How career factors influence the process of becoming a CEO in the United Kingdom
December 8th of 2014
Author:
Pere FARRERO i ROGER S2645181
(University of Groningen)
130592088
(Newcastle University Business School)
Under the supervision of:
Dr. Kees VAN VEEN
(University of Groningen) Dr. Stefanie REISSNER (Newcastle University Business School)
Abstract
The aim of this thesis is to study how several career factors affect the length of the career until becoming a CEO of a FTSE 100 company. The factors considered of each individual CEO are the maximum education held, having an MBA/PhD or not, having attended elite education, having background in accounting or finances, the first employer, and the tenure in the company of appointment. The academic literature has extendedly explored the career features that increase the probabilities to become a CEO, but not at how they affect the career length. This study contributes to the literature by looking at how the career characteristics affect the length of the career since the CEOs started their professional career until they became CEOs of a FTSE 100 company. The research approach of this thesis is quantitative statistical analyses of 95 CEOs of FTSE 100 companies.
The findings of this study provide evidence that the level of education, having a
degree in an elite institution, and if the first employer is a business services firm
have a significant impact over the career length of the CEOs. The main
conclusions drawn from this research are that holding an MBA in an elite
institution promotes a faster career towards the helm, as well as starting in a
business service (but not financial services) firm like, for instance, in a consulting
or accounting position.
Acknowledgements
Newcastle upon Tyne, September 15
thof 2014.
Today it turns exactly 20 years since my parents brought me for my first time to school in El Pont de Suert. Hence I have 20 reasons and thousands more to thank to my parents all the support and help they have offered me along all my life as a student — basically all my life.
Secondly, I would like to thank Alba for supporting a half of my ideas and improving the other half. The time at your side has been openheartedly unique, but get prepared, as we will keep running together for a very long time.
For their condition as key people for this thesis/dissertation, I would like to thank Kees van Veen and Stefanie Reissner. Thank you for an excellent supervision of my work and for being the most valuable references on my discovery journey towards business research. All of my gratitude!
And finally, but never less important, I would like to thank all the people that has shaped me the man who I am right now. This includes almost every single person interfering on my life, but I would emphasize Els Boks, the people from UPC & Telecogresca and the people from the Masters (both of them). Thank you so much for such an amazing bunch of memories and stories.
If I am who I am right now, it is because of all of you.
Agraïments
Newcastle upon Tyne, 15 de setembre de 2014.
Avui fa exactament 20 anys que els meus pares em van deixar per primera vegada al col·legi a El Pont de Suert. Això fa que tingui 20 raons i milers més per agrair als meus pares tot el suport i l’ajuda que m’han ofert al llarg de la meva vida estudiantil — bàsicament tota la vida.
En segon lloc, vull donar les gràcies a l’Alba, que dóna suport a la meitat de les meves idees i millora l’altra meitat. El temps al teu costat ha sigut, amb la mà al cor, únic, però preparat que encara seguirem corrent junts en aquesta vida durant un molt, molt llarg temps.
Per la seva condició de persones clau en aquesta tesis, també vull mostrar el meu agraïment a Stefanie Reissner i Kees van Veen. Gràcies per l’excel·lent supervisió de la meva feina i per ser un infinitament valuós referent a seguir en el meu viatge de descobriment de la recerca.
Finalment, però no menys important, m’agradaria agrair a tota la gent que m’ha anat donant forma fins a ser l’home que sóc a dia d’avui. Això inclou gairebé a totes i cada una de les persones que han interferit a la meva vida. No obstant, mereixen un especial èmfasi Els Boks, la gent de la UPC i Telecogresca i tota la gent dels màsters (dels dos màsters). Moltes gràcies a tots per tal conjunt d’anècdotes i històries!
Si sóc qui sóc ara mateix, és gracies a tots vosaltres.
Table of Contents
Chapter 1 – Introduction 1
1.1 – Presentation 1
1.2 – Problem Formulation 2
1.3 – Importance of This Research 5
1.4 – Conclusion 6
Chapter 2 – Literature Review 7
2.1 – Introduction 7
2.2 – Upper Echelon Theory: CEOs matter 8
2.3 – CEOs and Managerial Careers 10
2.3.1 – Educational Factors 11
2.3.2 – Professional Factors 17
2.4 – Business Elites in the United Kingdom 21
2.5 – Conclusion 24
Chapter 3 – Methodology 26
3.1 – Introduction 26
3.2 – Research Philosophy and Strategy 26
3.3 – Data: Structure and Collection 27
3.3.1 – Required Data to Test the Hypotheses 27
3.3.2 – Data Structure 28
3.3.3 – Data Collection 32
3.4 – Data Analysis Methods 33
3.4.1 – First Step: Univariate Analyses 33 3.4.2 – Second Step: Bivariate Analyses 34 3.4.3 – Third Step: Multivariate Analyses 35
3.5 – Limitations 36
3.6 – Conclusion 38
Chapter 4 – Results and Discussion 39
4.1 – Introduction 39
4.2 – First Step: Univariate Analyses. Descriptive
Analyses of the data 39
4.3 – Second Step: Bivariate Analyses. Exploring relationships 43 4.3.1 – Control variables: Age, Gender, and Industry of the
Company of Appointment 44
4.3.2 – Educational factors 47
4.3.3 – Professional variables 51
4.3.4 – Closing the Second Step 56
4.4 – Third Step: Multivariate Analysis. Accuracy of the
features studied 57
Chapter 5 – Conclusion 62
5.1 – Introduction 62
5.2 – Summary of Findings 62
5.3 – Suggestions for Future Research 65
5.4 – Closing 66
References 68
Appendices 76
Appendix I – Codebook of the Variables 77
Appendix II – Methodology Considerations 79
Appendix III – Results: SPSS and Excel Outputs 80
Appendix IV – Control Variables 97
Acronyms
CCF: Career to CEO of a FTSE 100 Company CEO: Chief Executive Officer
CFO: Chief Financial Officer
FTSE: Financial Times Stock Exchange LSE: London Stock Exchange
MBA: Master in Business Administration
PhD: Philosophiae Doctor (in latin) or Doctor of Philosophy ROA: Return On Assets
Mathematical Notation
ρ = Spearman’s Rho 𝜎 = Standard deviation In regression models:
𝑏 = Regression coefficient (non-standardised)
𝛽 = Standardised regression coefficient or beta weight 𝑥 = Independent variable
𝑦 = Dependent variable 𝑎 = Intercept
𝑒 = Error of the model
𝑁 = Number of independent variables considered in the model
Chapter 1
INTRODUCTION
1.1 – Presentation
According to the Oxford Dictionaries of English, the Chief Executive Officer (CEO) is ‘the highest-ranking person in a company or other institution, ultimately responsible for taking managerial decisions’ (Oxford Dictionary, 2014). Therefore, it makes sense to believe that this particular person, the CEO, plays an important role in the organisation.
The exposure of the CEO position in the top of an organisation makes it an interesting area for academics to study (Hamori, 2006). There are studies in a very wide range of topics regarding CEOs. For example, from the personal traits of the CEOs and on how they affect the company (Amran et al., 2014) (Bebber and Fabri, 2012) (Serfling, 2014) to how the company situation affects the CEO turnover (DeFond and Park, 1999) (Farrell and Whidbee, 2003) (Warner et al., 1988). For this thesis, a relevant branch of the literature is the academic research that studies the different factors of the careers of the CEOs and managers.
Before going any further, it is a good idea to define what a career is. Current
research has defined careers in different ways. For instance, many researchers
understand career as all the professional experiences that build the skills and
knowledge of a person until a certain point in time (Cappelli and Hamori, 2004) (Hamori, 2006) (Judge et al., 1994). However, the professional factors are not the only ones that define the skills and knowledge of an individual: education can be included as well. In reality there are, if not unlimited, a very large number of events that could potentially shape a person’s knowledge and skills; for instance, personal skills like intelligence, ambition or even cultural factors can have strong impact on people’s skills and knowledge. This thesis does not pretend to cover them all being exhaustive: it is important to dichotomise at some point whether or not factors belong to the career. For this research, I only consider the purely educational or professional factors as career. Hence, my understanding of career in this thesis does not include the subjective and most personal factors for two reasons: firstly, it would be very difficult, even impossible, to obtain personal features of a large sample of CEOs with the detail that these characteristics require and, secondly, these personal factors are hardly objective, so they might not fill the expectations of the research strategy that this thesis follows. In conclusion, in this research I understand the career as the set of objective and measurable educational and professional characteristics of a particular person.
In other words, a career of a certain individual today is made up by all the professional and educational achievements that have shaped this person up to the date.
1.2 – Problem Formulation
The present thesis aims to understand how some particular factors of the career
of the CEO have an effect on the time they took to become a CEO. The factors
considered in this study are of two natures: educational and professional. The
academic aspects covered are the education degree that the CEO holds (giving a
particular emphasis to MBA programs) and the institution where they took their
studies (in concrete if it was an elite institution or not). Regarding professional
aspects, the tenure in the company of appointment, whether the CEO has got or
not a background in finances or accounting, and if the first employer of the CEO was an industry leader are the factors studied. These factors have been chosen after reviewing the academic literature, and more details about the pathway followed to select them are explained in the section 2.4 – CEOs and Managerial Careers.
I would like to emphasise that the objective of this thesis is to analyse how the different factors affect on the length of the career until they become a CEO. This is illustrated in the Chapter 2 with the Literature Review, but the common approach of the literature is to study how the career factors affect the probabilities of becoming a CEO. What I study is a different facet of the career of CEOs: I study how the career length is influenced by several factors.
Consequently, both my approach and the aim of my research differ from the current literature.
In order to conduct this research, the approach I follow is to break down the problem into smaller pieces and analyse them independently. These small pieces are each one of the career factors that I propose. By doing so, I aim to create an accurate understanding of how the different career factors affect independently the time to access a FTSE 100 CEO position.
I follow the scientific method: after reviewing the existent relevant literature in the topic, I formulate a set of hypotheses and I try to verify or refute them using statistical analyses of empirical data.
The data comprises 95 CEOs of FTSE-100 companies. I collected the data from
two main sources, which are two databases of the UK Data Archive, and I
complemented them with a variety of other sources. This is explained in detail
later in the Chapter 3 – Methodology. I use data of the United Kingdom for four
reasons. First of all, most of the research done so far is based in the United
States (Cappelli and Hamori, 2004) (Hamori, 2007) (Judge et al., 1994) (Koyuncu
et al., 2010) and some studies done in a more international basis even consider Europe as a whole (Hamori and Kakarika, 2009) (Hamori and Koyuncu, 2011). I want to focus in the United Kingdom in order to have a concrete and differentiated geographical area of investigation. The second reason is that there are factors behind education that are very country specific (Maclean et al., 2006).
For example, in the UK a big percentage of students start working after their undergraduate degree without pursuing a master’s degree. This differs for instance of Spain, where traditionally (before the 2009’s Bologna Educational Plan) the university studies were generally of 5 years, achieving a degree of
‘licenciatura’, equivalent to a masters degree. In the same line, Maclean et al.
(2006) illustrate how only a 28.4% of the UK directors holds a higher degree, while an 80.6% of the French directors had attended at least five years of higher education, so there is clearly a difference in the educational behaviour amongst countries. Hence, I consider that it is better to start the analysis in a narrow cultural context to ensure that the differences amongst countries do not lead to vague conclusions. The third reason to do this research about the UK is because my status as a postgraduate student in a British university gives me access to the UK Data Archive, where several datasets with key information for this research can be found. These datasets are mainly UK-based and to find the equivalent information about CEOs and top executives of other countries would require a set of resources that are beyond a conventional master’s student capabilities. Finally, a fourth but very important reason is that the FTSE 100 companies are the firms with the largest market capitalisation of the London Stock Exchange. This is an appropriate proxy for the size of the company, so we can understand these FTSE 100 companies like the biggest corporations of the UK.
Now that the problem is presented, thus, the research question that this thesis
aims to answer is the following: How do the career factors — in concrete the
maximum education held, having an MBA or not, having attended an elite
education, having background in accounting or finances, the first employer, and
the tenure in the company of appointment — affect the career length until becoming a CEO of a FTSE-100 company?
After the statistic analyses of the empirical data, I discuss and try to get the most insights possible from the results that the analyses has provided. In other words, I aim to answer the informally known as ‘so what?’ questions arising from each fact that the data shows. This discussion aims to not only state what the results are, but also to go one step further and synthetize them and ultimately create empirically supported knowledge that answers the research question.
The main findings of this thesis are that holding an MBA in an elite institution promotes a faster career towards the helm, as well as starting in a business service (but not financial services) firm like, for instance, in a consulting or accounting position. This is further explained in the Chapter 5 – Conclusions, where I end the thesis with the main findings and future research recommendations.
1.3 – Importance of This Research
The importance of this research resides in the fact that it approaches a commonly studied topic, the careers of the CEOs, using a new standpoint. The literature so far has essentially looked at how the career affects the probabilities of becoming a CEO (Koyuncu et al., 2010) or how the career factors relate to career success (Hamori and Kakarika, 2009) (Judge et al., 1994). For the career success, it is common to find subjective (e.g.: job satisfaction) and objective (e.g.: salary) measurements (Judge et al., 1994) (Ng et al., 2005). However, what I do is to analyse how the career affects the length of the career to become a CEO.
It clearly differs with studying the probabilities of becoming a CEO. It differs also
from studying career success: the career length that I study could be a proxy or
indicator of career success. I do not study the overall career success but
specifically how the career factors affect the career length. There is a main reason why I study exclusively the career length: it is interesting to evaluate the intrinsic parts of career success separately. So, in the same manner that some researchers study exclusively the CEOs/executives’ salaries (McKnight and Tomkins, 2004) (Elsaid et al., 2009), I study exclusively the career length. If we are interested on seeing how the different career factors affect the career pace, using all the subjective and objective factors for career success might be too vague. Hence, I keep an objective and static focus on the number of years between the first job and the time of appointment as CEO of a FTSE 100 company. This attention to the career length has not explicitly been studied in previous studies and, consequently, it is the gap in the literature that I focus in this thesis.
1.4 – Conclusion
To finish the Chapter 1 – Introduction, I restate the problem formulated and I present the full structure of this thesis in a clear manner.
This thesis aims to understand which (and how) career factors affect the number of years since a CEO started working until the year that this person was appointed to a FTSE 100 company CEO position. To answer this question, the Chapter 2 – Literature Review will understand what the relevant literature argues about the topic and will formulate eight hypotheses. Then, the Chapter 3 – Methodology will present the designed research strategy to test the hypotheses.
The Chapter 4 – Results and Discussion will state the results of the statistical
analyses described in the Chapter 3 – Methodology and will discuss them to
arrive ultimately to strong and data-supported findings. Finally, the Chapter 5 –
Conclusion will present the main conclusions drawn from this research as well
as some recommendations for future research.
Chapter 2
LITERATURE REVIEW
2.1 – Introduction
The management literature has studied a wide range of topics related to the CEOs. The main objectives of the present literature review are two. The first one is to understand what the academic literature argues about what are the effects of the career process upon becoming a CEO and to what extent they matter. The second objective is to eventually formulate the hypotheses that this thesis will intend to test, which will come up directly from the literature.
The review is organised in three different sections. The first one, 2.2 – Upper Echelon Theory: CEOs Matter, reviews the upper echelon theory, illustrating the importance of the CEOs and their characteristics for the company outcomes.
Secondly, the section 2.3 — CEOs and Managerial Careers reviews the literature
about the careers of managers (including CEOs) and it breaks down the different
career factors in two basic categories: educational and professional factors. In
this section I present the hypotheses. Finally, the third section, 2.4 — Business
Elites in the United Kingdom, studies the main characteristics of the business
elites of the UK because it is important to understand the context of the CEOs
and their characteristics to get an accurate image of the topic of study.
2.2 – Upper Echelon Theory: CEOs Matter
There are a variety of academic approaches to the question on whether the top managers, as individuals, do matter or not for the organisation.
The leadership studies, on the one hand, study the factors associated with leadership (Bennis and Thomas, 2002). This academic strand argues that top management individuals matter and they have an impact over the organisation.
In fact, the leadership studies are not only a matter of the present; classical philosophers and intellectuals like Plato (Takala, 1998) or Machiavelli (Forbes, 2014a) thought and wrote about leadership, generally focused on military and political leaders. It is a fact that there have always been leaders in the human history and leadership is an issue that has intrigued the people from past eras as well as people of the present. Bennis argues in his book On Becoming a Leader that leaders ‘come in every size, shape, and disposition’, but they all have some characteristics in common: guiding vision, passion, integrity, trust, curiosity and daring (Bennis, 2009).
Besides, the upper echelon studies show a large number of links between top
management (which includes CEOs) and the outcomes of the organisations
(Hambrick and Mason, 1984). Being more specific, there is extensive literature
that illustrates the effects of CEOs (as a particular category of leaders) over a
variety of outcomes of the organisations, like for instance the firm’s
performance. An example of this empirical literature is Lin et al. (2011) that
analyse the effects of both managerial incentives and CEO characteristics on
innovation activities of the firms. They find that the education and professional
background of the CEOs is positively associated with the firm’s efforts to
innovate. Even though this study is limited to the Chinese private sector (Lin et
al., 2011), it is logic to believe that education and professional career will make
an impact on the willingness to innovate of the CEOs, ultimately increasing the
firm’s innovation efforts, in a broader scope of countries, and not exclusively in
the Chinese private sector. Yadav et al. (2007) has similar findings to Lin et al.
(2011) but in the U.S. retail banking industry. In conclusion, in the literature there is empirical evidence that illustrates how CEOs have effect upon the firm’s outcomes.
On the other hand, there are scholars that argue that organisations are to a certain extent inert and, hence, top managers do not have a significant relevance for the organisation. Coming from natural sciences like biology, the population ecology is a set of models, theories and methods that some academics are recently applying to social sciences (Young, 1988). However, Young (1988) concludes that the population ecology is not very useful to study organisations and it has got a very narrow application to them. There are scholars who are based on empiricism to argue that CEOs do not have a key effect on the organisations. Lieberson and O’Connor (1972) study the effect of leadership upon sales, earnings and profit margins — as proxies of firm performance. They find that the variance in these three variables can be mostly explained by factors others than leadership. Therefore, they conclude that overemphasising leadership we might be missing far more powerful factors (Lieberson and O’Connor, 1972). Another example is the study performed by Bartrand and Schoar (2003), who conclude that only a 5% of the return on assets (ROA) can be attributed to top managers. The reality is that the literature that argues that organisations are inert just show that they are inert to a certain extent. In other words, they conclude that CEOs matter little, but still matter after all.
There are stronger arguments supporting the idea that CEOs do matter for
organisations. The literature arguing organisational inertness is not completely
conclusive, acknowledging that there is an effect of managers upon
organisations outcomes. The researchers supporting this strand argue that the
effect on the outcomes is small, but this effect actually exists (Bartrand and
Schoar, 2003) (Lieberson and O’Connor, 1972). On top of that, there is plenty of
literature illustrating how CEOs impact on different organisational outcomes (Lin
et al., 2011) (Yadav et al., 2007) (Bebber and Fabri, 2012) (Serfling, 2014), including performance and strategy (Amran et al., 2014). Finally, there is one third reason: it is anecdotally known that many organisations have been turned around — with tangible results — as a consequence of a CEO replacement.
Hence, there is a significant relationship between the CEO and the outcomes of the organisation.
Overall, the bottom line of this section of the literature review is that CEOs are key people within their organisations. There is extensively theoretical and empirical literature that argues that CEOs matter. Therefore, given their importance, the personal characteristics that define each CEO (id est the characteristics that define how the CEO acts and performs) are of major importance for the company as well.
2.3 — CEOs and Managerial Careers
Since the moment the CEO positions are very exclusive and reserved only to a small group of managers, it becomes of high interest to understand what are the particular characteristics of the careers of these managers who have reached the top positions. Recalling the definition of careers presented early in the Chapter 1 – Introduction, the career of a manager is understood as all the educational and professional factors that build the skills and knowledge of an individual until a certain point of time. Matching with this definition, the next subsections will study what the academic literature argues about the educational and professional factors (respectively).
Before proceeding, however, I want to make a clarification. In this section I will
formulate the hypotheses of this thesis. For this reason, at this point it is worth to
recall the objective of this research so the comparison with the literature is
clearer. In this thesis I aim to study which and how the factors of the seen in the
next subsections have an influence on the velocity of the career progression to become CEO of a FTSE 100 company. This is interesting because as will be shown what the literature has studied is which factors increase the chances on becoming a CEO, but not how they affect the velocity on becoming a CEO, which is in its turn an objective indicator of success. Hence, it is important to have in mind that the aim of this thesis is not the same than the one existing in the literature so far.
2.3.1 – Educational factors
Maximum Education Degree
Maclean, Harvey and Press (2006) argued that there are country-dependent differences on education. As mentioned earlier, they illustrate with data that only 28.4% of the UK directors in their sample had a higher degree (masters or above) in front of the 80.6% of the French directors who had attended five years or more at superior studies, many in more than one Grande École (Maclean et al., 2006).
This shows that in some countries it is given more importance to university education (or at least to higher academic degrees such as masters, PhDs or MBAs) than in other countries. This country-differentiation makes the education factors more interesting to be studied in the particular case of the UK because a European standpoint is too broad.
It is sensible to think that a higher education degree will lead to a better-prepared
student who enters the labour market. When talking about preparation, it is
important to distinguish between knowledge, skills and abilities. Knowledge is
the theoretical and/or practical understanding of a matter (Lauby, 2013). Skills
and abilities are the qualities of being able to carry a task (Lauby, 2013). A thin
line usually separates abilities and skills: skills are commonly understood as
learned while abilities as innate (Lauby, 2013). However, while there is a
difference between knowledge, skills and abilities, the results of holding any of
them have got similar outcomes in terms of professional success. In other words, it is not necessary to differentiate between knowledge, skills and abilities in this particular thesis. For this reason, I encompass the three different categories inside preparation, because there is no factual need to discern between them.
If this person holds a better preparation, it is more likely to ultimately hold a faster career progression: the person is more qualified to do the job and a better work leads to more frequent and greater promotions. This factor is, of course, applicable to the CEOs of the UK. Therefore, following this line of reasoning, I formulate the first hypothesis:
Hypothesis 1: ‘The higher education degree a CEO holds, the more likely this individual is to have a faster career towards CEO of a FTSE 100 company.’
The UK is in particular a very interesting context to study this previous hypothesis because the majority of the CEOs do not hold a degree higher than a bachelor (MacLean et al., 2006). This means that, statistically speaking, there is a good opportunity to contrast bachelor and higher education degrees.
MBA, PhD and similar academic degrees
I want to start this section by contrasting MBAs and doctoral studies like PhDs.
The chief difference between both programs is their purpose. MBAs are
conceived as a management qualification, mainly for practitioners, while a PhD is
an academic qualification aiming the preparation for an academic career
(Seetzen, 2011). However, although I considered important to state this
difference in the nature of the programs, in the case of the present research it is
not relevant: I study the CEOs of the FTSE 100 companies, who are business
practitioners, so an academic career that is what the PhD is designed for, is not
considered. Hence, what I consider in this research are the characteristics that a PhD brings to practitioners, as it will be explained.
Comparatively, MBA programs are taught programs, while doctoral studies are research programs focused on learning through investigation (Seetzen, 2011).
An important difference between both programs is the learning methodology.
However, it is important to notice that MBAs follow a generalist scope, usually teaching the knowledge useful for the corporate world in different relevant subjects. The PhDs, contrarily, are focused on a very specific topic about which the candidate develops total mastery writing the doctoral thesis (Moore, no date). In spite of its specificity, doctoral programs are well valued in the corporate environment because they provide the skills to conduct exhaustive and lengthy research (Wise, 2012). It is common that companies are interested in people with very strong analytical skills for management positions, because this capacity of analysis can result in very useful for managerial positions (Seetzen, 2011). Actually, the fact that most of the successful entrepreneurs are scientists and engineers (Blank, 2011) illustrates how these analytical skills are applicable to business. Therefore, most of the skills learned in a PhD are often very useful in a managerial position. In short, while an MBA provides the general knowledge, doctoral studies provide the generic skills plus the specific knowledge. In the case of my research, however, the similarities between programs prevail over the differences, so I will consider all the time MBAs, PhDs and other equivalent doctoral programs (e.g.: JD) to be equivalent degree levels.
Beber and Fabbri (2012), in a United States based research, illustrate how young MBA-holder CEOs with little working experience have higher tendency to corporate speculation. The authors define corporate speculation as the variation of derivative holdings that is not explained by the fundamentals (the factors that determine the well-being and the financial valuation of the company, such as revenue, earnings, assets, liabilities and growth) (Beber and Fabbri, 2012).
However, Geczy et al. (1997), said that derivatives may provide a valuable benefit
to firms that use them rationally. This means that there is a trade-off relying on corporate speculation: using it rationally is beneficial, but there is a ceiling to the beneficial use of derivatives (Geczy et al., 1997). The fact that are the young MBA-holder CEOs who are more likely to speculate is logical inside the context where young CEOs are more likely to take risky and less conventional actions (Serfling, 2014), and also considering that an MBA gives a theoretical and academic knowledge perspective. In conclusion, young MBA holders have some characteristics that make them likely to take less conventional and risky actions and also have the knowledge that allows them to do so, in some cases with results of success (Geczy et al., 1997). Risky actions can be more desirable for some companies and less for some others, but it is desirable for these young managers who, after a risky action, achieve success: they receive the merits of their accomplishments.
Hall (2008) argues that there has been a recent change in the nature of which business schools impart MBA programs. Traditionally, MBA programs were proud to be focused on academia (Hall, 2008). Lastly, due to preferences of business practitioners, these MBA programs have turned towards a more practical approach — without loosing the rigorous academic facet (Hall, 2008) (Financial Times, 2007). MBA programs are designed to develop in depth knowledge about the corporate environment. Like Hall (2008) argues, in the last years MBA programs are following an approach that satisfy practitioners’
preferences while keeping the academic rigor that they are characterised for.
Thus, it makes sense to think that this change makes MBA programs more
supported by practitioners, because candidates receive higher preparation for
their corporate jobs. Besides, like Geczy et al. (1997) argue, MBA holders are
better prepared to take risky actions that end up in success. Overall, it looks like
holding an MBA program will lead to a faster career rise. Thus, I formulate the
following hypothesis:
Hypothesis 2: ‘MBA, PhD or equivalent degree holders are more likely to get a CEO position faster.’
Elite Institution
The results of Tedlow et al. (2003) clearly suggest that the big majority of American CEOs hold a degree in an elite university (both for undergraduate and postgraduate studies). Chandy (1991) noted a difference in institutions between undergraduate and postgraduate studies of the CEOs of Fortune 500 companies:
while the undergraduates were mostly degrees from Yale and Princeton, the graduate degrees tend to be from Harvard and Stanford. However, it is clear that the Ivy League universities have a clear presence. Martelli and Abels (2010) review how there is extensive literature arguing that large companies’ CEOs tend to have elite education, and their results support this fact. Hence, there is clear evidence that education in an elite institution increases the chances to become CEO of a large company.
De Janasz et al. (2003) illustrate that the skillset required to employees is very
different when they are in the bottom of an organisation in comparison when
they are in the top (de Janasz et al., 2003). Hence, this leads to the conclusion
that most of the knowledge acquired in university may become irrelevant while a
manager climbs inside an organisation if this knowledge is not directly related
with the context of senior management. For example, the technical knowledge of
an engineer might loose relevancy if this person becomes a high-level manager
of a non-technical firm rather than a technician, which is a common case for
engineers nowadays. Applied to CEOs, this means that what they studied in the
university might become irrelevant along the positions they scale, only remaining
these knowledge and skills that are actually useful for a CEO, like for instance
managerial and analytic skills.
To formulate the next two hypotheses, I will consider the two different arguments presented in the previous paragraphs. First of all, Martelli and Abels (2010) show that around 90% of Ivy League students tend to be within the top 10% of their classes in high school. The low acceptance rate of these universities certifies a general better standard of students (i.e. better students). This power of attraction of outstanding students means that upon graduation, students of elite universities are more likely to be better prepared for the post-university life than the students of non-elite universities for two reasons. First of all, these students were already outstanding before joining the university. Secondly, these outstanding students assist together in the elite universities, which creates a concentration point for outstanding people, resulting in a more successful flow of knowledge and skills in these institutions. In conclusion, elite university will be more likely to generate better-prepared students for the corporate life.
The second argument comes from the fact that only the skills related to senior management remain important in a senior managerial position. This suggests that the studies not related with these skills will not make an impact in the CEO level. Hence, the studies that are directly related with senior management positions are mainly MBA programs, which are focused on teaching how to administrate a business from the top; and as seen earlier, PhD and other doctoral studies because they provide the analytical skills and learning capacity. Thus, it seems that MBAs, PhDs and equivalent degree holders will have a better preparation once they are in a management role.
These two arguments converge in the fact that elite schooling will have a big impact on MBA and doctoral students while not on bachelor and master students. Thus, I formulate the following two hypotheses:
Hypothesis 3: ‘Education in an elite institution in an MBA, PhD or
equivalent academic degree will promote a faster career until CEO
of a FTSE 100 company.’
Hypothesis 4: ‘Education in an elite institution in a bachelor and masters degree will not promote a faster career until CEO of a FTSE 100 company.’
2.3.2 – Professional factors
Company Tenure
Cappelli and Hamori (2004) compare the careers and characteristics of the executives of the Fortune 100 companies in the period ranged between 1980 and 2001. They found out that the tendency of promoting company’s insiders to executive positions has decreased throughout the 1980-2001 period, being progressively higher the likelihood of hiring people external to the company for top management positions (Cappelli and Hamori, 2004). This means that going up in the hierarchy by jumping between companies is easier now than in the past, when climbing from the inside was a more attractive option. Regarding the executives’ careers, the study concludes that in 2001 the executives were younger than in 1980 and less of them hold an Ivy League education (Cappelli and Hamori, 2004). The study suggests that the tendency has gone towards giving less importance to the educational institution and more to the personal characteristics (Cappelli and Hamori, 2004). In other words, the trend goes towards reaching the top because of earned merits throughout the professional career and not because of an education in a better-ranked institution.
However, already in 1990, Ellis and Heneman argued how interfirm mobility had a
negative relationship with hierarchical level for mature managers (Ellis and
Heneman, 1990). The authors associate this factor with the loyalty and length of
service to the current company of the managers, the one who has to actually
promote them. Another interesting finding of Ellis and Heneman to understand
the nature of interfirm mobility is that industrial mobility is positively related to
salary levels, meaning that managers jump from one industry to another
because of a salary premium (Ellis and Heneman, 1990). At the time of the study, to jump across industries for a salary plus was the case of only a few managers and not an extended practice (Ellis and Heneman, 1990). So a possible interpretation of this finding is that these managers where very talented people to whom the new company was keen to recruit by using a salary incentive.
In 2009, Hamori and Kakarika published an article about how external labour market strategy (spending a bigger fraction of their career in another company than the current one (Hamori and Kakarika, 2009)) influences the career success.
The authors use the 500 largest organisations in Europe and the 500 largest of the United States. They find that the external strategy is negative for the success, leading to a longer climb to the CEO position (Hamori and Kakarika, 2009). In other words, people who stay in an organisation are more likely to be promoted faster and reach earlier the top-echelon (e.g.: CEO) position. This argument is consistent with several lines of thought: some companies tend to payback the loyalty to their employees (Ellis and Heneman, 1990) (Hamori and Kakarika, 2009); managers have a more effective social network established in the company that makes them actually more productive (Hamori and Kakarika, 2009); and employees have firm-specific knowledge that allows them to grow faster as insiders (Hamori and Kakarika, 2009). In conclusion, the literature consistently argues that CEOs who follow an internal market strategy are more likely to have a shorter career until becoming a CEO of a FTSE 100 company.
However, it is also an anecdotal fact that at some points of the career an external strategy can be more rewarding (in terms of career progression). There are a variety of reasons, like for instance managers who get stuck because there is a lack of available positions in the immediately superior hierarchical level of their organisation or managers who are hired by another company with the promise of a promotion. For this reason, there are particular cases when following an external market strategy can payback better than staying in the same company.
In any case, this is a very isolated and particular set of cases, so after reviewing
the aforementioned literature, and guided by Hamori and Kakarika (2009)’s arguments that company insiders are more likely to reach the CEO position, I formulate the following hypothesis:
Hypothesis 5: ‘The tenure in the company of appointment is inversely related with the career length until CEO of a FTSE 100 company.’
Industry Leaders
Hamori (2006) finds that the professionals that come from industry leaders have greater chances of a fast paced advance in their career. This paper uses a sample of 2,000 random executives. Although the dataset is global, it is important to mention that a large majority of the executives work in the United States.
In 2007, Hamori reviews the existing literature concluding that it is advisable for young managers to start their careers in industry leaders in order to reach a top management position (Hamori, 2007). In fact, around the 89% of chief financial officers (CFOs) started their professional career in industry leaders (O’sullivan, 2004; cited by Hamori, 2007). Schoar (2007) finds that early career movements towards the banking sector and towards large and public firms are related to the fast track into CEO positions (Schoar, 2007). Therefore, from the consistent arguments presented in this section I formulate the following hypothesis:
Hypothesis 6: ‘If the first employer of a CEO was an industry leader, this person is more likely to have a faster career until a CEO position of a FTSE 100 company.’
Following the same line of reasoning, it is interesting to investigate also if the
first company was a business services firm and not only whether the first
company was an industry leader or not. The literature mentions the business
services industry as a common point of departure for some CEOs (Hamori, 2007). For this reason, I formulate the following hypothesis:
Hypothesis 7: ‘If the first employer of a CEO was a business service company, this person is more likely to have a faster career until CEO of a FTSE 100 company.’
Background in Accounting or Finances
There is an important factor to consider also, and it is that not all the companies are in the same situation when they appoint a new CEO. Koyuncu et al. (2010) argue that organisations that are facing poor performance are more likely to appoint CEOs with backgrounds in operations. The authors argue that this may be due to their strong knowledge of the operational side of the firm and, therefore, to their ability to apply more effective cost-cutting measures (Koyuncu et al., 2010). Thus, it seems like top executives with background in accounting or finances are, in general terms, more likely to be appointed in the CEO position faster than other candidates without this background. Besides, it makes sense to believe that people with a background in accounting or finances are better valued inside the company not only in a top management level but also in lower points of the managerial hierarchy. Therefore, people with accounting/financial backgrounds may receive earlier promotions than people without these backgrounds. This leads to the following hypothesis:
Hypothesis 8: ‘CEOs with background or experience in accounting or
finances are more likely to have a faster career until CEO of a FTSE
100 company.’
2.4 — Business Elites in the United Kingdom
There are academics that have studied the business elites and their characteristics in different contexts. This section aims to review how the business elites of the United Kingdom in particular are portrayed by the literature.
In this section I talk about characteristics of a more personal sphere like nationality, age, or even the types of relationships between the business elite network members.
The implications of this section on my study are not explicit but implicit. Through this section, I aim to generate a general knowledge about the context surrounding the individuals observed by this study, the CEOs of very large companies. It is important to understand the immediate context of the CEOs (id est the business elites), in particular since I want to understand the factors that make a difference in the career progression of the CEOs. Thus, the reason of the existence of this section is to provide very valuable knowledge to elaborate a more comprehensive discussion in the Chapter 4 — Results and Discussion.
Maclean, Harvey and Press (2006), in their book Business Elites and Corporate
Governance in France and the UK, define the business elite members in the UK
as all the board members other than those who hold a purely honorary position
(Maclean et al., 2006). The UK companies follow a one-tier structure: executives
and non-executives sit in the same board (Van Veen and Elbertsen, 2008). The
UK Corporate Governance Code — formerly known as the Combined Code — sets
as a guideline of best practice the companies having a one-tier board system,
with the board composed by executive and non-executive directors (Financial
Reporting Council, 2014). Therefore, the definition of business elite of Maclean et
al. (2006) that considers all the board members (excluding the honorary
positions) as business elite seems very accurate; it includes executive and non-
executives directors, embracing the people of highest power within the
organisations (Maclean et al., 2006) — understanding power as the command
over resources (Maclean et al., 2006). The corporate governance is inextricably linked to the business elites since the business elite and the board members who exercise the corporate governance are the same people (Maclean et al., 2006).
The business elites can be proven as a very powerful group of people: knowing that they are the top management of the most powerful companies of the UK, they have a very robust control over the company’s resources. Like Maclean et al. (2006) state, are the companies, as legal entities, who have power, but are the company directors who exercise this power (Maclean et al., 2006). This means that although the power legally belongs to the company, it is individual people who choose how to use it.
Regarding the relationships between the members of the business elite, what Maclean, Harvey and Press (2006) found is that ties within the business elite in the UK are predominantly of a social nature and relatively weak, like for instance acquaintances or private clubs memberships rather than close friendships. In Britain, the networking activities are mainly based on social and sporting events (Maclean et al., 2006). As a consequence of these factors, the UK’s elite members creation depends more on the individuals rather than on the institutions, which is the case of other countries like France (Maclean et al., 2006). As an ultimate consequence of the British particular network structure, the social life is of major importance in the UK. Like Coleman (1992) said, social ambition provided an immensely powerful motor of business activity (Coleman, 1992). Donald Coleman (1992) was describing the British industrial revolution, but his statement is yet still valid today (Maclean et al., 2006).
In the UK there is a strong tendency of cultural reproduction (this is the
transmission of values and norms from generation to generation (University of
Canterbury, 1997) (Kavousy and Tohidy Ardahaey, 2010)), inducing continuity at
the same time that not preventing change (Maclean et al., 2006). Schools and
high education institutions play a key role in the process of cultural reproduction,
reinforcing, rather than lessening, social differences (Maclean et al., 2006).
Moreover, successful business players usually want their own sons to be gentlemen to display the sought-after ‘habits of confident social superiority’ and follow the ‘gentlemanly code’ (Maclean et al., 2006).
The conclusion emerging from the work of Maclean et al. (2006) is that the business elites in the United Kingdom are very powerful groups of individuals, the constitution of whose members highly relies on the personal ties and acquaintances rather than on elitist institutions, and with a strong cultural reproduction tendency.
A characteristic factor of the business elites of different countries is its
internationality. Van Veen and Marsman (2008) find that a 25.2% of the
managers (members of the executive committees) of the UK are of other
nationalities than British. The results show a high internationality level in the UK
in comparison with the other European countries, being only higher in
Luxembourg and the Netherlands. They also argue that the level of national
diversity is not very high across Europe (being 14.9% the average of the 15
countries studied), concluding that executive positions in foreign countries are
not very accessible (Van Veen and Marsman, 2008). These results are consistent
with the study of Van Veen and Elbertsen (2008), where they find that the UK
boards have a 36.7% of foreigners, considering executive and non-executive
directors (Van Veen and Elbertsen, 2008). This 36.7% is comprised by the
weighted average of executives and non-executives. 25% of the executives and
42% of the non-executives are foreigners (Van Veen and Elbertsen, 2008). Thus,
executive positions in the UK are less accessible than non-executive positions
for foreigners. They also show that the main foreign nationality is the United
States with a 13%, followed by South Africa with a 4% (Van Veen and Elbertsen,
2008). In order to select the largest companies of the UK, Van Veen and
Elbertsen select the companies with highest market capitalisation; this led to 29
British MNC derived from the FTSE 100 companies on December of 2005 (Van Veen and Elbertsen, 2008).
In conclusion, the business elites in the UK are formed by a British majority of very powerful people: they have power over the largest companies of the country, which have a very large set of resources. The relationships between elites members are not very strong ties in general, but are more in the form of weak friendships and acquaintances. Besides, the British business elite culture has a strong reproduction habit, so it looks like this elite business society is not in immediate threat of disappearing.
2.5 — Conclusion
The aim of this research is to see which factors affect the career length until becoming a FTSE 100 CEO and to what extent they affect this career length. To do so, I have started studying the relevant academic literature. This review aimed to understand what the academic literature argues about what are the factors that affect the career process upon becoming a CEO and also to formulate the hypotheses that this research will intent to test.
According to the literature, I have found several factors that can potentially affect
the career length until becoming a CEO of a FTSE 100 company. These factors
are the maximum degree of education held, having attended an elite education
institution or not, the tenure in the company of appointment, if the company is an
industry leader and/or a business service firm, and if the CEO holds a
background in accounting or finances. I have formulated a total of 8 hypotheses
from these different factors that I will explain how to test in the next chapter,
Chapter 3 - Methodology.
Besides of studying these factors, I have reviewed the literature about the
business elites in the United Kingdom. The aim of this last section was to provide
valuable points of reference for the discussion in the Chapter 4 – Results and
Discussion.
Chapter 3
METHODOLOGY
3.1 – Introduction
The aim of this chapter is to explain the main characteristics of this research and how I will proceed on testing the presented hypotheses. This chapter is structured as proposed by Biggam (2008) and hence divided on three different sections. The first one gives an explanation of the research philosophy and strategy followed. The second section looks at what data is necessary in order to test the hypotheses, how this data is structured, and how it is collected. The third section explains the methodology followed to analyse the data in order to extract some conclusions and test the hypotheses.
3.2 – Research Philosophy and Strategy
The present thesis follows a positivist research philosophy with a deductive
approach: having formulated a set of hypotheses that emerge from the literature,
I aim to test them. I target to do so through statistical analyses of collected data
in a certain point of time, so the research strategy followed in this thesis is a
cross-sectional quantitative study. I will back the arguments and conclusions up
in the data and its analysis in order to provide strong conclusions.
The research strategy proposed is appropriate to approach the problem formulated for several reasons. First of all, a positivist approach matches the willingness of uncovering the understanding of the reality of this thesis. Besides, a deductive approach allows utilising the current knowledge to generate hypotheses that will be subsequently tested and discussed. Testing the hypothesis with a quantitative approach makes sense in this context in particular because it provides a set of objective methods that, with a large sample of individuals (i.e. observations), will provide rigorous insights from the data. Finally, the literature has shown that the business elites, and consequently the CEOs, have remained considerably static in their characteristics during the last years (Maclean et al., 2006), so a cross-sectional approach will not present any problem.
3.3 – Data: Structure and Collection
3.3.1 – Required Data to Test the Hypotheses
Each hypothesis requires specific pieces of data to be proven or refuted. But what data is needed to do this testing? It is important to be aware of which data is needed to test the hypotheses, so the data collection can be conducted in a fully conscious way. Looking at every single hypothesis independently, the Table 3.1 illustrates which data is the required data to test them.
Dependent variable(s)
Independent variable Hypothesis 1 ‘The higher education degree a CEO holds, the
more likely this individual is to have a faster career towards CEO of a FTSE 100 company.’
Career to FTSE 100 CEO
Highest education degree
Hypothesis 2 ‘MBA, PhD or equivalent degree holders are more likely to get a CEO position faster.’
Career to FTSE 100 CEO
MBA/PhD degree holder
Hypothesis 3 ‘Education in an elite institution in an MBA, PhD or equivalent academic degree will promote a
faster career until CEO of a FTSE 100 company.’ Career to FTSE 100 CEO
Elite education
Highest education degree Hypothesis 4 ‘Education in an elite institution in a bachelor
and masters degree will not promote a faster career until CEO of a FTSE 100 company.’
Hypothesis 5 ‘The tenure in the company of appointment is inversely related with the career length until CEO of a FTSE 100 company.’
Career to FTSE 100 CEO
Tenure in the company of appointment
Hypothesis 6
‘If the first employer of a CEO was an industry leader, this person is more likely to have a faster career until a CEO position of a FTSE 100 company.’
Career to FTSE 100 CEO
1st employer was industry leader
Hypothesis 7
‘If the first employer of a CEO was a business service company, this person is more likely to have a faster career until CEO of a FTSE 100 company.’
Career to FTSE 100 CEO
1st employer was business services
firm
Hypothesis 8
‘CEOs with background or experience in accounting or finances are more likely to have a faster career until CEO of a FTSE 100 company.’
Career to FTSE 100 CEO
Background in accounting or
finances
Table 3.1: Data needed to test each hypothesis
