Fancy Degree Doesn’t Guarantee CEO Success

Whether or not the chief executive officer (CEO) holds a degree from a top school has little bearing on a company’s long-term performance. And when it comes to getting canned, CEOs with degrees from the nation’s most prestigious schools are no safer than the average CEO, according to new research from the University of New Hampshire.

The findings suggest that decision-makers should be careful about placing too much emphasis on an individual’s education when trying to assess his or her ability to lead the company and maximize shareholder value, say researchers.

The research analyzes the relationship between CEO education, CEO turnover, and firm performance. The researchers were primarily interested in the role that CEO education plays in a company’s decision to replace its current CEO, the role that it plays in selecting a new CEO, and whether CEO education significantly affects performance.

The researchers found that CEO education does not play a large role in the decision by a company to replace its current CEO; poorly performing CEOs are replaced, regardless of their education. Education, however, does play a significant role in the selection of the replacement CEO; there is a positive correlation between the education levels of new CEOs and those of the CEOs they replace. For example, even after a CEO with an MBA degree gets fired for poor performance, the board still looks to replace him or her with a new CEO who also has an MBA.

Hiring new CEOs with MBA degrees does lead to short-term improvements in operating performance. However, the researchers did not find a significant relationship between CEO education and long-term company performance. CEO education does not seem to be an appropriate proxy for CEO ability.

Companies may rely on CEO education in hiring decisions because they have few other identifiable and measurable criteria to use, say researchers As a result, they rely on what they believe to be the observable pedigrees of the executive.