Why Do MBAs Make Better CEOs?

As I move closer to taking on an MBA, several colleagues & alumni students continue to provide wholesome advice and point me to interesting articles. I’ve included one such article below.

An MBA really does help a CEO to add value. At least, that’s what a recent INSEAD study suggests. The more difficult question is why

By Herminia Ibarra, Morten T. Hansen, and Urs Peyer

MBA programs have taken a lot of criticism over the last year or two. According to naysayers, they are guilty of many crimes: teaching the wrong financial models, riding roughshod over risk management, sidestepping business ethics, overheating the managerial job market, hiding from the real world, and cloistering students in academe.As a result, so the script goes, we have a generation of business leaders tainted by greed and short-term thinking.Hence, the recent global economic crisis. Oh, and remember Jeff Skilling of Enron? He had an MBA, while Bill Gates and Steve Jobs didn’t even finish college.Now, we enjoy a good debate. And we’re ready to take criticism on the chin. But we also prefer analysis to anecdote.

In our ranking of the 100 best-performing CEOs in the world, published in the JanuaryFebruary issue of the Harvard Business Review, we sought to judge the performance of business leaders in a new way by focusing on objective gauges of long-term performance. That is, we measured the performance of chief executives over their entire time in office, rather than focusing on the last year—or worse, the last quarter. As part of the analysis, we evaluated the impact of having an MBA on a CEO’s overall position in the ranking. This gave us fascinating data to contribute to the great MBA debate.

Not a Necessity

Initially, we’d hoped we could analyze our whole sample of 1,999 CEOs from the world’s top companies for the effects of an MBA on their ranking position. Remember, our data was based on long-term performance—to be precise, return on shareholder investment and change in market capitalization over a chief executive’s entire tenure. If business schools encouraged short-term thinking and unfettered greed, then having an MBA would surely be correlated with a low ranking. At this point we were keeping an open mind.

While information about educational credentials wasn’t in the public domain for all countries, CEOs’ academic records were widely available in France, Germany, the United Kingdom, and the U.S. That left us with 1,109 of our original 1,999 to analyze—still a sizable sample and statistically significant enough to work with.

Fewer than one-third of the CEOs in our reduced sample of four countries had an MBA. So let’s be clear. We’re certainly not saying it’s a necessity for getting the top job. But it could still be sufficient to improve performance.

As it turns out, we found a definite correlation between holding an MBA and achieving high performance as a CEO over the long term. In our list, CEOs with an MBA ranked on average a full 40 places higher than those without. Indeed, half of our top 10 went to B-school (although, admittedly, one of them dropped out before getting an MBA).

What does that mean in terms of performance? CEOs without MBAs had average shareholder return of 81% over the course of their entire tenure, while those with MBAs averaged total returns of 93%, a substantial improvement.

Next we looked at those who had become CEO before the age of 50. The effect of an MBA was even more significant for this group. The advantage went up from 40 places to 100. Our study controlled for a great many other variables that might have explained the superior MBA performance: industry, company size, the CEO’s starting year, even prior company performance (to guard against the possibility that MBAs fared better, for example, by selectively choosing companies that were already doing well). Time and again, the MBA advantage persisted.

Magic MBA Ingredient

The big question is, why? The simple answer is that something in the MBA curriculum or experience helps a CEO add value, particularly if that executive has comparatively few years of business experience. But what exactly is this magic MBA ingredient? Here, we’re forced to part from our data and speculate.

For some graduates, an MBA simply gives them better skills. It can add right-brain creativity and warmth to left-brain logic and financial acumen. Or vice versa. It can even help get the hard and soft skills working together.

For others, an MBA is a badge of excellence. After all, top schools only accept a chosen few. And most top companies look among the elite for their leaders.

An MBA may also provide a network of other rising stars. This network offers business contacts, opportunities, and priceless advice. And it lasts for an entire career.

So far, so good. When we blogged about our findings on hbr.org, several readers suggested a less obvious but equally convincing advantage. Those who choose to do an MBA, the readers said, are opting to improve themselves. Their openness to ideas and willingness to learn is going to benefit them all the way to the top—and long after they arrive in the executive suite.

We’d like to add a final suggestion of our own. Our ranking shows that no country or industry has a monopoly on excellence. This indicates that business leaders ought to look outward—to new geographies and sectors—for role models. An MBA program, or at least a good one, gives just such a perspective, especially if it recruits a globally diverse student body. And here our speculation is backed up by research. An INSEAD colleague, Professor Will Maddux, has carried out experiments demonstrating conclusively that the simple fact of having lived abroad makes people more creative.

The most successful MBA graduates are probably those who manage to mix all of the above ingredients into a potent cocktail of excellence. Perhaps they’re the ones who made it into our top 200. Today’s MBA students should take note.

Herminia Ibarra is a professor of organizational behavior and the Cora Chaired Professor of Leadership and Learning at INSEAD, the international business school with campuses in France, Singapore and Abu Dhabi. Morten T. Hansen is a management professor at the University of California, Berkeley, School of Information, and at INSEAD. Urs Peyer is an associate professor of finance at INSEAD.

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