Harvard Business SchoolJODI HILTON
Whether chief executive officers hold a degree from a top-ranking university or a no-name college makes no difference in the long-term performance of the companies they lead. And when it comes to getting canned for poor performance, CEOs with degrees from prestigious schools are no safer than others, according to a new study.
"The findings suggest that both boards and researchers should use caution in placing too much emphasis on an individual's education when trying to assess their ability to lead the company and maximize shareholder value," says lead researcher Brian Bolton, assistant professor of finance at the Whittemore School of Business and Economics at the University of New Hampshire.
The researchers studied 2,600 cases of CEO turnover from 1992 to 2007 and the academic credentials of the departing executives. They found poorly performing CEOs are replaced regardless of the prestige of their alma mater or the type of degree they received.
Education, however, does play a significant role in the selection of the replacement CEO. There was a strong positive correlation between the education levels of new CEOs and the educational experience of those they replace. For example, even after a CEO with an MBA degree gets fired for poor performance, the board still looks to replace him or her with a new CEO who also has an MBA.
Those with MBAs did tend to bring bigger short-term improvements in their first year on the job than those who didn't have the grad degree. But in subsequent years there was no significant difference in company operating performance between those led by MBAs and those that were not, according to the study, co-authored by Sanjai Bhagat of the Leeds School of Business at University of Colorado at Boulder, and Ajay Subramanian of the J. Mack Robinson College of Business at Georgia State University.
Companies often 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," Prof. Bolton says.
"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." While these may be more difficult to identify and even more difficult to measure, they are ultimately better predictors of executive performance than education alone, he says.