Wednesday, May 13, 2009

What Type of CEOs Make Money for Investors?

I found the following study in a recent book called “Who: The A Method for Hiring”, by Geoff Smart and Randy Street, from the management assessment firm ghSMART. Geoff is the son of Brad Smart, a frequent guest blogger on Great Leadership.

While I worry that managers might not read this carefully and jump to the wrong conclusions, it’s worth reading and considering. Take a look and let me know what you think.

What Type of CEOs Make Money for Investors?

If you are a CEO, or want to become one, you may find this enlightening. We conducted the largest study ever done, pairing in-depth assessments of CEO traits with financial performance. What we found may make your head spin. It flies in the face of conventional wisdom.

To learn whether there is indeed a profile that can predict CEO success, we teamed up with Steve Kaplan, professor of entrepreneurship and finance at the University of Chicago, and his collaborators, professor Morton Sorensen and research assistant Mark Klebanov. Together, we analyzed the data from 313 Topgrading interviews we conducted on private-equity-backed CEOs from 2000-2005. Then we matched the CEO assessments with the actual financial performance they delivered, which we tracked down with permission from our clients.

The results were compelling and controversial. In fact, The Wall Street Journal ran a half-page article about this on November 19, 2007, that attracted a lot of attention.

Boards and investors have a tendency to invest in CEOs who demonstrate openness to feedback, possess great listening skills, and treat people with respect. These executives have mastered the soft skills. We call them “Lambs” because these CEOs tend to graze in circles, feeding on the feedback and direction of others. (Note from Dan: I hate the “Lamb” label!)

Boards love lambs because they are so easy to work with, and in fact, in our study Lambs were successful 57 percent of the time. That is not a bad success rate. A batter who hit .570 over a career could walk backward into the Hall of Fame.

The second dominant profile that emerged from our analysis was of CEOs who move quickly, act aggressively, work hard, demonstrate persistence, and set high standards and hold people accountable to them. We call these CEOs “Cheetahs” because they are fast and focused.

Cheetahs in out study were successful 100 percent of the time. This is not a rounding error. Every single one of them created significant value for their investors.

Conventional wisdom holds that the sort of emotional intelligence Lambs show is the critically important leadership quality. In fact, our analysis agues otherwise. Emotional intelligence is important, but only when matched with the propensity to get things done. Too many executives have fallen into the trap of accentuating their lamb skills at the expense of their Cheetah qualities. They work hard to stay in tune with their employees. They’re well liked on the shop floor and in the boardroom. There’s only one problem: they don’t produce value at anywhere near the rate Cheetahs do.

This isn’t to say that Cheetahs lack soft skills. To the contrary, they are talented people whose soft skills played a critical role in their ascent to the top job. The difference, though, is that Cheetahs know when it is time to stop asking for feedback and to attack a target to achieve key outcomes that move a company forward.

The characteristics that make up a Cheetah or a Lamb were statistically significant predictors of success in the job. Steve Kaplan and his team have presented these findings at the University of Chicago, Harvard, Wharton, and Kellogg. We know the results hold true in private equity, and plan to study how extensible these findings are to public-company CEOs. In the meantime, you might consider how these findings apply to you.

Should you always want to be a Cheetah, or do you always want to hire a Cheetah? No. (Note from Dan: this is an important point. Most of the assessment work that ghSMART does is for private equity firms looking for CEOs to turn around troubled buy-out companies. So in these kinds of leadership challenges, a tougher, more directive style would be needed. That doesn’t mean the same approach would work in all situations.)

But if you have the choice to be or hire somebody who errs on the side of being too fast and focused versus being too slow and extremely collaborative, we recommend going with the fast and focused option. In this fast-paced age of business in which we all exist, it appears that speed and focus really count when it comes to delivering great financial results.

5 comments:

Wally Bock said...

I don't think this flies in the face of conventional wisdom at all. It does fly in the face of the PC idea that if you make people happy, they will be productive. But great organizations from the Marines to the top-performing supervisors in my research all work with a dual focus. They need to accomplish the mission and care for the people. And, therefore, they create working environments that have high productivity and high morale.

I think your presentation is far more accurate than the Journal story based on the research. I especially like your point that the research is based on a database of CEO who are primarily hired by private equity firms in turnaround situations. Here's a link to my post from November 2007 that makes similar points.

http://blog.threestarleadership.com/2007/11/27/dont-believe-everything-you-read-in-the-studies.aspx

Wally Bock said...

Congratulations! This post was selected as one of the five best independent business blog posts of the week in my Three Star Leadership Midweek Review of the Business Blogs.

http://blog.threestarleadership.com/2009/05/13/51309-midweek-look-at-the-independent-business-blogs.aspx

Wally Bock

Dan McCarthy said...

Wally -
I read your post - awesome. Right on, as always.
And thanks for selecting this post as one of your 5 best of the week!

Susan Zelinski, The Zen of Business - The Business of Zen said...

Dan, compelling post! I believe the most effective leaders are those who use both sets of competencies. Often development focuses on highlighting one leadership skill over others rather than looking at what the best integration of skills would be to fit the organization's strategy and desired culture. Many coaches often focus on developing Lambs, and that may be because there are so few leaders out there who truly have or leverage EQ skills. The best CEOs know how to apply their EQ skills while driving for results and when to apply different approaches. After all, all the collaboration in the world to arrive at the most effective and innovative solution is not meaningful unless you can implement it!

Dan McCarthy said...

Susan -
Thanks, makes sense. Excellant points.