PROF. STEVEN NEIL KAPLAN, NEUBAUER FAMILY DISTINGUISHED SERVICE PROFESSOR OF ENTREPRENEURSHIP AND FINANCE AT THE UNIVERSITY OF CHICAGO BOOTH SCHOOL OF BUSINESS
What makes a good CEO?
Looking for the best CEO? A recent study finds that efficient and persistent decision-makers trump good listeners
Amir Moin | Issue Date - 03/02/2012
Go to Page Number - 1 2
To Hire or Not to Hire
Hired candidates score significantly higher than non-hired candidates on many of the characteristics assessed by ghSMART. This also is true when hired and non-hired candidates of LBOs and VCs are analysed separately. The more skills a CEO candidate has, therefore, the more likely he or she will be hired. This means that overall talent or ability is a desirable quality that private equity firms look for when deciding who to place at the helm of their companies. Such execution-related skills as being fast and aggressive are fairly important, especially for VCs, while team-related skills like being open to criticism and listening are significant for LBOs.
There also is a strong tendency to hire incumbent CEOs, which might be interpreted as placing a substantial value on firm and position specific skills relative to general skills. In fact, the ratings of incumbent CEOs who are eventually hired are not much different from non-hired incumbents, partially reflecting the fact that private equity firms have no choice but to keep the current CEO if they want to make an investment in that company. In general, the patterns suggest that abilities can be measured and that hiring decisions are based on those perceived abilities.
Which Skills Matter for Success?
To find out whether certain CEO characteristics and abilities are related to company performance, we use three measures of success.
The first measure relies on direct appraisals of the CEOs by the private equity firms, while the second supplements these appraisals with information from public sources. A CEO is considered successful if he or she has led a company to a clearly favourable exit such as an initial public offering or sale to another company. On the other hand, a CEO is unsuccessful if the CEO’s company either went bankrupt, was sold to another firm under distress or at a substantial loss, or if the CEO was removed before an exit occurred. A broad public indicator of success is the third indicator, which takes into account the previous measure as well as positive news reports regarding a company’s operations or receipt of additional funding at higher valuations.
Comparing the ratings of successful to unsuccessful CEOs, the data shows that successful CEOs score higher on most characteristics, especially for LBOs, no matter which measure of success is used. The results for VCs are harder to interpret as they appear to be affected by the technology bust earlier in this decade. But overall, successful CEOs attained better ratings and scored significantly higher, particularly on execution-related skills.
The study found that CEOs who scored higher on the general talent factor tended to have better results than CEOs who scored lower. At the same time, CEO success was negatively related to the second factor that contrasts interpersonal and team-related skills with execution-related skills. In other words, CEOs who were more persistent, efficient, proactive, and faster produced better results. Indeed, analysing the two characteristics separately confirmed this result – success is strongly related to execution skills rather than interpersonal and team skills.
The patterns are somewhat stronger for LBOs where the differences in performance were particularly economically meaningful. For LBOs, CEOs who rated high on persistence, efficiency, or proactiveness were 30 to 40% more likely to succeed than other CEOs. The results indicate that a CEO can have the best interpersonal or team skills but if he does not get things done then he will not be effective.
The authors also found that – holding talent constant – incumbent CEOs are no more successful than outside candidates, particularly for LBOs. This dispels the notion that insider CEOs may have certain firm and position specific skills that would make them more successful. Thus, the results suggest that investors should hire the most talented candidate regardless of whether the candidate is an incumbent or not.
The study concludes by speculating whether the results generalise beyond companies owned by private equity firms. The results are consistent with management guru Peter Drucker’s personal observations of different types of executives, particularly public company executives, which he discussed in his 1966 book The Effective Executive.
Drucker observed that executives "differ widely in their personalities, strengths, weaknesses, values, and beliefs," and that "all they have in common is they get the right things done." The "right things" include using time efficiently, focusing on contribution, making strengths productive, doing first things first, and making effective decisions. These characteristics and abilities correspond well to the execution-related skills that the study has found to matter the most.