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Do MBAs make better CEOs?

Institutional Investor recently set out to discover questions like this and understand whether or not CEOs can truly play a role in driving stock price performance.

“This research has important implications for investing,” authors Dan Rasmussen and Haonan Li write. “There is broad consensus among investors that one should seek out ‘well-managed’ companies. And what better way to assess the quality of management than to examine the chief executive’s resume and record?”

The Study

Rasmussen and Li’s study included a database of approximately 8,500 CEOS and their characteristics. Each CEO was mapped to their perspective company and noted for their duration of tenure.

The study also took into consideration company fundamentals, stock returns, CEO education and background.

Rasmussen and Li ran tests on the data set to look for correlation, persistence, and predictive power.

Do MBAs Make Better CEOs?

The short answer? No.

Rasmussen and Li tagged CEOs by MBA programs they attended, formed monthly portfolios of companies organized by b-schools CEOs attended, and compared portfolio performances and returns. In the end, they found no statistically significant alphas that showed MBA programs produce CEOs who are better at running companies.

“We ran similar regressions controlling for industry and found that — even after controlling for industry — elite MBAs did not produce positive statistically significant alpha,” Rasmussen and Li write. “Elite MBAs did perform relatively well as CEOs in healthcare and consumer staples, but relatively poorly in energy and materials businesses, though those results were not statistically significant.”

The researchers also looked at how CEOs who previously worked at investment banks and elite consulting firms performed.

They, again, formed monthly portfolios for bankers and consultants and ran regressions. The result? Neither bankers nor consultants performed any better.

“This suggests that the ‘best and brightest’ do not have a statistically significant edge when it comes to managing public companies,” Rasmussen and Li write. “An elite pedigree — the type of pedigree favored by headhunters and corporate boards — is not predictive of superior management.”

The CEO and the MBA

Rasmussen and Li’s study echoes findings in the past. A previous study by the Harvard Business Review found that of the 100 top performing (measured by increase in total shareholder return and market capitalization) CEOs around the world, only 29 have MBAs.

But the study by Harvard also found another interesting observation: 24 of the top 100 performing CEOs have undergraduate or graduate degrees in engineering.

“Studying engineering gives someone a practical, pragmatic orientation,” Nitin Nohria, the dean of Harvard Business School, who holds an undergraduate degree in chemical engineering from the Indian Institute of Technology, Bombay, tells Harvard Business Review. “Engineering is about what works, and it breeds in you an ethos of building things that work—whether it’s a machine or a structure or an organization. Engineering also teaches you to try to do things efficiently and eloquently, with reliable outcomes, and with a margin of safety. It makes you think about costs versus performance. These are principles that can be deeply important when you think about organizations.”

All these findings raise an important question: are CEO credentials really that important? And if they aren’t, why do they have such a large effect on share price?

Rasmussen and Li say it’s impossible to prove that CEO credentials don’t have an effect on share price, but it does raise a whole lot of other questions.

“If there is no evidence that stock returns are attributable to CEOs, then what justification is there for their stratospheric pay? How much longer will investors and boards be fooled by randomness and hollow credentialism?”

Which MBA programs’ alums performed the best in equity returns? Think Chicago – as in Northwestern Kellogg and Chicago Booth – with USC Marshall, Cornell Johnson, and Michigan Ross bringing up the rear. However, as the study notes, the differences between the highest- and lowest-performing MBA programs were negligible.

“We found no statistically significant alphas — despite testing every possible school with a reasonable sample size. MBA programs simply do not produce CEOs who are better at running companies, if performance is measured by stock price return,” the study notes.

Check out the full study at Institutional Investor.

Sources: Institutional Investor, Harvard Business Review