The quality of a CEO can make a difference in driving company performance, but a substantial part of this added value comes from how they fit with a specific company.

“Some top managers contribute to the performance of the firm above and beyond what the firm would already do without them,” said Ines Black, an assistant professor of strategy at Duke University’s Fuqua School of Business, “but you can't fully separate the manager from the firm.”

In the working paper, Better Together? CEO Identity and Firm Productivity, Professor Black introduces a new way of measuring the quality of a CEO based on their pre-CEO career and employee-firm data across many years.

Leveraging the same historical dataset, she was also able to quantify the unique contribution CEO-company fit brings to firm performance.

“Firms are not abstract entities,” she said. “People in charge matter and firm-CEO match matters.”

How to measure CEO quality

“How do you quantify that ‘something’ that the CEO brings with them wherever they go, regardless of whether they're working for Apple, Google or for a smaller, less known company?” Black said.

It is hard to pinpoint that extra ’something’ a CEO has above their peers, she said. Looking at how much the CEO is paid or at the company's results during their tenure can be misleading. Since the firm deliberately selects their top manager, the performance outcomes of this match are confounded: should we attribute any failure or success to the CEO’s actions, or to the company’s characteristics that led it to choose that specific CEO in the first place?

A more objective measure may be gleaned in the career trajectory of the top managers during their pre-CEO years, she said.

Leveraging Portuguese datasets that match employees and firms (a mandatory employment census and an annual survey of firm financial information) Black was able to extract the history of private sector workers in the country, tracking their wages and job positions spanning decades.

“The data identifies workers’ movements across firms, which is crucial to infer difficult-to-observe qualities, beyond their training or experience,” she said. “The data allows me to track when workers started out-earning their peers, for similar job titles, experience and education — which I infer as this person having a set of qualities that are valuable to firms.” 

Black used this method to obtain an unbiased measure of worker’s quality (“quality coefficient”) before they took on CEO positions. She was then able to pinpoint the CEO's unique contribution to the firm, after comparing it with the firm's performance in previous years and the average performance of similar firms.

She found that a 1% increase in CEO quality led approximately to a 4-5% boost in firm productivity.

“Even though these managers can have the same years of schooling and the same experience, some show additional valuable qualities with respect to their peers,” she said. 

The value of CEO and company match

Black also suspected that along with CEO quality, there was something in the specific match between a CEO and a company that could explain some excess firm performance.

“Let's say one CEO is a delegator and another is more controlling,” she said. “They can have the same years of experience, both may have earned an MBA from Fuqua, but maybe a company that is structurally decentralized might prefer a CEO who's a delegator, as opposed to one who likes to hold the reins on most decision-making process, who might be a better fit for a centralized type of firm.”

Black used the same Portuguese dataset showing a history of CEOs moving across classes of firms. Based on CEO pay before and after the move — and subtracting the “quality coefficient” — she identified what “types” of CEOs perform well with certain classes of firms, estimating how the fit factor contributes to company productivity.

She found that about half of the impact on productivity generated by CEO quality is explained by the match between a specific CEO and a specific company.

Working on Portuguese data means the study can be representative of a relatively small, open economy, where job mobility is lower than in the U.S., Black said.

But these results may be even more relevant for the U.S. economy — where people change jobs more frequently — as worker mobility may offer firms better information on their fit, she said.

Managers matter, even for small- and medium-size companies

This research suggests that companies hiring top managers should focus on finding the right match at least as much as on chasing the top-quality candidate, as inferred from their resume, she said.

“Most firms should think of CEO hiring as finding the right match, figuring out exactly the type of CEO they need, rather than looking for the best CEO on paper,” Black said. “And for that, firms need to know themselves quite well.”

“Do we need someone who has a lot of ideas, or do we need a good aggregator of ideas? Do we need someone who really values R&D and can orient a firm towards innovation, or who is more of a salesperson with great communication skills?” 

Black said big, public firms are already investing a lot of resources to recruit candidates who bring the best fit for the company, but even smaller companies can grab the opportunity.

“Proactive recruiting has become more accessible, and hunting for talent has increased significantly in the past 10 to 15 years," she said. "There are many online platforms that allow you to filter for the type of skills you need to hire. For a small company with a small budget, becoming proficient in using platforms such as LinkedIn to successfully target their desired candidates may be a good investment. But instead of looking for the person who was at a certain firm that is similar to ours, it might be equally helpful to look for the person who has the skills or attributes that are fundamental to your company.”