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The
Speculator
Do
Harvard-educated CEOs deliver?
The Speculators find
that companies run by graduates of Harvard and other Ivy
League schools fare worse than those run by CEOs educated at
rivals such as Stanford, MIT and the University of
Chicago.
By Victor
Niederhoffer and Laurel Kenner
And walking into the ring, the Crusher
from Cambridge, the Ivy League Annihilator, the Brain Trust
Blitzer, able to consume libraries at a bite and calculate
second derivatives while stomping the strongest adversaries,
from those hallowed halls of M&A, those white towers of
knowledge, the brawny, the brainy … CHRIS NOWINSKI, putting
the best of his coveted Harvard degree to use in the ring
against opponents whose only education came in the school of
hard knocks and who often weigh twice as much!
The
success of Chris Nowinski in the trash-talking,
slapstick-sweaty arena of World Wrestling
Entertainment (WWE,
news,
msgs)
inspired the Spec Duo to study the value of Harvard degrees in
the corporate ring. In particular, do Nasdaq 100 ($IQX)
companies with Harvard-educated CEOs show the kind of superior
performance that Nowinski shows in his wrestling matches?
It turns
out that nine Nasdaq 100 companies have CEOs with Harvard
backgrounds: eBay (EBAY,
news,
msgs),
Human Genome Sciences (HGSI,
news,
msgs),
IDEC Pharmaceuticals (IDPH,
news,
msgs),
Introgen (INGN,
news,
msgs),
Lamar Advertising (LAMR,
news,
msgs),
Microsoft (MSFT,
news,
msgs),
Staples (SPLS,
news,
msgs),
Starbucks (SBUX,
news,
msgs)
and Sun Microsystems (SUNW,
news,
msgs).
(Editor's note: Microsoft owns MSN Money.)
At
close to 10% of the Nasdaq 100 contingent, this is a much
higher proportion than would be expected if the Harvard name
were not a passport to the executive realm. After all,
Harvard’s annual crop of 1,500 degrees amounts to just 0.1% of
the total 1.5 million degrees awarded by U.S. colleges and
universities each year. The nine Harvard-graduate CEOs amount
to three times the total number of Nasdaq 100 CEOs from the
University of Chicago, the next most popular school.
Aside from the University of Chicago’s three (who work
at Brocade Communications Systems (BRCD,
news,
msgs),
Gilead Sciences (GILD,
news,
msgs)
and Oracle (ORCL,
news,
msgs)),
the other Ivy League equivalents -- Stanford, Berkeley and MIT
-- each have two CEOs among the Nasdaq 100 group. The two
Berkeley CEO companies are Altera (ALTR,
news,
msgs)
and QLogic (QLGC,
news,
msgs).
The two MIT CEO companies are Chiron (CHIR,
news,
msgs)
and Symantec (SYMC,
news,
msgs).
We enumerate these companies in full because these nine
Ivy-equivalent CEOs turn out to show by far the best
performance of all the classes considered.
How elite, really?
In considering
the Harvard CEO group, however, the Spec Duo started out with
a certain trepidation. There is a proverb among businesspeople
that the value of a Harvard degree increases with the square
of the distance from Harvard. And many of our friends can
recall selective anecdotes of many Harvard CEO-led companies
that fell to the bottom.
These doubts are reinforced by
the academic studies on this point. Stacy Berg Dale of the
Andrew W. Mellon Foundation and Alan B. Krueger of Princeton
University consider whether a degree from a selective college
has value in their paper, “Estimating the payoff to attending
a more selective college: An application of selection on
observables and unobservables.” They conclude that those who
go to selected colleges earn no more than those who go to less
selective schools.
The reason is apparently that those
who get into the selective schools would tend to earn more
regardless of where they went to college. If for some reason
they go to a good state school, they are likely to perform
quite well there. This leads to comparable earnings to the
Harvard contingent.
Moreover, there is an entire school
of thought in the literature that leadership is irrelevant for
performance. The idea here is that internal and external
inertia -- factors such as internal politics, previous
investments, organizational norms, competitive pressures and
entry and exit barriers -- prevent a CEO from having a
meaningful impact of any kind on performance.
Class by class
We expanded the
study of CEO education versus performance to include these
classes of colleges:
- Harvard
- Other Ivy League (Brown, Columbia, Cornell, Dartmouth,
Princeton, the University of Pennsylvania, Yale)
- Ivy equivalent (Berkeley, MIT, Stanford, University of
Chicago)
- Highly selective but second tier (St. Johns, University
of Texas Austin, Naval Academy, etc.)
- Non-selective (mainly state colleges with open admission
policies)
The results show that companies run by the
Ivy equivalents performed almost twice as well as those run by
the other four groups over the last five years. While the
absolute margin of superior performance of some 100 percentage
points over a five-year period is meaningful from a practical
standpoint, the variability of the data, about 300% standard
deviation, make the difference not significantly different
from randomness in statistical analysis.
Nevertheless,
our study suggests that the Ivy-equivalent CEOs are the best
performers. We attribute it partly to the tendency for
companies to choose Ivy League CEOs partly on the basis of
prestige. Ivy-equivalent executives, on the other hand, are
quite as able but are selected based on merit. This translates
into performance.
| How the Ivy League
CEOs perform on Nasdaq |
| CEO pedigree |
Number of companies |
Stock price gain Jan.-July
2003 |
5-year stock price gain
|
| Harvard |
9 |
33% |
90% |
| Other Ivy League |
7 |
49% |
110% |
| Ivy equivalent |
9 |
52% |
183% |
| Second tier |
9 |
29% |
72% |
| Other |
66 |
35% |
95% | | Note: If a CEO earned degrees from different
schools, all degrees are counted. Source: Bloomberg Management
Profile Database
We thank our colleague Adam
Robinson, a co-founder of Princeton Review, for his valuable
research and insights on this column. A complete set of all
Nasdaq 100 CEOs classified by college is available on our Web site.
Final note
An update of our
buyback study, showing the performance of all Standard and
Poor’s 500 ($INX)
companies that repurchased their own shares, is available on
our Web site. As our last column will run Sept. 4, after a run
of some 180 for this site and some 500 for our previous two
sites, we will endeavor to tie all loose ends and answer all
urgent reader queries directed to us by e-mail.
Neither
Victor Niederhoffer nor Laurel Kenner own or control any of
the securities mentioned in this article. Victor has degrees
from both Harvard and the University of Chicago. Laurel’s
degree is from UCLA.
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ideas. Our articles, columns, message board posts and other
features should not be construed as investment advice, nor
does their appearance imply an endorsement by Microsoft of any
specific security or trading strategy. An investor's best
course of action must be based on individual
circumstances.
 Fund data provided
by Morningstar, Inc. © 2003. All rights
reserved.
 Quotes supplied by Standard
& Poor's ComStock, Inc. and are delayed at least 20
minutes. NYSE, AMEX, and NASDAQ index data are
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