Who Becomes a CEO? What Makes a CEO Successful? byfaculty.chicagobooth.edu/steven.kaplan/research/ceos.pdf · Who Becomes a CEO? What Makes a CEO Successful? by ... successful executives

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Who Becomes a CEO?

What Makes a CEO Successful?

by

Steven N. Kaplan Chicago Booth

February 2017

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In this talk

■  What do we know about CEOs?

■  Who becomes a CEO?

■  Who succeeds as a CEO?

■  What does this mean for boards?

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CEOs?

■  Huge amount of anecdotal evidence and stories about:

–  what to look for in a CEO? –  what makes a CEO successful?

■  But, very little systematic, large sample, empirical work. –  very hard to get the right data.

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Question

■  What abilities / characteristics are most important for becoming a CEO?

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What Do We (Academics) Know? ■  Management literature:

–  George et al. (2007) - leaders should “establish long-term, meaningful relationships and have the self-discipline to get results.”

–  Waldman and Yammarino (1999) - CEOs need to be charismatic. –  Ones and Dilchert (2009) - industrial psychology literature finds

successful executives have high cognitive ability, conscientiousness / achievement and extraversion / assertiveness.

–  Ulrich, Smallwood, and Sweetman (2009) “leaders need to have: innovative strategies […], forge long-term relationships with customers, innovate, execute, build high-performing teams, ensure accountability, manage people, communicate, engage others, create workforce plans, exercise judgment, have emotional intelligence, and possess an honorable character.”

» No idea which of those are more important.

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■  Popular literature? Most notable is Collins’ “Good to Great.”

–  Identifies “Level 5” leadership as building “enduring greatness.” » Compelling modesty. » Give credit to others / take blame on themselves. » Unwavering resolve. Fanatically driven. Workmanlike diligence. » Get the right people.

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■  Popular literature? Most notable is Collins’ “Good to Great.”

–  Identifies “Level 5” leadership as building “enduring greatness.” » Compelling modesty. » Give credit to others / take blame on themselves. » Unwavering resolve. Fanatically driven. Workmanlike diligence. » Get the right people.

–  Sounds good, but concern that there is a large ex post bias. » CEOs of 11 companies have these characteristics. »  There could have been 1011 such CEOs and 1000 could have

failed.

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What Do We (Academics) Know?

■  Pfeffer (2015) –  Criticizes many of these as “leadership BS,” not describing what

leaders and CEOs actually are like. –  Leaders are not authentic, do not tell the truth, pay attention to

employees’ well-being, etc. –  Leaders build their power base, master influence, eschew popularity

contests and adapt.

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No systematic, large sample work anywhere.

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What does my research do?

■  What CEO characteristics and abilities do CEOs have? –  How are they different from CFOs and COOs?

■  Who gets hired?

■  Who becomes a CEO?

■  Which characteristics matter for CEO performance?

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Sample ■  Rely on detailed assessments of 2,500+ C-level / exec. job candidates.

–  Many in firms funded by private equity investors (PEs) and venture capital (VCs) – but include many non-PE firms.

–  Performed primarily from 2001 to 2011 by ghSMART, a firm that specializes in assessing top management candidates.

–  Based on structured interviews with candidates of roughly four hours in duration.

–  Assessments are typically 20 to 40 page documents. »  Include detailed information on the candidates’ life, from childhood

through current job experiences. »  Include assessments on more than 40 specific dimensions.

■  Coded as 4 = A or A+; 3 = A-; 2 = B+; 1 = B or less.

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What is assessed? ■  Leadership

–  Hires A Players, Develops People, Removes Underperformers, Treats People with Respect, Efficiency, Network, Flexibility.

■  Personal –  Integrity, Organization, Calm Under Pressure, Aggressive but

respectful, Moves Fast, Follows through on Commitments. ■  Intellectual

–  Brainpower, Analytical Skills, Strategic Thinking / Visioning, Creative / Innovative, Attention to Detail.

■  Motivational –  Enthusiasm, Persistence, Proactive, Work Ethic, Sets High Standards.

■  Interpersonal –  Listening, Open to Criticism, Writing, Oral Communication, Teamwork,

Persuasion,Holds People Accountable.

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Correlations / Factor Analysis ■  30 individual ratings across all assessments.

■  Ratings for each candidate tend to be highly correlated. –  Suggest that talent, ability, or skill have some general characteristic

or quality spread across many dimensions.

■  Solution => Factor Analysis. –  Factor analysis extracts main components that determine variation

in characteristics.

■  We find four significant factors. Explain 54% of variation. –  A factor should be interpreted as sorting the candidates from one

type of candidate, on one extreme, to another type, on the other.

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Factor Analysis

■  Factor 1 – General Ability / Talent. –  positive factor loadings for all characteristics. –  Sorts execs from those with high grades across all characteristics to

those with low grades across all characteristics.

■  Factor 2 – Agreeable (+) vs. Execution (-). –  Candidates with a positive score get high grades on “treats people

with respect,” “open to criticism,” “listening skills,” and “teamwork.” –  Candidates with a negative score get high grades on “aggressive,”

“moves fast,” “proactive” and “holds people accountable”.

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■  Factor 3 – Analysis (+) vs. Charisma (-): –  Candidates with a positive score have high grades on “analysis,”

“attention to detail,” and “organization.” –  Candidates with a negative score have high grades for

“enthusiasm,” “persuasion,” “aggressive,” and “proactive.”

■  Factor 4 – Strategic / Creative (+) vs. Manager (-): –  Candidates with a positive score have high grades for “strategic,”

“creative” and “brainpower.” –  Candidates with a negative score have high grades for “attention

to detail,” “holds people accountable,” “organization,” and “removes underperformers”

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Factors Correlations ■  Execution correlated:

–  negatively with nice person. –  positively with risk taker.

■  Charisma correlated: –  positively with outgoing and good at sales.

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Question

■  How do CEO candidates compare to all other candidates? –  General talent? –  Execution versus agreeable? –  Charismatic versus analytical? –  Strategic / creative versus managerial?

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CEOs strong on ability, execution; CFOs are the opposite.

!0.4%

!0.3%

!0.2%

!0.1%

0%

0.1%

0.2%

0.3%

!0.2% !0.15% !0.1% !0.05% 0% 0.05% 0.1% 0.15% 0.2%

Ability

Execution Agreeable

CEO

Sales COO

CFO

19 !0.8%

!0.6%

!0.4%

!0.2%

0%

0.2%

0.4%

0.6%

0.8%

!0.4% !0.3% !0.2% !0.1% 0% 0.1% 0.2% 0.3%

CFO

CEOs strong on charisma and creativity; CFOs are the opposite.

Analysis

Managerial Creative / Strategic

Charisma

CEO

COO

Sales

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Question

■  Who gets hired?

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More able, more agreeable, more likely to be hired.

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Little difference in hiring on charisma and creativity .

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Prediction ■  Interviews took place between 2001 and 2011. ■  We can see where the executives are today. ■  Do certain types of people become CEOs?

–  Look at candidates who were not considered for CEO positions at the time of the assessment.

–  Which ones subsequently became CEOs?

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Prediction ■  Which ones subsequently became CEOs? Execs who had higher

–  general ability scores. –  execution scores. –  charisma scores. –  higher creative / strategic scores.

■  Execs who looked more like CEOs when they were interviewed for other positions more likely to become CEOs.

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Implications ■  CEOs are different.

–  More ability. –  More execution oriented. –  More charismatic. –  More creative / strategic.

■  More agreeable skills help you get hired. –  True for all C-level positions, not just CEOs.

■  These characteristics can be measured. –  At least by professional assessment firms.

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What about outcomes / success? ■  This sample:

–  Will look at outcomes later.

■  Earlier sample: –  316 CEO candidates for PE and VC-portfolio company jobs. –  With less data, found same first two factors:

» General talent »  Execution versus Agreeable.

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■  Obtained data from two sources: –  Asked PE firms. –  Publicly available data:

» Company websites, PE firm websites, Zoominfo, etc.

■  Created 3 measures of success: –  Directly from PE Firms. [PE Success] –  Adding public data with certain outcome. [Public Success]

» CEO successful if led company to profitable exit. » CEO not successful if company bankrupt, sold at loss, or CEO

removed before exit. –  Adding public data with less certain outcome. [Broad Success]

» CEO successful is positive press, positive developments.

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Question: What matters more for CEO performance?

■  Execution / Individual: –  Efficient, persistent, aggressive, removes underperformers; or

■  Agreeable / Team: –  Develops people, teamwork, flexibility, good listener.

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Success and characteristics

■  Success measures: –  Significantly correlated with large number of individual measures:

»  “efficient,” “organized,” “persistent,” “proactive,” “sets high standards,” “holds people accountable.”

»  “analytical,” “brainpower.” –  Skills seem to be predominantly of the execution variety rather than

softer skills such as team building or listening. »  Also creative / strategic.

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PEP Magnitudes are meaningful:

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Similar Results for Broader Success Measure

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Broader Success (Execution)

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Broader Success (Team / Agreeable)

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Implications: What Determines Success?

■  General talent matters for success.

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Implications: What Determines Success? ■  Execution attributes, not agreeability attributes related to success:

–  Softer, team, and agreeability attributes not associated with success once you become CEO.

»  Although those attributes may help you become CEOs. –  Harder attributes, like “efficient,” “pro-active and “persistent”, are

associated with greater success.

Jack Welch Steve Jobs Jeff Bezos

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■  What about “Good to Great?” –  Appears consistent with

»  Unwavering resolve. Fanatically driven. Workmanlike diligence.

–  Consistent with hiring the right people.

–  Does not appear consistent with » Give credit to others / take blame on themselves. » Compelling modesty.

■  Steve Jobs? Jeff Bezos? Jack Welch?

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■  Peter Drucker (1967)? Effective executives: –  Utilize time efficiently. (Efficient) –  Focus on contribution. (Persistent / Follow through) –  Make strengths productive. (Efficient) –  Do first things first. (Proactive) –  Make effective decisions (Analytical skills).

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■  Peter Drucker (1967)? Effective executives: –  Utilize time efficiently. (Efficient) –  Focus on contribution. (Persistent / Follow through) –  Make strengths productive. (Efficient) –  Do first things first. (Proactive) –  Make effective decisions (Analytical skills).

■  Impressive correlation with significant variables: –  “efficiency,” “organization and planning,” “follows through,”

“analytical skills,” “attention to detail,” “persistence,” “proactive,”

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Do the results generalize? ■  Results in 2nd paper are

–  similar for PE, VC and public companies. –  consistent with execution being important in becoming a CEO.

■  Seems plausible that: –  CEOs who are persistent, efficient, and proactive:

»  get things done. »  get the right people to work hard.

–  CEOs who are not: »  do not get things done,

■  even if they are agreeable, good listeners, team players, etc. »  do not get things done,

■  even if they have the right people because the better people get frustrated or even leave.

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Other evidence?

■  Related research from Teresa Amabile. –  What really motivates workers? What makes them most enthusiastic about their work?

»  Incentives / Money? » Recognition? »  Interpersonal support? »  Progress? » Clear Goals?

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Other evidence?

■  Related research from Teresa Amabile. –  What really motivates workers? What makes them most enthusiastic about their work?

»  Incentives / Money? » Recognition? »  Interpersonal support? »  Progress. » Clear Goals?

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Overall Implications? In making hiring decisions for leaders:

■  Look for people who –  have a strong track record of execution.

»  PEP (persistent, efficient, proactive). –  are creative and strategic.

■  Do not be misled by strong people skills, but no PEP.

■  Valuable to –  measure abilities and skills. –  analyze the data.

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Thank you.

Steve Kaplan Neubauer Family Distinguished Service Professor of

Entrepreneurship and Finance University of Chicago Booth School of Business

[email protected]