
The MBA Myth and the Cult of the CEO - vinnyglennon
https://www.institutionalinvestor.com/article/b1db3jy3201d38/The-MBA-Myth-and-the-Cult-of-the-CEO
======
lordnacho
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
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
> 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
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.

~~~
Gibbon1
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.

~~~
com2kid
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.

~~~
Aeolun
Can’t say no to everything, or soon you won’t have anything to say no to any
more.

~~~
josephcooney
You can't say "no" to everything, otherwise you'd be taking security's job.

------
pembrook
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
Warren Buffet famously says he likes to invest in businesses that could be run
by a ham sandwich.

~~~
sokoloff
"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
I think the quote is by Peter Lynch from the book - One Up on Wall Street.

~~~
sokoloff
Perhaps, though Googling the quote has SERPs more than 25:1 in favor of
Buffett as origin.

------
darawk
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
> 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
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.

------
bkohlmann
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
And the management team is...all MBAs :)

------
crazygringo
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.

~~~
supercanuck
>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.

~~~
nugget
You’re absolutely correct, some of the time.

On the other hand, at other times, academic researchers can conjure up an
armada of buzz words and hot air balloons to support a position that even very
limited real-world experience and common sense proves laughable misguided.

~~~
hexane360
"common sense" and "real-world experience" are frequently euphemisms for
"everyone knows that's how it works".

------
kevinventullo
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
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.

------
sys_64738
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.

~~~
bluedino
>> I always figured to be an effective leader requires knowing your product.

One of the best bosses I ever had was when I worked at a small manufacturing
company.

This guy spent a ton of time with our customers and our products, came up with
improvements, made lots of fixes, found other products our customers could
use, made some people really happy.

Then he went through the production floor. Looked at everything a fresh set of
eyes, why do we do this, why don't we do this. Sped up production, saved
money, simplified things, made everyone's life easier.

Next stop was the office. Why do we touch this document 5 times through 4
people? Why do we do this backwards? How come this person doesn't do anything
all day? Let's move this schedule around.

It was about that time the owners fired him for petty shit even though we had
record sales and profits for the 3 years he was here. Lesson learned, don't
try to make any changes or recommendations that come a little too close to
home.

~~~
klenwell
Interesting story. I'm curious about the "petty shit" part. Did he step on the
owners' toes? Did he have an abrasive personality? Was he fudging his expense
reports?

Also curious what happened after he left. Did sales/profits drop? Did his
legacy of reforms carry on?

~~~
bluedino
Things are starting to go back down, but they’re staying in the black at least
for now.

Petty things would be exposing inefficiencies in the owner’s pet departments,
usually consisting of underperforming employees that are family members, and
the owners undermining random decisions he made just to spite him.

------
gallerdude
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/ne...](https://www.independent.co.uk/life-style/gadgets-and-
tech/news/tesla-spacex-elon-musk-latest-zip2-technology-entrepreneurship-
business-queens-university-a8274186.html)

~~~
zeroname
> 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.

------
venantius
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.

------
jedberg
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.

------
azhenley
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/)

------
subjectHarold
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).

------
hjk05
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.

------
starcraft
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.

------
leakyvalve
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.

------
victor106
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.

------
bitL
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
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
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.

------
blunte
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
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.

------
rdiddly
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.

------
achow
> _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.

------
vasilipupkin
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
Except... the study also points out that this is not a statistically
significant difference. How do you miss that?

~~~
vasilipupkin
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.

------
yowlingcat
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.

------
solatic
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?

------
crb002
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.

------
galaxyLogic
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.

------
hacknat
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
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.

------
whack
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
Can you elaborate on why they’re “entirely orthogonal?” Since this increased
compensation is stock, aren’t they at least somewhat related?

~~~
whack
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
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.

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

~~~
chasely
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% |

