Posted by: Louis Lavelle on September 16, 2010
Do MBAs make better CEOs? When a team of researchers from INSEAD posed this question last year, the answer they arrived at was a resounding yes! CEOs with the degree delivered better long-term shareholder value than those without one. Now comes some new research that calls that conclusion into question.
Researchers Sanjai Bhagat, University of Colorado at Boulder; Brian Bolton, University of New Hampshire; and Ajay Subramanian, Georgia State University, found that “hiring new CEOs with MBA degrees leads to short-term improvements in operating performance. We, however, do not find a significant systematic relationship between CEO education and long-term firm performance. CEO education does not seem to be an appropriate proxy for CEO ability.”
The study examined 1,500 companies from 1992 to 2007 and used several performance metrics including return on assets and stock returns. Among the CEOs for whom educational information was available, about 39 percent had MBAs, and of that group, 63 percent attended a “top 20” program. While MBAs overall did little to improve firm performance, the researchers found a “weak positive relationship” between CEOs with MBAs from top schools and company operating performance. So which school you attend does matter, just not a whole lot as far as your company is concerned.
As interesting as that is, the researchers also found something that had them scratching their collective heads. While a CEO's MBA had little or no impact on their company's long-term performance, it was a key factor in whether the CEO was hired in the first place. Even when a CEO with an MBA is fired, the researchers found that companies tend to hire another MBA to replace him. That's not a typo. From the study:
"These results suggest that CEO education does not play a distinguishing role in determining a CEO's ability related to enhancing firm performance. It is certainly possible that the CEO's education does have a critical influence in determining whether or not the individual becomes a CEO (or, even earlier, whether or not the individual 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."
The researchers aren't the only ones that are baffled by that finding. I'm a little dumbfounded too. Even if you view the MBA as some kind of good housekeeping seal of approval, if it does nothing for company performance, as the new research suggests, why would corporate boards keep hiring them?