The CEO is important but they are only one person. Rarely do they determine the success of a company. The instances where they seem to are so rare as to almost seem like just random luck. I think they can make a difference, but that they make a significant difference rarely. Steve Jobs seems to have made a huge difference to Apple, for example (and Jeffery Bezos at Amazon – note both of these examples are also founders of the company). Jason Zweig has a good article on Why a New CEO Isn’t Always a Panacea
If you took the CEOs with the best track records and brought them in to run the businesses with the worst performance, how often would those companies become more profitable? According to economist Antoinette Schoar of Massachusetts Institute of Technology’s Sloan School of Management, who has studied the effects of hundreds of management changes, the answer is roughly 60%. That isn’t much better than the flip of a coin.
“Some people,” Prof. Schoar says, “may have this almost blind belief that the manager at the top changes everything. Our results show that managers do matter, but they don’t change everything.”
Since the 1970s, several other studies have measured what happens when companies bring in new bosses. Most of the findings have been consistent: Changes in leadership account for roughly 10% of the variance in corporate profitability on average.
a company will be much more inclined to replace the CEO after a run of bad lossesâ€”and to bring him in from a firm that has been on a hot streak. That leads to an illusion: “You change the CEO,” Dr. Kahneman says, “then performance reverts to the mean, and you attribute the improvement to the new guy.”
Furthermore, the hot profits at the new CEO’s former company are likely to cool offâ€”by regression to the mean alone. When investors see that, they will mistakenly conclude that he is such a good boss that his old firm can’t thrive without him.
The management system is far more important than one person. Jim Press, Toyota N. American President, Moves to Chrysler (don’t expect much – Sept 2007). We are often fooled by randomness (understanding psychology lets you know this truth and factor it into your thinking): Illusions â€“ Optical and Other, Attributing Random Results to a Special Cause, Seeing Patterns Where None Exists.
CEOs like to think they are royalty and take huge amounts of money from the company’s treasury, as a way, they hope, of providing evidence of this false belief. Don’t be fooled.
Jason Zwieg is the editor of the last few issues of the Intelligent Investor where he adds commentary on Benjamin Graham’s classic.