Chicago Booth Review Podcast How Much Does a CEO Really Matter?

Michael Gibbs: When Steve Jobs came back to Apple the second time and was successful as a CEO, I think a lot of what happened there is he had a COO to take care of the internal operating of the business, operational efficiencies and so forth and so on and he was really good at strategic vision, high-level product design decisions, and also as an external brand for the company.

Hal Weitzman: It's a cliche for organizations to say that their people are their most important asset, but how important is the person at the top? Can we measure the impact that a CEO or a manager for that matter has on a company? Welcome to the Chicago Booth Review Podcast, where we bring you ground-breaking academic research in a clear and straightforward way. I'm Hal Weitzman.

Today, Chicago Booth's Mike Gibbs gives us a survey of economic research on leadership and management. How much of a difference does a good leader make and why do manager types so often struggle when they get promoted to leadership roles? Mike Gibbs, welcome back to the Chicago Booth Review Podcast.

Michael Gibbs: Good to be here, Hal.

Hal Weitzman: Delighted to have you. This time, we're talking about leadership and CEOs. We're basing this episode on a talk that you gave entitled "Does Leadership Matter?" Isn't it obvious that it does?

Michael Gibbs: I guess, but it's nice to have some evidence for these things. And what's interesting is that economists are starting to study this question. And we tend to look at things in a different way. We collect data and we do statistical analysis, and that's a complement to traditional methods of field interviews and things like that.

Hal Weitzman: Okay. So tell us a little bit about that. What techniques of economic research is used to measure leadership and management quality?

Michael Gibbs: There's a bunch of different methods that are, economists are getting pretty creative. One of the earliest ones is a little morbid. This is asking what happens to stock price if a CEO dies unexpectedly? So that's a surprise. How does the market react to that? If it doesn't, if the stock price doesn't change, that suggests the CEO was irrelevant to firm value. Another way to do it is to... So that's for CEOs. A lot of this research is not about CEOs directly, but about other kinds of leaders, managers, supervisors.

So another strain of research collects personnel records from a company. We get measures of employee productivity. We know who their supervisor is, and then we can measure the effect of the supervisor on employees by exploiting the fact that supervisors sometimes get reassigned to different group of employees or employees get reassigned.

So we see multiple pairings of the same person with different supervisors for example. Another approach is to use employee surveys such as surveys about how they feel about their supervisor and the quality of the management that they receive from them. There is another CEO study that I'm aware of, and this is one where some researchers had CEOs or their personal assistants fill out time-use diaries about how they spent their time, and then they categorize those and then they did statistical analysis of those to try to uncover patterns.

Hal Weitzman: Wow. Okay. Well-

Michael Gibbs: I'm sorry.

Hal Weitzman: I was going to say, I want to hear more about when a CEO, as you say it is very morbid, but I'm talking about when a CEO dies suddenly in office. What are the findings of that research? What effect does that have on stock prices?

Michael Gibbs: On average, stock price falls several percent, which is kind of reassuring that CEOs matter and improve firm value.

Hal Weitzman: Right.

Michael Gibbs: There's exceptions of course. And I have one study of CEOs who were founders of a company. This is a sample of 200 Asian firms. What we found is if the founder died unexpectedly, stock price actually went up on average. Maybe they'd stayed around a little too long, grandpa should have passed on the firm to someone else or something like that. So there's some variation, but the by and large, the pattern is if the CEO unexpectedly dies or retires or something like that, stock price falls.

Hal Weitzman: Yeah. I was going to say, is that the same if the CEO unexpectedly leaves? Not necessarily because it depends on what circumstances.

Michael Gibbs: It does, yeah. But we should expect exactly the same thing in most cases. A notable exception was when Steve Ballmer surprised Microsoft and Wall Street by announcing he was going to retire unexpectedly, and Microsoft's stock price went up by several billion dollars that day. That was kind of embarrassing for him, I guess.

Hal Weitzman: Which makes sense. I mean, you sort of think that even if a CEO isn't that great, frankly, it's going to have some effect on the organization when the leadership suddenly isn't there. Right? So that tells us something, as you say about leadership and not just about the individuals. The other thing that you talked about is that CEO characteristics and personal lives can have significant effects on a company. What characteristics or personal aspects have academic studies linked to company performance?

Michael Gibbs: Yeah. I teach an elective on corporate governance, and I go through these kinds of issues because there's some really interesting literature out there on this. And also from my personal experience in a couple of board cases, this is an issue that has come up for me. So I challenge my students to ask themselves, "If you're a director, what characteristics of the CEO's personal life should you be paying attention to?"

And normally we think that's kind of distasteful, that's a matter of privacy and so forth and so on. So let's talk about some examples. First of all, let's forget personal life for a minute. CEO's experience, education, cognitive ability, whether they're a military veteran or not, their gender, all of these things tend to be related to firm value or the way the firm is managed. So for example, women and men tend to have different propensities for taking risks as a CEO.

And the same thing is true for military vets compared to non-military vets. In terms of personal lives, there's a really interesting research. Some of it was done by Abbie Smith, our amazing accounting professor. So for example, if a CEO suddenly buys a large house, a mega mansion or a yacht, or starts driving around in Ferraris or buying expensive toys, stock price tends to fall. It looks like they're enjoying their life instead of focusing on their work. If a CEO has a death-

Hal Weitzman: Then the opposite, and seeing which CEOs driving a beat-up minivan like I do?

Michael Gibbs: Well, good for you.

Hal Weitzman: Well, I'm not a CEO.

Michael Gibbs: Yeah, that's fair enough. Maybe you should be.

Hal Weitzman: Is that a good sign?

Michael Gibbs: Yeah, I don't know. I guess the implication would be that it would tend to be. Right.? Think of Jeff Bezos, famously frugal. In fact, frugal is one of the leadership principles.

Hal Weitzman: Apart from when he got married, but yes.

Michael Gibbs: Well, that's why he's not CEO anymore.

Hal Weitzman: There you go.

Michael Gibbs: Yeah. Other personal characteristics of CEOs personal lives didn't matter. If a CEO has a death of a house or a child, stock price falls. That study also found, although it was not quite significant, that if the mother-in-law dies unexpectedly, stock price goes up.

Hal Weitzman: Yeah.

Michael Gibbs: Other studies looked at if a CEO has a history of financial fraud or legal entanglements, the company itself is more likely to be involved in misstatements of earnings, SCC warning letters and so forth, suggesting that they're less rigorous in their financial matters of the company. Other research looked at whether CEO's got entangled in substance abuse or marital infidelity, and sure enough, these things are negatively associated with stock value. So I come back to these and think, these are things that we would really not like to-

Hal Weitzman: You're talking about when it's not known about, or you're talking about once it becomes known?

Michael Gibbs: Once it becomes known.

Hal Weitzman: Okay.

Michael Gibbs: Or and some of these studies look at reactions of stock price, others look at what effect is there on accounting measures such as profitability. Does it fall afterwards?

Hal Weitzman: Okay. Fascinating stuff. So I guess if you're an investor, you want to look at, you want to know a lot of personal information as well?

Michael Gibbs: Well, unfortunately, I think if you're a director, you-

Hal Weitzman: You need to know.

Michael Gibbs: ... probably need to pay attention to these things as part of your fiduciary duty to shareholders. It's a delicate issue, of course, but... and I've had personal experience as a director in where these issues have arisen and these kinds of behaviors can be predictors of future risks.

Hal Weitzman: Fascinating. I mean, some CEOs are thought of as leader types. Some CEOs are thought of more as manager types. And you talked about these time use diaries where people wrote down everything they did using machine learning to analyze those. How did that help us differentiate between the manager types and the leader types?

Michael Gibbs: Okay. So what they did is they had time use diaries. And this tells us how much time the CEO spent, say per week in various kinds of meetings. Would it be meetings with C-suite executives? Would it be a visit to a factory? Would it be meeting with outsiders such as shareholders or investors or clients or something, customers and so forth? And then they took those data, which were kind of high dimensional, and they could have tried to use standard statistical methods, but instead what they did was a version of what is often called factor analysis, but using machine learning to try to uncover very complex patterns among all the data, which in statistical terms has high dimensionality.

In order to do so, they had to start with an underlying statistical model that the algorithm could try to estimate in effect. And they had very simple one, which is let's assume that CEOs behavior in running their companies falls on a spectrum from one extreme to another extreme. So in some sense, just a two-dimensional. Obviously things are a lot more complicated than that, but that's what they did.

And they ran their algorithm and concluded that one way to think about this is the spectrum is between CEOs who emphasize management more or leadership more. So management with CEOs tended to spend more time visiting factories, getting involved in operational issues, having small group meetings with employees or something like that, most of the meetings tend to be with people inside the organization. Whereas leader CEOs were more hands-off on those operational issues, were spending more time with C-suite executives, people outside the organization. So you might say taking more of a strategic role as opposed to an operational role.

Hal Weitzman: And so they can go through the diaries, work out what they're doing and work out what kind of a leader they are. And you pointed out in your talk that the leader CEO style is more prevalent in productive, profitable, larger, multinational public, R&D intensive type firms. Why companies? Why is that? How do you explain that?

Michael Gibbs: Maybe that's what a CEO is supposed to be doing. I guess the way I think about it is that manager one feels more like what we often call a COO, Chief Operating Officer.

Hal Weitzman: Right.

Michael Gibbs: And you think about Steve Jobs and Tim Cook. When Steve Jobs came back to Apple the second time and was successful as a CEO, he had been a failure the first time. I think a lot of what happened there is he had a COO to take care of the internal operating of the business, operational efficiencies and so forth and so on and he was really good at strategic vision, sort of high-level product design decisions, and also as an external brand for the company with investors, with customers as well.

Hal Weitzman: Okay. And now Cook is then when Tim Cook takes over, does that mean he, in your assessment, did he change his style or is he now the-

Michael Gibbs: I'm not an expert on Tim Cook, but it doesn't feel like he's changed his style much. And we see Apple is doing very well, but its innovation has more or less stalled.

Hal Weitzman: If you're enjoying this podcast, there's another University of Chicago Podcast Network show that you should check out. It's called Nine Questions. Join professor Eric Oliver as he poses the nine most essential questions for knowing yourself to some of humanity's wisest, the most interesting people. Nine questions with Eric Oliver, part of the University of Chicago Podcast Network.

So Mike, in the first half, we talked about this dynamic of the sort of leader CEO versus the manager CEO. Would all companies benefit from having a leader rather than a manager?

Michael Gibbs: The authors of the study I've been talking about do make that argument. Their analyses suggest that when companies have a CEO who behaves more in the leader style rather than a manager style, they tend to perform better. And their simulation suggests that that would be true, even for firms which have more of a manager style.

And what they further argue then is why don't all firms adopt the leader style? That it's a relatively scarce resource, suggesting it's not something you can adopt and train yourself in. So it's more valuable, and every company would like to have that leader style, but not every company can afford that because they're competing in the market for talent against other companies.

Hal Weitzman: Okay. So just there's fewer leader type CEOs around?

Michael Gibbs: Yeah.

Hal Weitzman: Do they tend to jump around from company to company?

Michael Gibbs: I don't know.

Hal Weitzman: If you hire internally, you're more likely to get a manager?

Michael Gibbs: Yeah.

Hal Weitzman: Than a leader.

Michael Gibbs: I think that's probably true.

Hal Weitzman: And this came up a little bit earlier when you talked about the difference between Steve Jobs and Tim Cook, but there is a lot of research, isn't there? About the psychological profiles of C-suite candidates that reveals distinct traits, different types of behaviors for CEOs, COOs, and CFOs. What are some of those characteristics?

Michael Gibbs: I don't think there's a lot of research, unfortunately. We'd love to get more. But the research I'm most familiar with was done by Steve Kaplan here at Booth with colleagues, and they collected data from an executive recruiting firm, which companies, private equity firms or whatever might hire when they're looking for a candidate for a C-suite job. It's called ghSMART. And this is an unusual form of data. What ghSMART does is they'll charge $10,000 or more to the company to assess someone. So how your candidate for CEO, you're going to come into ghSMART, we're going to spend four hours interviewing you, charging $10,000 or more.

We're going to write a 40-page analysis of your behavioral traits. Okay? So what Steven and his co-authors did is they collected those data which end up producing 30 different measures of behaviors, if you will, or personality traits. I'm a little reluctant to use that word because I'm not a psychologist and I don't... That may have a precise meaning that I don't intend. So the challenge then is what do you do with these 30 measures for all these CEOs to make sense of them? And they use a statistical technique called factor analysis.

And the idea there is assume there's some underlying personality profile of C-suite executives. There's small number of dimensions, and we can't observe those directly. These are what a statistician would call latent variables. But what we can observe is outcomes that were created by the CEO's personality and behaviors, and we can then use those measures, these 30 measures in this case through some statistical methods called factor analysis to try to uncover the underlying true traits, the latent variables. And so they do that. And what you end up with is you have a small number of measures of, I'll just call it personality informally of the CEO's.

And each of those, in this case, they came up with four. The statistic said, "This is a pretty good model of describing the variance in our data here." They came up with four dimensions. And for each of those four dimensions, many of the different 30 measures contributed to that dimension. So might have a positive effect or a negative effect depending on which one. And so what you have to do then is, this is more art than science, you have to look at the list of these 30 measures that we have and which ones are working with each other positively or negative to create one of these underlying psychological traits.

And then you have to interpret it. So the first is pretty easy. What they found is that if all 30 of the traits are positively correlated with each other, if you're higher ranked on one of them, you're probably higher ranked on all of the other 29. And in fact, all of those contributed to the first and most important factor that explains the most of the variance in the data. And so they just call that general ability. And that one actually makes sense because other researchers found that, for example, entrepreneurs tend to have general ability.

They tend to be a jack of all trades rather than a master of and a master of not. Right? If you're an entrepreneur, you have to do a little bit of everything. And in some sense, that's also true for a CEO. But it also is consistent with research that finds that CEOs who have higher cognitive ability tend to perform better or their companies tend to perform better. So this, just this sort of general bandwidth effect. The second measure is one they called execution. And so some of the 30 measures were associated with someone who is focusing more on being proactive, aggressive, focused on efficiency and things like that.

And others had a negative relationship with that measure. And they tended to be ones that we think of as related to interpersonal skills. So they interpreted that, they call it execution, but the opposite of they call interpersonal. Again, this is art rather than science. The third, they called charisma. And the opposite of that is analytical. As a triple alumnus of the University of Chicago, this one kind of feels very close to home here. We're really high in the analytical, maybe not so much on the charisma, go Maroons.

Anyway, and then the last one, they call creativity or strategy as opposed to organizational. So what they find is that CEOs tend to be high in general ability. They tend to be executives, so proactive, focused on getting results done. They don't tend to be analytical. They tend to be stronger on charisma. Steve Jobs is an excellent example of that. And they tend to be better at thinking about creativity and strategy, which I think makes sense as well, and not so much on the operational side.

Now, again, that's quite similar to what we saw in the time diary study where we had this spectrum from management to leader. This is giving four different dimensions. Now for COOs, it was a little bit different. They tend to focus more on the operational rather than the creativity and strategy side, tend to be a little more balanced on analytical versus charisma and so forth. And then CFOs, as you would expect, tend to be low on the charisma, but high on analytical.

Hal Weitzman: And is that the reason you think that so many CFOs struggle when they become CEOs?

Michael Gibbs: And not many become CEOs too.

Hal Weitzman: Right, not many become.

Michael Gibbs: Yeah.

Hal Weitzman: And then when they, well, maybe they're not seen as potential CEOs because they don't have the ability to show the other skills that they could show because they're in that kind of role that requires more analytical type thinking. Is that fair?

Michael Gibbs: Yeah, I think so.

Hal Weitzman: Okay.

Michael Gibbs: So there's a related question though. Is this nature or nurture?

Hal Weitzman: Right. Does that mean some people just have-

Michael Gibbs: I can't answer that with these studies.

Hal Weitzman: ... charisma. Yeah.

Michael Gibbs: I think that's definitely true, and I think it's difficult to change personalities. My wife's been trying to do that with me for 30 years. It's failed.

Hal Weitzman: But it does suggest that things that got you to the CFO, to the C-suite, but in a non-CEO position are not the things that make you the CEO. And if you become CEO, that you may struggle to adapt because of your lack of charisma or perceived charisma or whatever else.

Michael Gibbs: And similarly for COO to CEO, although the leap is not as dramatic as it would be for CFO.

Hal Weitzman: Right. I want to move on to talk about managers, because you said we're not just talking about CEOs, we're not just talking about leaders, but managers. And managers matter too. There's research that suggests that managers vary a lot in equality. Nobody will be surprised to hear that, but that that has a significant effect on real results. So if you replace a boss who's in the bottom 10% with the boss who's in the top 10%, that can lead to a massive increase in productivity between, I mean, it's a large range, but between 11 and 50 percent increase in productivity. How do good managers do that?

Michael Gibbs: Yeah. That was from one study, just to clarify. But we are getting new studies appearing, and they all have pretty similar results. And in fact, one of the newest ones is the thesis of one of our new junior faculty members, Virginia Ginni. It's a really nice paper. And it's building on the one that you referenced, which was done part by Ed Lazear who spent most of his career at Booth before he moved to Stanford. So what these studies do is we, first of all, we just ask if we have measures of employee productivity? Is productivity higher with someone who's asked me to be a better boss?

And the answer is yes, and it tends to be significant. One thing that surprised me was these studies tend to find that a good boss can improve performance for all of his or her subordinates, tends to have a stronger effect on the best performers. I would've expected the opposite. The best performers are already performing well without the extra coaching or supervision or motivating, but it turns out that's not the case, which is kind of a sad result in some sense. The rich get richer and the poor get poorer or something like that. But it suggests you might want to pair your best people-

Hal Weitzman: Maybe they're more coachable.

Michael Gibbs: Maybe. Yeah.

Hal Weitzman: The best people. Yeah.

Michael Gibbs: So then the question, so how is this happening? So one thing you can look at is if I work for a relatively strong boss now, and then I get reassigned, is my productivity higher even with a new supervisor? And the answer is to some extent, yes. So there is some persistent effect, but to some extent, no. And in fact, this... So that suggests there are two things going on. One is there is some training that improves my long-term productivity. I'm accumulating human capital learning from a good boss and not learning from a poor boss.

But the second thing that bosses or supervisors are doing is they're supervising or they're monitoring or they're providing better evaluations and incentives. So as soon as I don't have that supervisor anymore, I'm losing that effect. And then the third thing, which is what Virginia Minni found was that one of the things that good bosses do to raise organizational productivity is they don't hoard talent. So they're more likely to reassign people through lateral transfers or promotions and deploy them to the best use.

Hal Weitzman: Okay. Fascinating. And staff care about working for a good manager. They value it at least in one study I think, the same as a 36% pay increase. Tell us about that.

Michael Gibbs: This was an amazing study that was done by economists with a data set, which is essentially a random sample of the entire Canadian workforce. So they collected data on characteristics of people. So they knew your age, education, experience, gender, things like that, that might affect your compensation. They knew how much you were paid, but they also had responses to a government survey that these citizens had filled out, which are very, very simple to what firms often call engagement surveys, employee engagement surveys, asking questions about how much do you value this characteristic of your job, or how much do you dislike this characteristic?

Okay? So then what they did is complicate statistical analysis to try to uncover how much employees actually valued those things. So where you might go into a company and there's an engagement survey and it says, "This is the most important response by employees," what's nice about this study is that we're able to put a price on these things. So think about it this way. I have two different job offers. One of them offers me more ability to work from home, which I value, the other does not.

If I'm going to accept the one that does not, I have to be compensated in some other way. So they're basically doing that kind of analysis, what labor economists would call compensating differentials. Statistically, if someone is in a job where they report that their boss is one they do not like very much, or they find the work interesting or something like that, how much extra they get paid for things they dislike, how much less do they get paid because the job has other characteristics that they do? And what they found is the number one thing that these employees cared about the most was the extent to which they trusted their leadership, their manager.

Hal Weitzman: And they're prepared to work for less because of it?

Michael Gibbs: Yeah. Or they need to accept combat pay if they have a poor boss.

Hal Weitzman: That's right. Yeah. Well, we've all kind of been there. So Mike Gibbs, thank you. This has been a fascinating conversation about... Thank you for leading us through this survey of why leadership and management really matters. Great chat.

Michael Gibbs: Thank you. Thank you, Hal.

Hal Weitzman: Thanks for coming on the Chicago Booth Review Podcast. That's it for this episode of the Chicago Booth Review Podcast, part of the University of Chicago Podcast Network. For more research, analysis, and insights, visit our website at chicagobooth.edu/review. When you're there, sign up for our weekly newsletter so you never miss the latest in business-focused academic research. This episode was produced by Josh Stunkel. If you enjoyed it, please subscribe, and please do leave us a five-star review. Until next time, I'm Hal Weitzman. Thanks for listening.