Contributor Panos Mourdoukoutas, PhD, explains why the “CEO effect” — the impact CEOs have on corporate performance — is often unreliable.
Dr. Mourdoukoutas cites a study by Markus Fitza, PhD, a professor at College Station-based TexasA&MUniversity. The study, which was published in the Strategic Management Journal, analyzed data from 1993 to 2012 from 1,500 of the largest U.S. firms. It attempted to estimate how much a firm’s performance has to do with a CEO’s abilities.
“Differences in the performance of a firm during the tenures of different CEOs can be caused by at least two things,” said Dr. Fitza. “There are differences in CEO abilities as well as events that are outside of the CEO’s control — chance events.”
Such chance events can have negative or positive effects on how a firm performs. “I wanted to know how big the effect of chance on CEO performance might be,” said Dr. Fitza.
In his research, Dr. Fitza found most CEOs stay in their position for an average of four years, which isn’t long enough for negative and positive chance events to even out. Thus, one occurrence of good luck or one occurrence of bad luck may be the biggest contributor to a CEO’s success. In fact, Dr. Fitza determined good luck and bad luck can
have a more than 70 percent impact on a CEO’s performance.
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