Does a CEO With a Prestigious Degree Help a Company's Bottom Line?
A CEO with a college degree from a top school doesn't help a company's long-term performance – and those with prestigious diplomas are no safer from getting canned, says a new study.
The report – called "CEO Education, CEO Turnover, and Firm Performance" – attempts to analyze the role that the chief's education plays in a company's decision to replace its current CEO, the role it plays in picking a new one, and whether education affects performance at all.
The researchers came up with six main measures of CEO education: whether or not the CEO attended a top 20 undergraduate school, whether he or she had an MBA, law or master's degree; and whether or not the MBA or law degree was from a "top 20"program. (What is a "top 20" program? It's defined as US News & World Report's 2008 rankings, when Harvard had the top undergraduate and MBA programs, and Yale had the top law school.)
The study – which judged company performance based on figures such as return on assets and stock returns -- includes more than 1,500 companies and 2,600 cases of CEO turnover between 1992 and 2007. It was conducted by professors from the business schools of the University of New Hampshire, the University of Colorado at Boulder, and Georgia State University.
Among the findings: CEO education doesn't play much of a role in a company's decision to replace someone – not surprisingly, poorly performing CEOs are replaced, regardless of education.
"CEO education does not seem to be an appropriate proxy for CEO ability," the researchers wrote.
Education does have a part in the selection of a replacement CEOs: Even after a CEO with an MBA degree gets fired for poor performance, he or she is still usually replaced with a candidate who also has an MBA. (For an Inc story about how little what you learn in school can matter in business, click here.)
Hiring new CEOs with MBAs does lead to short-term improvements in operating performance, the researchers found – but has no effect on how a company performs in the long term. Ad there is a "weak positive relationship" between CEOs with MBAs from top schools and the company's operating performance.
"Even though CEO education does not lead to superior performance by firms, firms may rely on CEO education in hiring decisions because they have few other identifiable and measurable criteria to use. All else being equal, they rely on what they believe to be the observable pedigrees of the executive," says Brian Bolton, one of the study's co-authors and an assistant professor of finance at the Whittemore School of Business and Economics at the University of New Hampshire.
He adds: "Of course, all else is rarely equal, especially when dealing with something as nebulous and potentially unobservable as managerial talent. Interpersonal skills, leadership ability and strategic vision are among the traits that CEOs should possess; these can be difficult to identify and even more difficult to measure. As a result, boards rely on those characteristics which they may be able to observe: work experience, track record, and education."
The study's authors suggested that a CEO's education may have critical influence in determining whether the person gets hired into positions that may lead to becoming a CEO. "Nevertheless, it is still rather puzzling (at least to us) that education affects CEO hiring decisions even though it has little effect on long-term firm performance," they wrote.
A 2008 Indiana University study found that CEOs with Ivy League degrees don't receive higher total compensation – the degree usually brings marginally higher salary and marginally higher "other" income, but "significantly lower stock-based compensation."
How much do you care about education when making hiring decisions?
Inc. contributing editor COURTNEY RUBIN was for five years a London-based staff writer for People magazine. Rubin, a former senior writer for Washingtonian magazine, has written for the New York Times magazine, Time, Marie Claire, and other publications. She is the author of The Weight-Loss Diaries.
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