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When boards evaluate the most suitable CEO, they need to consider the match, not just the candidate on its own.

What truly defines a "successful" CEO, and what attributes are essential for their effectiveness?  In our session on Boards and CEOs Hiring, Development and Firing - at the ECGI / IESE conference “Towards a New model of Bords of Directors” held at IESE Business School, Prof. Herminia Ibarra focused her contribution on the leadership dimension of CEOs and the challenges some face to transform their management style to be more effective. Next, in my discussion, I provided a complementary view on hiring CEOs and their attribute profiles, from recent research in corporate finance.

The market for CEOs 

The market for CEOs is not a classic competitive market since finding the right candidate involves a costly and elaborate search process. Yet, CEOs tend to come from a very small pool of candidates. Among the largest US corporations, an overwhelming 80% of new CEOs are promoted internally, a statistic that underscores the importance of company-specific knowledge and established networks (Cziraki and Jenter, 2022). However, this practice invites scrutiny over potential inefficiencies and the risk of insular thinking under disruptive or transformative phases. In contrast, private equity firms, often lauded for their ruthless efficiency, tend to look externally for 75% of their CEO hires. 

The typical tenure for CEOs in the U.S. and Europe averages around five years, highlighting a dynamic turnover. CEO profiles have been shifting towards more general and transferable professional backgrounds, that is, having prior positions in different industries, experience in conglomerates, and increasing number of prior firms before reaching the CEO position. 

Moreover, the compensation gap relative to other top executives continues to widen, with external CEO hires commanding salaries vastly superior to their internal counterparts. This hints at the premium placed on candidates perceived to bring a fresh perspective from the outside. In fact, a generalist profile is associated with 20% premia relative to a more specialist one.

In this context, how crucial is the CEO’s identity to a company’s success? Traditional metrics of corporate performance often fail to isolate the impact of leadership from other variables such as benign market and macro conditions or a firm’s organizational structure. Recent scholarly efforts aim to estimate this impact by employing advanced analytics and machine learning to parse out the effects of CEO behavior or “leadership styles”.

What do CEOs Do?

Research spearheaded by Bandiera et al. (2020) has taken an innovative approach by collecting detailed activity logs from over 1,100 CEOs across six countries. This wealth of data reveals distinct "behavioral types" among CEOs that can be synthesized in two predominant styles of leadership: the "Manager" and the "Leader." We need to think of these styles as a continuum for each CEO.

Manager CEO’s have a more hands-on operational focus and are experts in setting up systems, while Leaders focus on strategic vision and broad-based communication, and are experts in creating organizational alignment. The effectiveness of these two distinct styles depends on the specific needs of the company at the time of the CEO's tenure – and we need to wait at least 3 years to observe an impact on performance. 

What emerges from this literature is that the match is key. Some companies facing operational challenges might find greater value in a Manager's attention to detail and process optimization. In contrast, large firms undergoing radical transformations or pivoting in response to market changes may benefit more from a Leader's vision-setting capabilities. 

And from this matching perspective, the research suggests that around 20% of firms could have CEO mismatch. This might be due to labor market frictions to find the right CEO in the specific geography, or to due to individual frictions of managers trying to evolve from managers to leaders – as Herminia noted in her presentation. 

Are CEOs abilities different from other top executives such as COOs or CFOs?

Indeed, this seems to be the case when focusing on large scale assessment data (Kaplan and Sorensen 2021). In a comparative analysis, CEO are distinctly strong on 4 dimensions: General Ability (talent), Execution (to the expense of Agreeableness), Creative/Strategic and Charismatic (a combination of enthusiasm, persuasion, proactive). Interestingly, other executives such as CFOs or COOs look very different of these four dimensions. CFOs are, in fact, the most divergent relative to CEOs (CFOs are titled towards strong Analytical and Interpersonal/Agreeableness at the expense of the Strategic and Execution dimension). 

These four factors are as well predictive of who gets hired and, therefore, provide guidance for becoming a CEO. That is, you can modulate your abilities, very much in alignment to Herminia Ibarra’s main idea. Still, boards tend to overweight interpersonal skills at the expense of execution. 

Finally, setting the right pay is fundamental in the hiring and retention process. Periods of fast technological change, such as the one we currently live in, are associated with increases in pay differentials between CEOs and the rest of the top executive team. Firms are willing to pay for the ability to identify new growth projects and investments that will bring value. (Frydman and Papanikolaou, 2018). This skill is scarce and is exceptionally valuable for fast growing firms. Connecting this evidence to Kaplan and Sorensen’s main point: CEOs that have both a strong creative and strategic ability, as well as the capacity for strong execution will be sought after in times of industry disruption. 

In sum, when boards evaluate the most suitable CEO, they need to consider the match, not just the candidate on its own. Also, they should be aware of certain biases: overweighting certain abilities, such as interpersonal capabilities at the potential expense of execution or underweighting the creative ability to discover growth projects under uncertainty. 



By Mireia Giné, IESE Business School

The ECGI does not, consistent with its constitutional purpose, have a view or opinion. If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.

This article features in the ECGI blog collection Board of Directors

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