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Do MBAs Make Better CEOs?


Coach Inc. Chairman and CEO Lew Frankfort

Photograph by Thomas Iannaccone/Corbis

Coach Inc. Chairman and CEO Lew Frankfort

If an MBA should prepare students for anything, it’s running a company well. Plenty of research, however, claims that it doesn’t. But new research calls those findings into question, suggesting that MBAs are significantly less likely to be among the most ineffective corporate leaders.

The research is from Chief Executive magazine and Applied Finance Group, a Chicago equity research and valuation firm. Using a complex proprietary methodology, AFG measured the degree to which companies in the S&P 500 are making money in excess of their risk-adjusted capital costs. The result was a list of 359 CEOs who had been in that position for at least three years—a corporate “naughty and nice” list. If you don’t care for AFG’s methodology, it’s worth noting that the 50 companies at the top of the list had total shareholder returns that averaged 93.5 percent from January 2009 through June 2012; the 50 at the bottom averaged total returns of  -21.1 percent.

Bloomberg Businessweek took a look at the 10 CEOs atop the list and the 10 at the very bottom. We knew, courtesy of research from Spencer Stuart, that roughly 40 percent of the S&P 500 chief executives have MBAs in any given year, so we wondered how those CEOs fared in the AFG analysis. Pretty well, it turns out.

Among the top 10, half had MBAs—more or less what you’d expect. But among the bottom 10, only two were holders of the degree, findings that one expert says should be cause for cautious optimism. ”We hope they do better with an MBA,” says Professor William A. Sahlman of Harvard Business School. “The fact that there is a disproportionate number of CEOs with an MBA at the top of the list compared to the bottom of the list is suggestive that they do, but it’s only suggestive.”

Who’s at the top? Lew Frankfort, CEO of the New York-based handbags and accessories company Coach (COH) and a Columbia Business School grad, earned the No. 1 spot, thanks to “great inventory management, strong marketing, impressive sales initiatives at stores, and a core product in high demand,” according to the magazine. Joining him in the top 10 are two Harvard Business School alumni, David W. Nelms of Discover Financial (DFS), at No. 7, and Pete Miller of National Oilwell Varco (NOV), at No. 9, along with Stanford Graduate School of Business alum James A.C. Kennedy of T. Rowe Price (TROW), at No. 8, and DePaul University Kellstadt Graduate School of Business grad James T. Ryan of W.W. Grainger (GWW), at No. 10.

The thing that makes this interesting is the AFG methodology. Unlike a lot of earlier research on this subject, which relies heavily on company stock performance and other measures that can be influenced by factors outside management control, the AFG methodology relies on measures that isolate management and finance skills—the kind of thing MBAs should have in spades. They include “Economic Margin,” or operating cash flow minus invested capital, and management quality, a measure that rewards companies that increase their asset base or divest money-losing divisions.

Drew Morris, CEO of Great Numbers!, who provided the analysis of the ranking for the magazine, does not credit an MBA for putting CEOs on top. “They need good business sense, and they need to listen to people who know finance and know what they’re talking about,” he says. “That’s been lacking in some CEOs lately.”

Morris didn’t point any fingers, but the bottom of the list includes a number of “wealth destroyers,” including two MBAs. John F. Lundgren, CEO of Stanley Black & Decker (SWK) and a Stanford MBA, is the second worst at No. 358, and William V. Hickey, CEO of Sealed Air (SEE) and an HBS MBA, is the seventh worst at No. 353.

Ken Aurichio, a spokesman for Sealed Air, says the company’s stock slump after it announced plans in 2011 for a $4.3 billion acquisition of Diversey Holdings, a cleaning and food safety company, was responsible for the poor ranking, adding that the acquisition will position Sealed Air for future growth. A spokesperson for Stanley Black & Decker did not respond to multiple requests for comment.

The impact of a CEO’s MBA (or lack of one) on company performance is very much disputed territory. One 2010 study by three Insead professors of more than 1,100 CEOs in the U.S. and Europe found that those with MBAs created far more shareholder wealth than those without the degree. But another study that same year concluded that while CEOs with MBAs lead to short-term performance improvements, no relationship exists between MBAs and long-term gains. The authors wrote: “CEO education does not seem to be an appropriate proxy for CEO ability.”

Maybe not, but if the AFG data can be believed, it may be too early to write it off completely.

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Francesca_dimeglio
Di Meglio is a reporter for Businessweek.com in Fort Lee, N.J.

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Companies Mentioned

  • COH
    (Coach Inc)
    • $34.1 USD
    • -0.40
    • -1.17%
  • DFS
    (Discover Financial Services)
    • $62.66 USD
    • -0.36
    • -0.57%
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