Indispensable and Other Myths by Michael Dorff

Author:Michael Dorff
Language: eng
Format: epub
ISBN: 9780520281011
Publisher: University of California Press

CEO POWER

The most popular view is that leadership is crucial to an organization’s success. The business press certainly seems to share this view. In articles about a company’s achievements, the CEO is generally the focus. We do not read about the great culture at Southwest Airlines that fosters innovation and hard work in its employees or the clever strategies implemented by its founders nearly as often or as prominently as we read about its CEO. (Even if we do hear about cultures and strategies, we hear about them in relation to the CEO’s inspired leadership.) Because so many of us share a powerful instinct that CEOs not only matter, but perhaps matter more than anything else, a number of scholars have tried creative approaches to demonstrate leadership’s impact on corporations.

If CEOs are critical to companies’ earnings, then when CEOs die or lose close family members, the companies’ profits should suffer. Three business school professors—Morten Bennedsen, Francisco Pérez-González, and Daniel Wolfenzon—examined corporations in Denmark to study whether this is true. The study found that when CEOs died or lost close family members, corporate earnings declined significantly. The authors concluded that CEOs are a critical part of corporate performance. Interestingly, not all close family members had this impact. When CEOs lost their mothers-in-law, company profits actually rose slightly.33 (Since my wife will read this book, I’ll mention that I would be entirely devastated if my own mother-in-law passed away.)

While this study suggests that having an active leader matters, it does not demonstrate that any particular leader is critical. Having a different, competent CEO in place who did not lose a close family member might have protected the company from the decline in performance. Two other types of studies have gone a step further, trying to reveal the importance of having an especially talented CEO at the helm. The idea here is that not just any competent leader will do; it is important to have the very best CEO possible.

One way to get at this question is to find a measure of CEO talent. If we could quantify CEO talent, at least well enough to rank CEOs by skill, we would have an easier time deciding how important it is to hire the very best CEO, as opposed to just one of several very good alternatives. Antonio Falato, Dan Li, and Todd Milbourn recently attempted to do just that. They compiled three alternative proxies for CEO talent: good publicity, career pace, and undergraduate education. The authors ranked the CEOs in their study using these proxies for talent and found that better CEOs generated superior results. In particular, CEOs one decile higher in talent generated shareholder returns that were between 0.3 percent and 0.45 percent better (depending on the talent measure). Choosing the best possible CEO could therefore pay significant (though not enormous) dividends for a company.34

But studies like this are only as good as the talent measure. Do we really believe these proxies for talent correlate with actual ability? A person’s relative youth

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