Value added by best CEOs
By Stefan Stern
Published: December 14 2009 23:14 | Last updated: December 14 2009 23:14
A rare event in the business world last week: everyone seemed to agree about something. When Procter & Gamble’s former chief executive, A.G. Lafley, announced he would be retiring as its chairman in the new year, there was universal acclaim for his work at the company. Fortune magazine’s verdict was typical. “It is not overstating things to say that Lafley brought P&G into the next century,” it said.
Well done, A.G. But just to disrupt this mood of consensus for a moment, let me restate my belief that, sometimes, too much attention gets paid to individual CEOs, and not enough to the work that goes on elsewhere inside businesses. A.G. did not invent P&G’s blockbuster cleaning product Swiffer, for example, or lead on every aspect of the company’s merger with Gillette.
How important are CEOs, exactly? “The CEO is responsible for creating and leading the team that will deliver great performance,” says Morten Hansen, professor of management at the University of California at Berkeley, and also at Insead. “A CEO can have great impact by creating a strong team.”
Prof Hansen should know what he is talking about. With his Insead colleagues Herminia Ibarra and Urs Peyer, he has just finished researching the performance of almost 2,000 CEOs at 1,200 public companies over the past 15 years. (No CEO already in post in 1995 – Bill Gates, Warren Buffett, Jack Welch – was included.) The full results will be published later this week at www.hbr.org/top-ceos and in the new year edition of the Harvard Business Review. But here is a sneak preview.
After crunching through a wealth of data on total shareholder returns (TSR) during a CEO’s tenure, which were adjusted for movements in stock markets and within industry sectors, and then looking at inflation-adjusted changes in the company’s market capitalisation, the researchers drew up their list of top-performing CEOs.
Some expected names appear in the top 10: Apple’s Steve Jobs comes first, with Cisco’s John Chambers not far behind in fourth place. Jeff Bezos of Amazon, Meg Whitman, formerly of Ebay, and Google’s Eric Schmidt are placed seventh, eighth and ninth respectively. But some less familiar figures crop up too. Yun Jong-yong, CEO of Samsung between 1996 and 2008, is second only to Mr Jobs as a wealth-creating boss. John Martin, head of Gilead Sciences, the California-based pharma company – maker of the antiviral drug Tamiflu – is sixth. Monsanto’s Hugh Grant comes 10th. One or two prominent bosses do not make it into the top 400: JPMorgan Chase’s Jamie Dimon, for example, and GE’s Jeff Immelt.
The research indicates that, when they reach the top job, company insiders tend to do better than those who are brought in from outside. In countries where reliable information is available, those with MBAs seem to do better than those without – although more than half the top 50 bosses do not have one. It also helps to take over from someone who has not performed well, in a company that is struggling. All the leading bosses proved their worth over an extended period, and not just in a brief period characterised by luck or (fleeting) brilliance.
One last revealing discovery: there was virtually no correlation between fame, a strong reputation and actual performance. Out of the 30 “most respected CEOs in the world” named by the US magazine Barron’s in 2009, only five made it into this new list of top performers. Many celebrity CEOs got nowhere near the top.
Time for a few caveats. However carefully the researchers adjusted the data, TSR numbers, which are derived from the sometimes irrational and excessive movements of stock markets, can never be a wholly reliable guide to the performance of a company. Messrs Dimon and Immelt, for example, might argue that, for different reasons and at different times, stock markets have not reflected the true value or strength of their businesses. And bosses who run privately held companies cannot by definition feature in lists such as these, which focus only on public companies. A.G. Lafley, incidentally, came 189th: inside the top 10 per cent, if not quite as high as the response to his retirement might have suggested.
Here is the executive summary. Bosses set the pace and direction, and lead the top team. Their judgment and people management skills are vital. So how important are CEOs, exactly? I admit it. Very.
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