul for a storm exposing his incompetence. Jobs had his storms - the dot-com bust and the 2008 recession. So what?

thecleaner 8y ago

Does anybody know what Figure 2a and 2b are trying to show ?

chasely 8y ago
Don't know why they included two figures when two numbers would do (it appears the first graph in each is showing the definition of median and quartile). If the top quartile of performers were consistently the top quartile, then the plots in Fig. 2B would be the same because their performance is persistent over two three-year periods. Same thing can be said of Fig. 2A but with the median. The simpler and more intuitive way to show this would be a some way to display "skill performance", "chance performance", and "observed performance". | -------------- | Skilled | Chance | Observed | |---------------+------+-----+-------| | Median------ | 50% | 25% | 25% | | Top quartile | 25% | 6.25% | 7% |

subjectHarold 8y ago

This is kind of crazy. Presumably, there is a correlation between going to a good business school and getting a job with a good business (which generates market-beating returns). So you would expect some kind of correlation just because people think MBAs are valuable...but no. In particular, "Elite MBAs did perform relatively well as CEOs in healthcare and consumer staples". Not significant statistically but the reason this is true is because both healthcare and staples (until recently) have had a killer run. So I don't think share price performance is the best metric but...even then...you would still expect to see something totally different to the actual results. The stuff that looks at the portfolios of bankers is more understandable...but this has been shown elsewhere (generally, poor fund managers do better).

hacknat 8y ago

I love to hate on MBA types just as much as the next engineer, but this article contains a distracting logical fallacy right away: That CEO pay increased because of a trend in aligning incentives (the analysis of the CEOs performance says nothing about this). The article spends no time on this and is at best an ancillary point, it should have started with a general statement of how crazy CEO pay is and if it’s worth it without dealing with the incentive nonsense at the beginning. Otherwise good article.

tonypace 8y ago
But this was the justification in countless think pieces in the Economist, the NYT, and so on. Align the incentives of the CEO with the shareholders and magic will occur. The author is dueling with a ghost that you never saw.

jedberg 8y ago

My biggest takeaway from this is to invest in a company right when the CEO changes if they CEO came from a failed company. Assuming "strong track record" is priced into the stock of a company picking up a new CEO that's good, I also assume "weak track record" is priced in to the opposite. Since success afterwards is basically chance, it would be a discount.

vasilipupkin 8y ago

I just want to point out to those who are excited about confirming their preconceived bias that MBAs don’t matter: according to this result, MBA CEOs outperformed non MBA CEOs by 0.04% per month. That’s quite a bit of alpha. EDIT: yes, the individual means are not statistically significant but given the large effect a) where is the p-value b) there is no statistical significance reported of the difference between MBA and non-MBA performance, only of individual means

Sebguer 8y ago
Except... the study also points out that this is not a statistically significant difference. How do you miss that?
- vasilipupkin 8y ago
  I didn’t. Statistical significance is complicated. In a noisy data set, you have to also look at the magnitude of the effect - and its huge here. Note that they don’t report p-value magnitude, which matters. They also don’t report statistical significance of difference, only of individual effects.

galaxyLogic 8y ago

I believe, just my belief, that a "good CEO" can install a great spirit in the company, which trickles down through management to all employees.

starcraft 8y ago

I see a few critical problems with this research. The first in the section "Do MBAs Make Better CEOs?". If the labour market is efficient we would NOT expect CEOs with MBAs to outperform CEOs without MBAs due to selection effects. We may expect them to outperform if we sample randomly from the general population that has MBAs versus that which does not, but this is not the sampling scheme in effect. If boards are able to accurately select non-MBA CEOs whose other characteristics compensate for the lack of an MBA, then we would expect a zero within-group correlation in the selected population. It is like if I was to hire a quantitative researcher for a machine learning research team. I could pick a PhD from a top school, or I could allow a non-PhD into my team as long as their other characteristics are sufficiently great (e.g. competition math in high school), but after appropriate selection effects there is no within-group correlation between holding a PhD and not holding one. If I looked at the average PhD versus the average non-PhD in the general population though, then an effect becomes apparent, but that's not the sampling scheme I've used. The second problem is in the section "Is CEO Performance Persistent?". They used stock market returns which is flawed as expected CEO performance should be baked into the stock price from the beginning, meaning we expect zero excess return in the second sample even if the CEO was truly exceptional. This section would unlikely pass peer review into a top finance journal. The only valid thing I can see is research about "Share Price Performance for CEOs Who Ran Multiple Companies", since nobody knows the second company ahead of time so the information shouldn't be baked into the price. But a lot of details are missing. Skewness and kurtosis of returns will impact the way they've quantized the data, among other things. All in all, unpersuasive.

crb002 8y ago

Seems like they could just do a 15 year annuity that did X times the market avg price every two weeks. Make it transferable so CEOs could liquidate some for higher up front salary.

deleted 8y ago

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leakyvalve 8y ago

The design is interesting but the test itself is kinda pointless. Fama-French explains about 30% of stock return variation at best so by using stock performance as a measurement you are mostly testing signal (highly credited CEOs) against noise (residual returns). Another thing is you have to specify your position on EMH here. If you believe the semi-strong form then everything about the CEO should be priced-in immediately after the announcement, which means it will not have a persistent impact on stock return when you slice and dice time periods. IMO the CEO is just one input out of thousands that influence a stock's performance, which is implied by a lot of asset pricing studies already. Also managing a public company is an unbelievably complicated job. You have to be one of the "best and the brightest" just to keep the boat bearly afloat sometimes.

yowlingcat 8y ago

Here's my question: how do you create incentive structures towards sustainable operation? Is this even possible or feasible inside of a company, or is it the market's job to operate such structures, using corporate formation, dissolution, aggregation and division? It seems very hard to create an incentive structure that won't be gamed.