Deal of fortune – What proportion of any CEO’s success is attributable to luck?


Andrew Evans

Andrew Evans

Fund Manager, Equity Value

How much importance should fund managers place on meeting corporate management teams? Actually, let’s start with a different question – how much importance do fund managers place on meeting corporate management teams? Or, to put it another way, what proportion of returns do professional investors believe is down to the skill of the CEO and their team versus other factors? 

Obviously the answer will vary from fund manager to fund manager – some may well reply zero but others might put the proportion at, say, 75% or 80%. Our own educated guess, here on The Value Perspective, would put the average fund manager answer in the region of 50% – and certainly nowhere near the 4% or 5% a recent study has argued is closer to reality (and, as it happens, to our own view). 

These musings were prompted by an interesting Harvard Business Review article entitled Are successful CEOs just lucky? It references a number of papers that have attempted to quantify the roles of luck, ability and experience in the success of CEOs, one of which – written in 2001 – attributed somewhere between 2% and 22% of a company’s performance to the person at the top. 

Another paper concerned a Swedish study that wanted to see if there was anything innate in people that made them good CEOs. The researchers were aided by the fact all Swedes must spend time in the military, which meant there was plenty of data available on CEOs’ cognitive skills (intelligence) and non-cognitive skills (such as good communication) before they embarked on their business careers. 

The study concluded that people with good cognitive skills and, in particular, very good non-cognitive skills are more likely to be CEOs. Interestingly, bearing in mind what we learned in Handsome returns about the role the general attractiveness of a frontman can play in the success of an IPO, the study also found that people who are taller than average are more likely to become CEOs. 

Before we are side-tracked by the possibility that being born with good brains, smart chat and a future standing north of 6ft automatically qualifies you as lucky, let’s move onto the next study. This compared CEO turnover with companies’ relative performance and found CEOs are more likely to be dismissed after their firm has hit a recession – which obviously has little to do with them. 

Indeed, an industry-wide performance decline from the 90th to the 10th percentile was found to double the chances of a CEO being forced to leave their company, which leads to two conclusions – that you can be unlucky and lose your job due to circumstances beyond your control and, by implication, you can be lucky and win plaudits for your leadership that are equally only down to the situation you are in. 

The most interesting study of the lot, however, is the one that looked more closely at the 2001 paper’s conclusion that between 2% and 22% of a company’s performance is attributable to its CEO. This paper argued that even the factors that are put down to a CEO’s skills may actually just be the result of randomness or luck. 

By generating random company performance numbers, the paper demonstrated that a series of lucky strokes can create the illusion of a ‘CEO effect’. It does not go so far as to suggest some well-regarded CEOs might simply have been lucky enough to choose the right career path but it does say we can only be sure that CEOs are responsible for 4% or 5% of a company’s performance. 

None of this is to suggest there are not some excellent CEOs out there – only that they are a lot thinner on the ground than most investors might believe. Or than most CEOs would believe too, to judge by the argument once put to us by someone who is now the chairman of a very large UK company and who used the efficient market hypothesis to argue that only corporate management can create value. 

As the market is efficient, he reckoned, it already knows the right price for a company, which means only management has the ability to change this. Well, let’s just say that is pretty much diametrically opposed to our own view as value investors and just one more reason why we are wary in our dealings with company management. All these papers suggesting so much is down to luck would be another. 

All of which sees us edging almost inevitably towards Napoleon’s supposed preference for lucky generals. Indeed it seems likely, were he alive today, Bonaparte could have ascended quite some way up the corporate ladder – always assuming his height did not count against him.


Andrew Evans

Andrew Evans

Fund Manager, Equity Value

I joined Schroders in 2015 as a member of the Value Investment team. Prior to joining Schroders I was responsible for the UK research process at Threadneedle. I began my investment career in 2001 at Dresdner Kleinwort as a Pan-European transport analyst. 

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