A recent Ivey study confirms the commonly held view that General Electric is an excellent breeding ground for future business leaders. This article summarizes the study and its three conclusions: Firms led by CEOs who were trained at GE will outperform firms led by CEOs who were not; GE’s reputation for developing CEO talent is, in fact, well deserved and not mere hype; and GE appears to develop more CEO talent than other noted CEO talent-generating firms.
An outlier is an observation that lies outside the overall pattern of a distribution. Usually, the presence of an outlier indicates some sort of problem. In statistics, an outlier is an observation that is numerically distant from the rest of the data. Outliers may be indicative of data points that belong to a different population than the rest of the sample set.
An outlier is something that is situated away from or classed differently from a main or related body; a statistical observation that is markedly different in value from the others of the sample.
– Malcolm Gladwell1
The General Electric Corporation (GE) has long been known as an organization that excels at finding and developing managerial talent. In addition, GE managers are sought after by other organizations to serve as senior managers. Consequently, many GE managers leave the firm for employment elsewhere.
GE has developed a reputation as a breeding ground for CEOs, and a relatively large number of ex-GE executives have been at the helm of Fortune 500 companies over the last 25 to 30 years. In addition, many business press writers have commented that firms which hire an executive from GE for their Chief Executive Officer (CEO) position experience an immediate increase in their stock market valuation, an increase that is not apparent for firms that hire their CEOs from other firms.
This leads to several questions: Do firms that hire CEOs from GE perform better than those firms that hire from the general pool of CEO management talent? Does GE have a better reputation than other firms for developing CEOs, and is this reputation deserved? Are more CEOs developed in GE than in other firms that also have a reputation for being a CEO talent generator?
In a study recently conducted at the Richard Ivey School of Business2, we attempted to answer these questions. The results are intriguing and of interest to those interested in senior leadership development, selection and training. We discuss the results in this article.
To assess the performance implications of selecting a CEO from the talent pool at GE versus the general CEO talent pool, we assessed the cumulative abnormal returns to stockholders over the three-day period surrounding the date the appointment of a new CEO was announced by 78 firms – 39 who announced the hiring of CEOs from GE and 39 who announced the appointment of CEOs from the general CEO talent pool.
GE: An outlier
GE is an outlier in many respects and we discuss three of them. First, it is one of a very few successful U.S.-based conglomerates. While conglomerates were very popular in the 60s and 70s, they became less popular in the 80s. Today, there are very few conglomerates. GE has not only survived as a conglomerate, it has prospered and become one of the largest, most successful, diversified firms in the world.
Second, GE is an outlier from a performance perspective. During the period, 1993 to 2002, it had phenomenal success in creating value for shareholders. It ranked either first or second in the Stern Stewart Performance 1000 on Market Value Added (MVA). In 2001, it ranked first with a MVA of $427 billion.3 GE competed with Coca-Cola for top spot in the MVA rankings from 1993 to 1996. From 1997 to 2002, its main competitor was Microsoft.
Third, GE is an outlier in its ability to develop managerial and leadership talent. One business writer stated that GE’s managerial development system, in addition to producing senior managers for GE, produced “an astonishing number of CEOs of other major companies.”4
Of course, these three characteristics that help make GE an outlier are related. Several writers have detailed how GE’s performance is a result of GE’s executive development system. In addition, GE’s diversity in, and large number of, business units creates the necessity to deploy, and offers the opportunity to enhance, the general management and strategic leadership abilities of its middle and senior level managers. This capability is a very important source of sustained competitive advantage for GE.
We searched GE’s annual reports from 1977 to 2002 to identify the company’s senior leaders over that period. We found 651 senior leaders. From this group we selected 39, based on the following criteria. They had to have spent a minimum of five years with GE and become the CEO of a publicly traded company after leaving GE. Further, there had to be no other significant events in a 20-day period surrounding the announcement of each CEO appointment. Examples of other significant events are renegotiation of bank loans, outcomes of major lawsuits, major changes in strategic direction and going ex-dividend.
In the following manner, we then searched for our comparison group of CEOs from the general talent pool for CEOs. First, for each ex-GE CEO, we found a group of CEOs from the general talent pool who were outsiders and who had been announced as their respective firm’s CEO within a one-month period of the ex-GE CEO’s announcement date. Second, for each of these groups of CEOs, we determined the market capitalization for the firm led by each CEO and selected the CEO whose firm had the closest capitalization to the firm led by the respective ex-GE CEO. Finally, we matched as closely as possible with respect to industry. These comparison CEOs also had to have served with their previous firms for five years or more. This gave us 39 ex-GE CEOs and 39 non-GE CEOs, all of whom were outsiders when appointed CEOs of their respective firms. This meant we had 39 pairs of CEOs (one from GE and one not from GE in each pair) whose appointments were announced within one month of each other and whose firm’s market capitalization were closely matched.