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Top Talent

Research by Steven N. Kaplan

Steven N. Kaplan is Neubauer Family Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business.


Looking for the best CEO? A recent study finds that efficient and persistent decision makers trump good listeners.

As the highest-ranking officer of a company, a chief executive officer (CEO) is in charge of setting the direction and implementing strategies to achieve his or her overall vision for a company. The CEO also is often one of the most visible parts of a company and some have even achieved “rock star” status in the press. Finding the right CEO is obviously important for any business. But beyond anecdotal evidence on what CEOs do and how they affect a company’s fortunes, there are few studies that analyze which qualities make a good CEO.

Most theoretical studies either assume that all CEOs are equal or differentiate them according to talent, but do not say what those skills exactly are. Empirical work in economics and finance is just beginning to consider which particular CEO abilities are important, while management literature has mostly focused on observable characteristics such as education, test scores, functional background, and age. The problem with looking at easily observable factors is that these are at best proxies for underlying qualities for which data would be difficult to gather. “It is impossible to do a study like this unless you can get 300 people to sit down and tell you their entire life story,” says University of Chicago Booth School of Business professor Steven N. Kaplan.

But a recent study by Kaplan and coauthors Mark M. Klebanov, PhD ’08, with Ziff Brothers Investments, and Morten Sorensen of Columbia Business School comes close. It systematically and extensively analyzes which CEO characteristics and abilities matter for hiring decisions and the subsequent performance of companies funded by private equity firms. The authors use detailed evaluations of 316 CEO candidates, which are based on four-hour structured interviews from 2000 to 2006. The data, compiled by management assessment firm ghSMART, are used by private equity investors when deciding whether to invest in a company and when choosing a new CEO. Each assessment includes quantitative and qualitative information about a candidate’s personal history and assessments on various skills and attributes.

The study shows that it is possible to measure individual CEO characteristics and abilities beyond the usual observable factors, and that crucial decisions made by private equity firms and the eventual success of their companies hinge on certain skills and attributes that top bosses possess.

Finding the Relevant Factors

Two of the most common investment strategies used by private equity firms are providing venture capital (VC) for a young business with high growth potential, and buying a controlling stake in a company financed through leverage or what is known as a leveraged buyout (LBO). The CEO skills that private equity firms look for and that are essential for success may differ according to the type of investment.

CEOs who are currently employed by a company may have different qualities from outside candidates who are being considered for the top post. Indeed, one of the authors’ observations from the data is that outside candidates, especially for LBOs, score higher than insiders on most of the 30 characteristics assessed by ghSMART. This is consistent with a number of explanations. First, private equity firms hire outsiders when internal candidates are not performing well. Second, it is an important function of these firms to upgrade managerial talent in the companies in which they invest. Third, the incumbent manager may have control of the company so that the private equity firm must keep the current management, even if he or she is not the best candidate. Finally, concerns about employee morale and other internal conflicts may prompt investors to keep the incumbent management.

Another observation is that a candidate who scores well on one characteristic tends to score well on others. This strong correlation suggests that talent, ability, or skill have some kind of general quality that encompasses many dimensions. However, when trying to find out which specific attributes really matter, it would be difficult to interpret the results of an analysis that includes all these related characteristics. To address this problem, the authors perform a “factor analysis” to extract the factors to which the most important characteristics are related. They find two strong factors in the data, both of which have intuitive interpretations.

The first factor captures general talent or ability. The second factor is one that contrasts interpersonal and team-related skills against execution-related skills. Candidates who score high on the second factor have high ratings on such qualities as treating people with respect, being open to criticism, being a good listener, and valuing teamwork. On the other hand, candidates who do well on such characteristics as being proactive, efficient, persistent, and moving fast will tend to score lower on this second factor. For instance, former General Electric CEO Jack Welch, who was often referred to as “Neutron Jack,” would probably get a negative score, while his successor Jeffrey Immelt, who was famous for holding “dreaming sessions” with customers and developing “imagination breakthrough” teams, would probably get a positive score.

The authors also create two alternative factors that come from breaking up the second factor into two distinct variables: one that describes interpersonal and team-related skills, and another that represents execution-related skills.

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 analyzed 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, the authors 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 favorable 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, analyzing 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 percent more likely to succeed than other CEOs. Kaplan interprets the results as indicating 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 authors conclude by speculating whether the results generalize beyond companies owned by private equity firms. They note that 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.

"Which CEO Characteristics and Abilities Matter?" Steven N. Kaplan, Mark M. Klebanov, and Morten Sorensen.