Do Ivy League alumni make better CEOs?

2010

Does an Ivy League education make you a better CEO? According to new research from the University of New Hampshire, the answer is a resounding "no". Whether or not a CEO holds a degree from a top school has no bearing on their firm's long-term performance.

Brian Bolton, assistant professor of finance at the Whittemore School of Business and Economics at the University of New Hampshire and co-authors 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 also found that CEOs with degrees from America's most prestigious schools are no less likely to get fired for poor performance than the average CEO.

The researchers used six main measures of CEO education: whether or not they attended a top 20 undergraduate school, whether or not they have an MBA, law or master's degree, and whether or not the MBA or law degree is from a top 20 program.

More than 2,600 cases of CEO turnover from 1992 to 2007 were examined for the study.

"These 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," Bolton said.

The research looked at the relationship between CEO education, CEO turnover and their firm's performance - in particular, the role that CEO education plays in a firm's decision to replace its current CEO, the role that it plays in selecting a new CEO and whether CEO education significantly affects performance.

Bolton and his colleagues found that CEO education does not play a large role in the decision by a firm to replace its current CEO - poorly-performing CEOs are replaced, regardless of their education.

But education does seem to play a significant role in the selection of the replacement CEO - there is a significantly positive correlation between the education levels of new CEOs and those of the CEOs 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 new CEO who also has an MBA.

And while hiring a new CEO with an MBA does appear to lead to short-term improvements in operating performance, the researchers did not find a significant systematic relationship between CEOs with an MBA and long-term firm performance. CEO education - and having an MBA - does not seem to be an appropriate proxy for CEO ability.

"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," Bolton said.

"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."

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