Chicago Booth Review Podcast Do Companies Hire the Right CEOs?

Steve Kaplan: What we found is that the efficient, proactive, persistent, and creative-strategic were associated with the more successful CEOs.

Hal Weitzman: Are American companies any good at hiring chief executive officers? When a company is searching for its next CEO, what skills are they looking for? And are those the same skills that make CEOs successful in the job? 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. And today, I'm talking with Chicago Booth's Steve Kaplan, who spent decades analyzing C-suite hiring practices and CEO performance using an empirical approach.

Kaplan finds that candidates who get hired as CEOs are different from other C-suite executives. But his research also suggests that hiring practices do not guarantee that the person who wows the hiring committee will succeed in the top job. Steve Kaplan, welcome back to the Chicago Booth Review Podcast.

Steve Kaplan: It's great to be here again.

Hal Weitzman: I want to talk to you about CEOs. You've been doing research for decades about CEOs. What makes a good CEO? What do companies look for in a CEO? Let's start with this. There's a lot of anecdotes about what it means. You only have to look on LinkedIn for three seconds to see something about leadership and what it means to be a good leader. Is there a common thread in that popular literature about CEOs that tells us anything significant?

Steve Kaplan: Okay. I think if you Google what goes into a CEO, or you can ask ChatGPT or Claude, that's always interesting as a start. What makes a good CEO? What pops out is actually what Peter Drucker called the universally gifted person. You'll see this person has to be a great leader. He or she has to be empathetic. They have to be incredibly smart and strategic. They have to know how to hire a great team. They have to do that. They have to be, again-

Hal Weitzman: Just do everything.

Steve Kaplan: ... universally gifted. And so it's not very helpful because none of us, I don't think are-

Hal Weitzman: Perfect, yeah.

Steve Kaplan: ... universally gifted. Nobody's perfect. So then you have sort of the better-known popular literature. You have Jim Collins, who wrote Good to Great, and he identified what he calls a Level 5 manager. After looking at, I think, over 1,000 public companies, he found 11 CEOs who perform well over a long period of time. And they hired the right people, they were humble. They were very diligent. And I'm blanking on what the fourth thing was, but he had four things. Bill George who wrote Authentic Leadership, his thing is the CEOs are authentic. They present themselves. And then you've got Jeff Pfeffer, who's at Stanford. Bill George is at Harvard. And Jeff Pfeffer wrote something called Leadership BS. He says, "The authentic stuff is sort of BS. Leaders are a little Machiavellian. They figure out what needs to be done. They're not necessarily authentic. They're careful what they say." And so, again, even in the popular literature, you've got these three people who have written bestsellers who say somewhat different things.

Hal Weitzman: Well, they couldn't all be exactly the same, I suppose, or they wouldn't sell the books.

Steve Kaplan: That's about it. That's true.

Hal Weitzman: I guess the difference is that-

Steve Kaplan: This goes back to getting research published.

Hal Weitzman: Right. That's right. So the difference there is that these are somewhat anecdotes. I mean the people you're talking about are typically interviewing CEOs themselves and sort of getting their wisdom from them or observing them and making some generalizations. But you are doing something very Chicago, which is you're doing empirical research as are many other people. What are the common threads that come out from empirical search? Not necessarily your research, but just in general, what are the threads that come out? The common threads that come out?

Steve Kaplan: You have to be more fair to Collins. Collins was quantitative. The thing that's tricky with Collins is he looks at the results ex-post and then he says, "Okay, 11 did really well, and they look like the way I told you." What you don't know is whether 1,000 people looked at that like that and only 11 succeeded, or there were only 11 and all 11 succeeded, because it's after the fact rather than before the fact.

In the academic literature, the threads, I think the research is very tough because it's hard to measure what you'd like to measure, which is, what are the characteristics of the CEOs? The work that's out there, there's definitely work that says that CEOs matter. So there's famous paper Marianne Bertrand wrote, who's one of our colleagues where they definitely found that CEOs matter. That different CEOs had different outcomes, which clearly makes sense. They couldn't say what it was about the CEOs that drove the results.

And people, you can look at your college or gender or whatever, but it really isn't getting into characteristics that you think about in the example I gave you earlier about the universally gifted person, which of these different characteristics is going to drive performance.

Hal Weitzman: Right. We want to know the behaviors.

Steve Kaplan: We would like to know that. Yeah.

Hal Weitzman: And so you're saying that in the empirical research, we don't have a clear sense of what the behaviors might-

Steve Kaplan: You can't look at somebody's LinkedIn page and say, "How is he or she on... " Are they empathetic?

Hal Weitzman: In terms of their skills. Right.

Steve Kaplan: Are they good listeners? Are they good at hiring or firing people? Do they drive results? So you can't tell.

Hal Weitzman: Okay, so tell us about your research project because you tried to do exactly that.

Steve Kaplan: So what I've been able to do, and I've done most of this work with Morten Sorensen, who's at Tuck, he was here for a while, is we have been able to get assessment data from ghSMART, which is a firm that assesses C-level candidates for jobs. They're not a search firm. They're hired when somebody is deciding, "Do I want to hire this person or not?" Or, "Do I want to invest in this person's company?" And they then assess the candidate. And over the years, and we have data in various papers really from 2001 to 2019, 2020, so we have 20 years worth of data. They've been doing this a long time.

And they go to the candidate, they interview the candidate for four hours. It's hard for the candidate to lie for four hours. And so they're asking the candidate question, "What did you do in this job? Who did you hire? Who did you report to? What would the people you work for think of you?" A lot of detailed questions. And after four hours, they write up a report which includes ratings on 30 different competencies, including all of the competencies that we talked about earlier. And that would go into a universally gifted person.

And what we can do with those competencies is we've got how these executives were rated before they started the job. So that's the key differences. We've got the ratings before they started the job, so we don't know what happened. And then we figure out how they do. Well, first of all, you figure out where they hired and then you figure out how they did. And that allows you to say something about, A, which of these factors show up in CEO candidates? Because we've got not only CEOs, we've got CFOs, COOs, et cetera. So you can see, do the CEOs look different as candidates? Then you can see who gets hired and then you can see who's successful. And by doing that, we have a sense, or a better sense we think, of if you want to be a CEO, what you might do to become a CEO. And then if you become a CEO, what you want to do to be successful.

Hal Weitzman: Right. And so you captured it. There's two different things. Who gets hired and whether they're successful. And then not necessarily the same thing, which I want to dig into. But first, let's start with the first part. So what does your research tell us about what companies are looking for when they're looking to hire a CEO? What kind of qualities, skills?

Steve Kaplan: So what you can do is you can take all these competencies and there are 30 of them and they can be correlated. So what tends to happen is somebody who scores really well on one thing tends to score highly on another. So you've got sort of a overall level. And then you've got other things running around in these candidates. So what you can do is you just use a statistical process called a factor analysis where you take these 30 variables and you see what moves together. And so we did that. And what we find, we found this, initially we had 300 observations, then we went to 2,500, then we went to almost 5,000. And in all three of these samples, the relationships were the same. So that was a very cool thing.

And here's what you find is that some people do tend to score higher on everything. So the first factor, you just basically add up all 30 rankings. It's close to that. The second factor, which is to us extremely interesting, is there's sort of this relationship between how agreeable or likable people are and how execution oriented they are. And that explains a lot of the variation in all these variables. So if you basically add up the agreeable interpersonal variables and subtract the execution oriented variables, that explains a fair amount of variation. Meaning, people tend to go together on these factors, that tend to be one or the other. Or the variables and people tend to move together. Then the third-

Hal Weitzman: So just to be clear, so you're saying that people tend to be either agreeable or execution focused, but not both? Is that right?

Steve Kaplan: Well, you can be in the middle, you can be all these, but that the variables together explain a lot of variation. So when you add them up and you put in the sum... You get that one variable, the sum. Explains as much as if you had 10 of them separately.

Then the third factor looks a lot like charisma. Again, these variables, for some people, tend to be more charismatic. Some people tend to be more, call, managerial. Some people tend to be in between, but those variables move together.

And then the fourth variable looks like something like creative, strategic. So these 30 things that we talked about earlier, 30 characteristics, compress into what looked like four. And those four explain over 50% of the variation. So you can take 30 variables to four and explain which is, what, 13% and explain 50% of the variation. So we quite like that and find that extremely interesting.

And then you can look at the factors, look at how the CEOs show up compared to CFOs, COOs and others. And the CEOs are stronger on talent, so they tend to score higher, the candidates. Then on charisma, they tend to score higher. Create a strategic, they tend to score higher. And then the one that's interesting is on the agreeable interpersonal versus execution, I always ask audiences, where do you think CEOs are? And the audiences are almost 50/50 on interpersonal versus execution. And it turns out the CEO candidates are actually pretty strong on execution. And so that's the candidates.

So then who actually gets hired? When you look at who gets hired versus the candidates, the talent goes up a little bit. So more talented, you get hired a little bit more. The charisma goes up, so the more charismatic. But what's interesting is the execution gets a little lower. So the people who get hired are the more agreeable ones. The execution still stays on the execution side in the hired people, but it's the more agreeable people who execute, who get hired.

So you look at that and if you're interested in becoming a CEO, what does it tell you? Well, you should be talented but that, you probably can't control. You definitely want to execute. And that's like being efficient, being proactive, getting things done. Charisma, which is being persuasive, enthusiastic. You want to work on that. And so that's something where you want to know, can you do that? You can probably tell yourself to execute. If you're introverted, you got to work a little harder than if you're not. But on the margin, try to be a little bit more enthusiastic and persuasive. And then create a strategic, I'm not sure how you work on that.

But those are the characteristics that are showing up in the CEO candidates. And that presumably boards... The sample has some public companies, probably has more private equity funded companies in there. Or it does have more private equity funded companies in there than any other. So these are what the private equity investors are looking for. And I'll say something about public companies in a second.

So that's what the CEOs look like. So the hired CEOs, more talented, more execution oriented, more charismatic and more creative-strategic. Then we've looked at performance. And so we looked carefully at performance in our oldest sample. And more recently we have a different data set, which actually has half public companies, half private companies where we've looked. It's a different sample, different variables, but the basic results are going to be similar. You look at what's successful, and in this first paper, what we found is that the most important variables were the execution oriented variables and what looks like creative-strategic. So it was like efficient, proactive, persistent and creative-strategic were associated with the more successful CEOs. And in this other sample that's more recent and has more public companies, the results are consistent with that.

Hal Weitzman: So execution is key to being a good CEO once you're in the job. But it sounds like to get that job, you need to show more-

Steve Kaplan: To get that job you want... Well, this is a question of what boards should look for. So ghSMART, one of the senior people there, Elena Botelho, wrote a piece. I think it was in HBR, where it says the danger of hiring a CEO, who's too nice. And so what is consistent in our data and is consistent with what Elena sees is that if you're a board or an investor looking at some candidates and you've got one who really executes but is a little rough, and then you've got one who you really like but doesn't execute, do not hire that one. The data say don't go out out of-

Hal Weitzman: How did you [inaudible 00:18:25] your best friend?

Steve Kaplan: ... your way. Think of a complete jerk, you don't want to hire, but you don't want to hire the person who doesn't execute, because they will fail. You want to hire, I mean the ideal person is probably a Satya Nadella. If you read his autobiography, he's big on execution. He has a few sort of directives that he says, and one of them is, "Be direct, be clear." I mean, it's really execution oriented. But then you meet him and he's charming and very personable. So ideally you'd have him.

Hal Weitzman: But if you had to choose, you'd choose-

Steve Kaplan: You have to choose between-

Hal Weitzman: ... the person who's a bit more of a jerk, not a complete jerk, but is execution focused.

Steve Kaplan: Call it a little rougher would be the analogy. I was talking with Elena recently and we said, "Go to Jungle Book."

Hal Weitzman: Baloo.

Steve Kaplan: "You don't want to hire Baloo, you don't want to hire Shere Khan. You might want to hire Akela," who is the wolf parent. Yeah, so it's a wolf, but the pack follows the wolf. And that's not Shere Khan, but not Baloo.

Hal Weitzman: It's interesting because it suggests that our process for hiring CEOs is not perfect.

Steve Kaplan: There's no way it's perfect. That first paper I told you about that I did, the success rate was about 50%. And then this other work I'm doing, the success rate's about 50%. And I think if you talk to the buyout firms, they'll tell you the hardest thing is figuring out whether the CEO is going to perform or not. So they're all trying to figure this out. I think for public company boards, but also I think for the private equity firms, there is this tendency you hire the person you like.

Hal Weitzman: That you like.

Steve Kaplan: Who may or may not be... If you like them, but they don't execute that's a mistake.

Hal Weitzman: But I mean for public companies, it's particularly important, if you are a shareholder of a company and you think the company is not good at selecting its own CEO, that's significant.

Steve Kaplan: That is correct. I have another paper which is a little consistent with this, that if you look at S&P 500 firms, who they hire as CEOs, like 70 or 80% of the time, it's an insider. So they're hiring the person they know. The private equity or buyout firms, 70% of the time when they change CEOs, they're hiring an outsider. So the buyout firms are much more willing to go to the outsider. So one interpretation is that there's more talent within an S&P 500 company, so you can find someone good within. The other explanation is you're hiring the person you know, you're playing it safe. Whereas the buyout investors are trying to hire the best person.

Hal Weitzman: Interesting. So you've obviously done a lot of research about private equity, there's something different about the way they run the companies that requires different kind of CEO skills? I mean, they're not having to schmooze shareholders in quite the same way.

Steve Kaplan: I mean, my sense is that this execution result is true if you're public or private. That if you hire the person who's agreeable but doesn't make decisions... And execution is really about getting the right things done and deciding, that you're going to be lost if you're... I mean, I know private equity investors who said they hired that kind of person and it was not good. And I know public companies where that's the same too. And I think if I'm a board member or an investor, that's what I want to be careful about, that I'm not hiring this person who's likable. I mean, I see this in organizations, is that a way to rise up is to get consensus, get people to agree and be sort the person who everybody likes. But when you become CEO, you got to make decisions and you've got to decide and you're invariably going to make some people happy and not. And that's, I think, where the agreeableness falls apart.

Hal Weitzman: But is it about making the right decisions or is it about making decisions and then actually following through and making stuff happen?

Steve Kaplan: I think it's, A, you have to make decisions and then ideally-

Hal Weitzman: They should be the right ones, right?

Steve Kaplan: ... they're the right decision.

Hal Weitzman: That always good. Yeah?

Steve Kaplan: I mean, Ulysses S. Grant has a great quote. So he's not a CEO, but he did win the Civil War, thankfully. He has this great quote where he goes, "In war, the worst thing is not to decide because if we decide and we are wrong, we can quickly do something else. But if we don't do anything, nothing happens."

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I know you've tracked this issue for a while, so tell us how these profiles of these CEOs have changed over time.

Steve Kaplan: So it's also super interesting in this data. So now Morton and I, we have 20 years basically of this data. And so we've split the sample between sort of before the great financial crisis, so 2001 to 2008; and then after, which is largely 2010 to 2019. And you can look at, do the CEOs in particular change? And what you find is for the hired CEOs, the talent looks kind of similar and the execution versus interpersonal looks more or less similar. I think a little less charismatic, but they kind of look similar.

So this view that CEOs have changed, that you have to be different, at least in these data, the way we calculate the factors, doesn't look like a lot has changed on the people who are hired. And if anything, the candidates are a little more execution oriented. So they're a little more execution oriented. The ones who are hired are about the same as they were. So again, there seems to be this hiring of people who are agreeable out of the candidates, but then the people who are hired kind of look the same over time.

Hal Weitzman: Okay. You talked about Satya Nadella, of course, Booth alum. Can you map these skills onto some other real life CEO examples just briefly, please?

Steve Kaplan: So Satya would be somebody who would be very strong on execution, but also on interpersonal or agreeable, I would say. You've got a Steve Jobs or a Jeff Bezos, who would be very strong-

Hal Weitzman: Execution.

Steve Kaplan: ... on execution. I don't know that Steve Jobs would be so agreeable. And I think Elon Musk would probably be in that boat. Unbelievable on execution, not clear how agreeable.

Bob Iger, if you read his autobiography... Or actually first if you read about him, people basically like Bob Iger. He's an incredibly likable or agreeable person. But then you read his autobiography and one of the things he says, he started talking about why he's successful, and he said, "Very early on in my career, people figured out that if they asked me to do something, I would get it done." And so it's very clear all of these people are very strong on the execution side and probably pretty strong on the creative-strategic. And the agreeable part is some are agreeable, some not. You got to get the execution right. And all of these people, that's true of.

Hal Weitzman: Okay, so with all your research, your decades of looking at this issue, if you go back to the more, how to say this politely, sort of airport type books about this topic that we referred to at the beginning, how do they stand up? Was the homespun wisdom basically more or less right? Or was it inaccurate?

Steve Kaplan: So I think the good to great, being fanatically driven and getting the right people, that's right. But he's also got being very humble and that wouldn't describe a number of these people. So he got it partially right. Bill George, authenticity, I am just not sure that that would explain very much. I think there's some truth into Pfeffer that they're, he says a little manipulative, but they're sort of doing what they need to do to get things done. I think Pfeffer comes out. Pfeffer and Collins both have some pieces that are pretty good and that I agree with.

I think the one who actually comes out the best is Peter Drucker. And Peter Drucker, some of the people listening will have no idea who he is. But he was kind of the best known management guru in, say, from 1960 to 1990 or maybe 2000. And he also was one of these people who just went and talked to people. No numbers, no analytics. And he wrote a book called The Effective Executive, which I recommend everyone read. It's terrific. He says, "I've seen executives with extrovert, introvert, worrying, confident, all different kinds of personalities, and what distinguishes them is they get the right things done." So he was all about execution and with a little bit of strategy, getting the right things done. That turns out to be true.

What's interesting too is he believes that you can get better at it. He believes that you're not born this way, that you can actually try to get better and can actually get better.

Hal Weitzman: Yeah, you can execute better, which is what we're always trying to do on the Chicago Booth Review Podcast. Steve Kaplan, thank you so much for coming back. It was great to chat with you again.

Steve Kaplan: Same here. Thank you.

Hal Weitzman: 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.