
Study: CEO effect on firm performance could be mostly due to chance - sr_banksy
http://www.sciencedaily.com/releases/2015/10/151022192337.htm
======
c3534l
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.

~~~
bardworx
> 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.

~~~
c3534l
Yeah, I'd have to look into it deeper. It seems like a hard thing to
demonstrate rigorously.

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bedhead
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
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
As with anyone in leadership, supporters want to spread blame to predecessors.
We see it in politics a lot, certainly.

------
rdl
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
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?

~~~
crdoconnor
>What is the large company, public or private, that is run democratically
without a CEO?

It's structurally made virtually impossible to do such a thing. Nonetheless,
this approach was successfully applied in Argentina. There's a good
documentary about it [http://www.thetake.org/](http://www.thetake.org/)

~~~
Animats
The closest example may be Visa International before it became a public
company. Visa used to be a chaord, a strange organizational form dreamed up by
Dee Hock. Visa was owned by banks who were competitors, and they needed for it
to be a neutral intermediary. Hock wrote a book, "Birth of the Chaordic Age",
on how this worked, but the idea never caught on.

~~~
twic
I'd never heard of this - it's fascinating, but also has a rather Buckminster
Fuller-esque '60s tang to it:

[http://www.fastcompany.com/27333/trillion-dollar-vision-
dee-...](http://www.fastcompany.com/27333/trillion-dollar-vision-dee-hock)

And in case anyone wants to discuss chaords:

[https://news.ycombinator.com/item?id=10443224](https://news.ycombinator.com/item?id=10443224)

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

~~~
ZeroGravitas
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
> 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.

------
vonnik
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
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?

~~~
vonnik
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.

------
npt4279
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...](https://medium.com/nick-tommarello/my-strategy-for-investing-in-
public-companies-805c323bd48d)

~~~
TTPrograms
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
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
Apple, Amazon, Google, Facebook, Berkshire Hathaway, FedEx, News Corp, Oracle,
Microsoft under Gates, Intel under Moore and Grove, ...

------
dschiptsov
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.

------
Zigurd
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
I think the ones who use leverage do beat the indices over the long haul.
Leveraged investments make more long term than stock indices.

------
nickpsecurity
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.

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

~~~
EliRivers
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
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
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.

------
tonomics
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

------
zobzu
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
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
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.

------
tfigueroa
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.

------
xivzgrev
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.

------
fauigerzigerk
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
In a way it would, if it's affecting the culture surely it would affect the
company as a whole.

------
maerF0x0
Then why is the CEO the highest paid person ?

~~~
crdoconnor
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
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
> 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.

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

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

------
erkaes
How about right person at the right time?

~~~
marcosdumay
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
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.

------
viahartdotcom
Obviously wrong.

