Sunday, 9 January 2011

CEO Education

This is interesting because of its implications for diversity. If CEO appointments are highly influenced by educational attainment then this must affect the prospects of groups such as those from poorer or ethnic backgrounds who are less likely to be able to get to the top universities. That the authors of the study found no long-term correlation between education and performance suggests unfair discrimination. The short-term effect they found could result from the MBA's tuition in cost-cutting, which achieves short-term benefits but at a risk to long-term performance.

I conclude that to increase diversity in the boardroom demands that recruiters show greater flexibility in their approaches. If they stick to old-fashioned techniques then there will be no improvement. Recruitment of more women to senior levels demands a more open approach to flexible career patterns whilst recruitment of more minorities and those from poorer backgrounds means placing less emphasis on  those factors that are unlikely to be able to meet. The evidence of this study suggests that the old fashioned ways do not produce better results.

CEO Education (from
"A paper by Sanjai Bhagat, Brian Bolton, and Ajay Subramanian finds that CEO education has no statistically significant effect on CEO tenure or turnover:
We use six main measures of CEO education: whether or not the CEO attended a Top-20 undergraduate school, whether or not the CEO has an MBA, law or masters‟ degree, and whether or not the MBA or law degree is from a Top-20 program. Our study includes more than 14,500 CEO-years and more than 2,600 cases of CEO turnover from 1993-2007.
Our results show that CEO education does not play a significant role in the decision by a firm to replace its current CEO; poorly performing CEOs are replaced, regardless of their education. Education, however, does 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. Further, hiring new CEOs with MBA degrees leads to short-term improvements in operating performance. However, we 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. Our results lead to the puzzling implication that, while CEO education appears to play an important role in the hiring of CEOs, it does not affect the long-term performance of firms.
To my mind, these findings make perfect sense. I suspect that the effect of one's education on one's job performance, if any, is short lived. I wasn't a lawyer for very long before I was relying on what I had learned on the job rather than in school, for example. What a CEO learned 30 years ago in b-school thus probably has zero impact on his job performance today.

At the same time, however, the correlation between education and hiring is equally unsurprising. There is an inherent problem in corporate governance of structural bias. Indeed, it's not just a problem of corporate governance; rather it is a pervasive failure among institutions of all types. Institutional decision makers tend to replicate themselves when they hire new people. They tend to lean towards people with the same background and socialization. If we plausibly assume most corporate directors have a top 20 education and a professional degree, we'd expect CEOs they hire to have the same.

Whether shareholders would be better served by more diverse boards that presumably would pick more diverse CEOs is a question for another day."


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