315. How to Become a C.E.O.

Mark Zuckerberg's dentist dad was an early adopter of digital x-rays. Jack Welch blew the roof off a factory. Carol Bartz was a Wisconsin farm girl who got into computers. No two C. E. O.'s have the same origin story — so we tell them all! How the leaders of Facebook, G. E., Yahoo!, PepsiCo, Microsoft, Virgin, the Carlyle Group, Reddit, and Bridgewater Associates made it to the top. (Part 2 of a special series, "The Secret Life of C. E. O.'s.")

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Stephen J. Dubner?

  Freakonomics Radio is sponsored by PNC Bank. Boring. Great word, bad rep. Yet, time and time again, here at Freakonomics, we find that when something culture-changing happens, boring things like calculations and careful planning are usually behind it. Which begs the question, why not apply it to other aspects of life? Like banking, for example? Well, PNC Bank did, since its inception, proving time and again that the best banking strategy isn't the exciting type, but the steady, reliable, definitely-not-yolo type. PNC Bank: brilliantly boring since 1865. Brilliantly boring since 1865 is a registered mark of the PNC Financial Services Group, Inc. PNC Bank, National Association, Member FDIC.

• 0:48Stephen J. Dubner?

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• 1:19Stephen J. Dubner?

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• 2:09Stephen J. Dubner?

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• 2:48Speaker 01

  It is a very lonely job. I wouldn't want it. Forty-hour days, eight days a week.

• 2:52Speaker 02

  And then boom, they make a decision and everybody's happy. Everybody has some skeletons in their closet.

• 2:57Speaker 03

  There really isn't a honeymoon period because you are the CEO.

• 3:04Stephen J. Dubner?

  Are CEOs born or made?

• 3:06Speaker 04

  I'm pretty sure it's some combination of both.

• 3:11Speaker 04

  You know, you look at the data and there's 10 different recipes for success.

• 3:16Stephen J. Dubner?

  Nicholas Bloom, an economist at Stanford, has been studying leadership for years.

• 3:21Speaker 04

  No one could really give us a straight answer on what to find a good or a bad leader. Sure, there are some people that are better than others, but it's damn hard to tell what it is.

• 3:29Stephen J. Dubner?

  We've been spending our time lately interviewing the CEOs of companies like Microsoft and PepsiCo and Facebook. You'd think there'd be some sort of a template for what makes a successful CEO, some set of common characteristics. But as Nicholas Bloom and others have told us, the data tell a different story. It's very hard to pin down just what produces or predicts or even indicates a good CEO. So today on Freakonomics Radio, in the absence of great statistical evidence, we'll go the anthropological route and ask the question, how do you become a CEO? We'll track our CEOs from their beginnings through their ascensions, including how they almost didn't make it.

• 4:11Speaker 05

  I expected I might get fired. He didn't have the nerve to see me face to face because he knew I would have probably punched him out.

• 4:18Speaker 06

  And then I had my ass kicked in enough times and then I, yeah.

• 4:38Speaker 07

  From WNYC Studios, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dubner.

• 4:54Stephen J. Dubner?

  Of the CEOs we've been interviewing, four of them got an MBA from an elite school, two have law degrees, one has a PhD. On the other end of the spectrum, one is a college dropout and one is a high school dropout.

• 5:07Speaker 08

  I was 16 when I started off in business, so I was virgin at business.

• 5:11Stephen J. Dubner?

  You may recognize that voice.

• 5:13Speaker 08

  Yep, my name is Richard Branson. And what do I do? I do everything virgin.

• 5:19Stephen J. Dubner?

  Now, your title, your official title, as far as I can tell, is Founder, Comma, Virgin Group. In addition to that, are you the CEO of anything?

• 5:29Speaker 08

  I used to be, but I've delegated pretty well all the CEO roles.

• 5:37Stephen J. Dubner?

  You created your own path and just kept going and kept having ideas, kept trying, failed, didn't let it bother you, and so on. But from the original, the magazine, Student Magazine, which was a culture magazine, to record stores, record label, airlines, trains, mobile phone company, et cetera, et cetera, et cetera. I don't know who you might have looked to as a model for that.

• 6:00Speaker 08

  First of all, I never thought of myself as a businessperson or an entrepreneur. I just initially just thought of myself as an editor and wanted to have a magazine to campaign against the Vietnamese war. But in order for the magazine to survive, I had to worry about printing and paper manufacturing and distribution and so on. And I sort of became an entrepreneur. And my education was being in the real world and learning the art of survival.

• 6:33Speaker 02

  I am the only child of two parents who both dropped out of high school.

• 6:39Stephen J. Dubner?

  David Rubenstein is a co-founder of The Carlyle Group, one of the biggest private equity firms in the world. Until recently, he was also its co-CEO. He went to Duke University on a scholarship, then law school at the University of Chicago. After a couple of years in New York doing corporate law, he moved to Washington.

• 6:56Speaker 02

  I worked for Ted Sorensen, who had written that great speech for John Kennedy. He helped me get a job, which ultimately led me to the Carter campaign. So at 27, I was the deputy domestic policy adviser to the President of the United States, a job I obviously wasn't qualified for.

• 7:09Stephen J. Dubner?

  Now, I've read that you stayed late at your job to make sure that your memos were on top of the president's briefing pile.

• 7:16Speaker 02

  It's, for better or worse, completely true. I would take into the president's private study my memos and bypass the staff system and put my memos on top. So when the president came in the morning, he would read my memos first because they were on top of the inbox. And that had the advantage of bypassing everybody else's comments on my memos, which was a way of beating the system. It wouldn't be something I would tell my three children it would be a good way to get ahead. But I would say sometimes you do things in life that in hindsight, with wisdom and gray hair, you realize probably don't look so good.

• 7:49Speaker 05

  I came from a dairy farm in Wisconsin. My mom died when I was eight, so I was very motivated, always to do well, the good girl.

• 7:58Stephen J. Dubner?

  That's Carol Bartz. She was CEO of the software firm Autodesk for 14 years and later CEO of Yahoo.

• 8:05Speaker 05

  I actually was very fortunate to get a computer science degree from University of Wisconsin in 1971.

• 8:13Stephen J. Dubner?

  Good timing.

• 8:14Speaker 05

  And I fell into a world that I just loved. And I could continue in that world for the next 40 years.

• 8:27Stephen J. Dubner?

  Talk for just a minute about how being a woman affected your career, if you can kind of measure that input.

• 8:37Speaker 05

  First of all, it was easier in the beginning because not many people had computer science degrees and so they didn't care if you were a orangutan. You could, you know, get a job because they didn't understand what was going on and they thought maybe you could help them. Unfortunately, though, at that time, I walked into a mess of typical bad men that you read about today. But I was a tough farm girl, so I didn't let too much get in the way.

• 9:11Stephen J. Dubner?

  You mean, bad in a sexually harassing kind of way?

• 9:14Speaker 05

  Oh, absolutely.

• 9:15Stephen J. Dubner?

  Yeah.

• 9:15Speaker 05

  Oh, absolutely.

• 9:16Stephen J. Dubner?

  Yeah, yeah, yeah.

• 9:17Speaker 05

  Absolutely. I mean, when I was at 3M, the guys that I worked with called me Carl because they didn't want their wives to know they were traveling with a female. So that, of course, wasn't harassing me. It was just kind of an indicator of how the world was. And, you know, as time went on and I was able to move up, I was fortunate enough to have some very good mentors and leaders that believed in me and I was ornery.

• 9:56Speaker 09

  I think I'm a product of two amazingly unique American things.

• 10:01Stephen J. Dubner?

  That's Satya Nadella, the CEO of Microsoft.

• 10:04Speaker 09

  The first is this technology that reached me where I was growing up, that even made it possible for me to dream the dream. And then the enlightened American immigration policy that we like to debate, but it allowed me to come here in the first place and live the dream. Only in America would a story like mine be possible.

• 10:27Stephen J. Dubner?

  In addition to you, the CEOs of Google, Adobe, Mastercard, and many other big American firms are Indian-American, often immigrants like yourself. How do you account for that massive success?

• 10:41Speaker 09

  Well, I mean, of those companies, other than the Sundar at Google, we all went to the same high school even. So I don't know. Maybe it was the water.

• 10:52Speaker 09

  First of all, I think it's sort of one of those false positives that you can take too much out of, right, which is I think each of us had our own unique story and a unique path. It's after all, a country with billion people.

• 11:08Stephen J. Dubner?

  But a relatively low immigration rate for most of the immigration.

• 11:11Speaker 09

  That is correct. I think what you're seeing here is that there was this tech boom, especially in the early, starting in the early 90s. There was a good supply of engineering graduates out of the country and demand meets supply and the enlightened immigration policy, I think, is what made it possible.

• 11:35Speaker 03

  I think it's because we are products of an Indian education system at the high school and the undergraduate level, which is all in English.

• 11:43Stephen J. Dubner?

  That's Indra Newy, the CEO of PepsiCo. She's also Indian, and I had asked her the same question.

• 11:49Speaker 03

  All of us grew up with a family that basically valued education over anything else. And I think that's what allowed us to come here and be successful, too.

• 11:58Speaker 10

  I think my dad has a lot of fun stories about how he got me into technology.

• 12:03Stephen J. Dubner?

  That's Mark Zuckerberg, founder and CEO of Facebook.

• 12:07Speaker 10

  He took a lot of pride in being the first dentist in the area who did digital x-rays instead of physical ones. And he was just such a geek, but he was always just like, Mark, don't you think this is cool? I mean, I think my sisters were happy enough to play the games that I programmed growing up, right? So they prefer like playing a snowball fight game or some strategy game that I made, even if the graphics were terrible and the game wasn't that good, right? Because I was still learning how to program. I was like 12 or 13 or 14. They'd prefer that to getting chased around the house with a super soaker.

• 12:46Stephen J. Dubner?

  You probably already know that Zuckerberg dropped out of Harvard.

• 12:49Speaker 10

  10 years ago, I was just trying to help connect people at colleges and a few schools.

• 12:54Stephen J. Dubner?

  He's probably the most accidental CEO we spoke with.

• 12:57Speaker 10

  Yeah, well, I never started this to build a company.

• 13:01Stephen J. Dubner?

  At 33, Zuckerberg is also the youngest CEO we interviewed. The oldest, at 82, is Jack Welch, former longtime CEO of General Electric.

• 13:12Speaker 11

  Treating everybody the same is ludicrous, and I don't buy it.

• 13:18Stephen J. Dubner?

  Welch joined GE in 1960 with a PhD in chemical engineering. It was a different era.

• 13:26Speaker 11

  Well, let's start with differentiation. I learned differentiation when I was 11 years old at the playground. And the other guys were 15 and 16. And what happens to the worst player? He picks last, and he goes to right field. That's differentiation. I mean, that hasn't changed in my mind from the day, the first day I went to the playground.

• 13:50Stephen J. Dubner?

  Welch spent his whole 40-year career with GE, the last 20 as its CEO.

• 13:56Speaker 11

  It's not cruel and Darwinian and things like that that people like to call it. A baseball team publishes every day the batting averages. And you don't see the 180 hitter getting all the money of all the raises. Athletics is the purest form of differentiation because it's public. Business is more subtle, and it's more qualitative. So the precision isn't there to differentiate. So judgment's important. But you don't win with a gang of mediocre players in business or in baseball.

• 14:35Speaker 10

  Yeah.

• 14:36Speaker 11

  Do you want to be in the loser's locker room or the winner's locker room? What's more fun?

• 14:41Stephen J. Dubner?

  When you look back at your tenure at GE, you had an awful lot of different issues, controversies, occasional crises. You had financial, you had environmental, you had some involving personnel.

• 14:54Speaker 11

  Right.

• 14:54Stephen J. Dubner?

  Walk me through what felt at the time like the worst one and how you addressed it.

• 15:01Speaker 11

  Well, I blew up a factory.

• 15:04Stephen J. Dubner?

  Yeah, that was early on, right?

• 15:06Speaker 11

  Early on.

• 15:07Stephen J. Dubner?

  And tell the story about how your boss, or maybe it wasn't your immediate boss.

• 15:11Speaker 11

  My immediate boss didn't know me.

• 15:13Stephen J. Dubner?

  Uh huh, yeah.

• 15:14Speaker 11

  He made sure he got away from me. And I blew the roof off the factory. Fortunately, no one was killed.

• 15:20Stephen J. Dubner?

  Yeah.

• 15:21Speaker 11

  And I was called out to New York to explain what happened by my boss's boss's boss. So I met this guy really for the first time.

• 15:31Stephen J. Dubner?

  This guy named Charlie Reed, I believe?

• 15:32Speaker 11

  Yeah, yeah. Good for you. You did some homework.

• 15:36Stephen J. Dubner?

  All right. You're expecting what from Charlie now?

• 15:39Speaker 11

  I didn't know him, so I didn't know what to expect, but I expected I might get fired.

• 15:45Stephen J. Dubner?

  Yeah.

• 15:45Speaker 11

  I drove out of my Volkswagen from Pittsfield. I met Charlie and all he did, it turns out he was a PhD chemical engineer from MIT. So he took me through the Socratic method. Do you know why it happened? What would you do differently? Why did you do that? Why did you do this? And he was coaching me and he couldn't be nicer. And I learned from that and never kick anybody when they're down. Kick them when they start to swell, but don't kick somebody when they're down. And Charlie did a hell of a job of coaching me through the error I made

• 16:26Speaker 11

  in blowing oxygen through benzene without enough grounding.

• 16:31Stephen J. Dubner?

  And you think that changed the way that you managed going forward?

• 16:34Speaker 11

  Right.

• 16:35Stephen J. Dubner?

  That was, you know, almost 20 years before you took over.

• 16:37Speaker 11

  Yeah, that changed my life forever.

• 16:43Stephen J. Dubner?

  From the outside, it's tempting to assume that the path of a chief executive has been a straight line, a procession of victories, small and large. That is rarely the case. Failure is not only common among the CEO class, but to some degree, desirable. Nicholas Bloom again.

• 17:02Speaker 04

  You need that experience of adversity. In Silicon Valley, there's this old saying about you actually love to fund people that have had one or two business failures, but three or more is pure carelessness.

• 17:14Speaker 06

  Oh, yeah. And then I had my ass kicked in enough times. And yeah, I remember the moment. In late 1980, 81.

• 17:26Stephen J. Dubner?

  That's Ray Dalio. At the time, he was running a small hedge fund called Bridgewater Associates.

• 17:31Speaker 06

  I had calculated that American banks had led into foreign countries a lot more money than those countries were going to be able to pay back.

• 17:38Stephen J. Dubner?

  Dalio's calculation turned out to be right. This brought him a lot of attention from Wall Street. He was asked to testify before Congress. Dalio told anyone who would listen that the looming debt crisis would inevitably lead to a stock market crash.

• 17:53Speaker 06

  I was so wrong. I had to let clients go. I lost money. I got so broke that I had to borrow $4,000 from my dad. And letting go of people who were like extended family, it was literally down to me. That was a very painful experience, but it was one of the best experiences that happened in my life because it changed my perspective from thinking I'm right to asking myself, how do I know I'm right?

• 18:21Stephen J. Dubner?

  Dalio rebuilt Bridgewater from scratch.

• 18:24Speaker 06

  And that began the whole process of trying to find the smartest people I can find who disagree with me and be curious about what they think to create a culture in which there's independent thinking.

• 18:37Stephen J. Dubner?

  Bridgewater would become famous for using algorithms to make decisions and for practicing what Dalio called radical honesty and radical transparency.

• 18:47Speaker 06

  The senior partner said that you're making people uncomfortable. You're demoralizing them with your straightforwardness.

• 18:54Stephen J. Dubner?

  But it worked. Bridgewater is now the biggest hedge fund in the world. 1,500 employees, roughly $160 billion under management. Dalio, who recently stepped down as co-CEO, has a net worth of around $17 billion. He traces his success back to having weathered and learned from that early failure.

• 19:17Speaker 06

  We have a challenge of being able to deal with our own imperfections and our own weaknesses and our own being wrong. And our society reinforces that. It's reinforced in schools about, you know, okay, you got the grades right. You're right, or you're right, or you're right, or you're right. It doesn't reinforce the notion of failure and learning from failures and that whole experience.

• 19:45Speaker 02

  Well, we've made plenty of mistakes, as everybody in this business has.

• 19:49Stephen J. Dubner?

  David Rubenstein again, from the Carlyle Group.

• 19:51Speaker 02

  Anybody that tells you they haven't made a mistake probably really isn't in the business or isn't being honest.

• 19:55Stephen J. Dubner?

  Carlyle is a private equity firm, buying established companies, sometimes replacing their CEOs, and ultimately selling them off. This is not to be confused with a venture capital firm, which generally funds startups.

• 20:09Speaker 02

  I don't think I have the skill set in venture capital. I passed on Facebook when Mark Zuckerberg was in college and I had a chance to be an early owner of Amazon and effectively turned it down.

• 20:19Stephen J. Dubner?

  Still, Rubenstein is among the most experienced people on the planet when it comes to observing CEOs. Carlyle has acquired or invested in nearly 600 companies in aerospace, healthcare, energy, media, financial services, you name it. So Rubenstein has formed some rules of thumb.

• 20:37Speaker 02

  Running companies is different than getting them off the ground. I think it's much harder to get them off the ground. But generally, the companies that are going to make it, with some exceptions, are the companies that have a CEO founder who has driven the company for the first couple of years and really driven it to success. And then you bring in a CEO who's better at managing a more mature company than somebody who's getting it off the ground. Some of the greatest managers of companies in the world are not great entrepreneurs, and some great entrepreneurs are not really good at managing companies.

• 21:06Stephen J. Dubner?

  In the latter category, Travis Kalanick of Uber comes to mind. Great entrepreneur, as a manager, much less great, which is why Kalanick is no longer the CEO of Uber. As for successful CEOs who weren't entrepreneurs, there's Lou Gerstner, who ran IBM and RJR Nabisco, Alan Mulally, who ran Ford and before that, a division of Boeing. But what about the third group? Company founders who go on to successfully run their firm.

• 21:38Speaker 02

  It's a rare person like Bill Gates, who was an entrepreneur and also was a very effective CEO for many, many years.

• 21:44Stephen J. Dubner?

  The high-profile nature of those relatively few excellent founder CEOs. You mentioned Bill Gates, you know, you could say Mark Zuckerberg at this point, you could say Jeff Bezos at this point, you could say Steve Jobs all he was alive. Do you think they give a kind of skewed anomalous view of what the CEO should be? In other words, it should be the founder, or at least it would be best if it were the founder?

• 22:09Speaker 02

  Well, clearly, they get all the attention, and so it does give people something to aspire to. But probably, most companies, five years into the formation of the company, are not being run by the person who conceived of the company and might have started it. It's just a different skill set, and very few people have the skill set that Jeff Bezos exhibited or Bill Gates exhibited. It just usually doesn't happen.

• 22:32Stephen J. Dubner?

  In the case of Facebook and Mark Zuckerberg, it wasn't at all clear that the founder would make it as the CEO.

• 22:38Speaker 01

  I thought he showed an incredible audacity to not learn and listen as a leader.

• 22:43Stephen J. Dubner?

  That's Jeff Sonnenfeld, a leadership scholar at Yale.

• 22:46Speaker 01

  Oh, my gosh, has he changed. And he's, he had a great board, great mentors, and also, he's just been a great learner. He has been remarkably different now as a leader than he was when he first became CEO.

• 22:59Speaker 10

  I actually think the most important thing is what decisions and what process on a day-to-day basis you choose to let people have the freedom to do and just not get involved with.

• 23:08Stephen J. Dubner?

  And that's Zuckerberg.

• 23:10Speaker 10

  A huge part of how Facebook works is giving a large amount of freedom to our engineers at the company and to people who use the product to make with it what they will, right? And trusting people to do that, rather than...

• 23:24Stephen J. Dubner?

  Was that hard for you to get to, or?

• 23:27Speaker 10

  I think it's hard every day. I think because when you're running something, you, of course, have the ability to make as many of the decisions as you would like. So, the, the real art, I think, is not, not when you know that you have someone who's a superstar, who's going to make great decisions, but deciding to let people do things that you disagree with because on principle, and you know it's just going to free up more creativity, and, and people will feel like there's more potential to try different things in the future that may be better if you let them go do those things, even if you disagree with them.

• 24:02Speaker 08

  Too many young entrepreneurs, you just want to cling on to everything and they're not, they're not good delegators.

• 24:08Stephen J. Dubner?

  Richard Branson again, the founder of Virgin.

• 24:11Speaker 08

  If I'm ever giving a talk to a group of young business people, I will tell them, you know, go and, go and take a week out to find somebody as good or better than yourself.

• 24:21Stephen J. Dubner?

  I know that once when you were asked how involved you are in the mechanics of your businesses, you said, I don't understand these things completely. And you said, I've never been able to know the difference between net and gross. I'm, I'm guessing you were exaggerating at least a little bit or no?

• 24:37Speaker 08

  Well, I'm, I'm quite badly dyslexic and it was on my 50th birthday that I was having a meeting with a group of executives and, and I asked the question, is that good news or bad news? When some figures were given to me and, and one of the executives took me outside the room and he had a, some coloring pencils and he had a blank sheet of paper and he colored in this piece of paper blue. And then he put a net, a fishing net amongst it. He put little fish in the fishing net and he said, Richard, I don't think you know the difference between net and gross. And let me simplify it for you. The fish in the net are your profit and the, all the fish that are not in the net are

• 25:21Speaker 08

  your, are your gross turnover. And hey presto, I got it. And, and ever since then, I've been, you know, very swankly saying net, profit and gross turnover.

• 25:38Stephen J. Dubner?

  Coming up on Freakonomics Radio, okay, the CEO chair is suddenly empty and you've got to fill it. What happens now?

• 25:46Speaker 01

  We can't take one of these knuckle dragging drones from within to save us.

• 25:50Speaker 03

  Even the day before, they told me that I was going to be CEO. I didn't think that I was going to become CEO.

• 25:57Speaker 11

  I was on the sidelines thinking what, what I would do if I got it. And when I got it, I did it.

• 26:06Stephen J. Dubner?

  Tradition versus change, insiders versus outsiders, Microsoft versus the world. That's coming up right after this.

• 26:36Stephen J. Dubner?

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• 27:20Stephen J. Dubner?

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• 27:38Stephen J. Dubner?

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• 28:22Stephen J. Dubner?

  Download the Quince app for app-exclusive offers or go to quince.com/freak. Get free shipping on your order and 365-day returns. Now available in Canada and the UK, too. That's Q-U-I-N-C-E.com/freak.

• 28:43Stephen J. Dubner?

  Freakonomics Radio is sponsored by Southern New Hampshire University. There's no hiding how convenient Southern New Hampshire University makes college. They offer over 80 career-focused graduate programs online. Classes have no set meeting time, so you can balance life and learning, and online tuition rates are some of the lowest in the country, making it all a little more manageable. A school this willing to work with you is worth the investment. Visit SNHU.edu/freakonomics to learn more. Where do CEOs come from?

• 29:24Stephen J. Dubner?

  First of all, keep in mind that small firms vastly outnumber large ones.

• 29:29Speaker 04

  When people mention CEO, they think of an older white man in charge of a company of 10,000 people. In fact, there are 6 million companies in America. The median company, so the 50th percentile, has three employees, and the most common company has one.

• 29:45Stephen J. Dubner?

  But let's say we are talking about a big company. Maybe it's a startup like Facebook or Uber that shot into the stratosphere. Maybe it's an old-timer like General Electric or PepsiCo. Where does the ideal CEO come from? Is it an insider who knows the culture, who's got institutional memory? Or an outsider with fresh eyes and instincts? To what degree and on which dimensions should the incoming CEO resemble the outgoing one? Let's start this conversation with Jack Welch, who became CEO of GE after 20 years at the company. You were ultimately appointed CEO by Reg Jones. You were very different from him.

• 30:30Stephen J. Dubner?

  He was kind of buttoned-down, formal, classically trained in a way, and British, and you were more scrappy, Boston-area, said what you thought, didn't necessarily care that much how people received it. It was a fascinating handoff from him to you. And it's amazing that he saw in you, you know, what others may not have seen. I'm curious, you were there a long time before that day. I wonder how much you were motivated to stay and rise by your desire to change the way the company was run, because you and he both acknowledged that at the time you took over, GE needed a lot of change.

• 31:09Speaker 11

  Yeah, I had an enormous thirst to get my hands on it. And so obviously, I was on the sidelines, thinking what I would do if I got it. And when I got it, I did it.

• 31:26Stephen J. Dubner?

  You make us sound pretty easy.

• 31:28Speaker 11

  Well, frankly, it's a lot easier to come up in a company and see its foibles from the bottom to the middle than be brought in as a hero at the top and know nothing of the infrastructure or the vibes of the place.

• 31:47Stephen J. Dubner?

  Welch eliminated many of GE's business units, and he let go so many employees that he came to be known as Neutron Jack. Doing so, he argued, was how GE was going to win. And it didn't help any employee to pretend that they were better than they were.

• 32:03Speaker 11

  It's a sin that people come to work not knowing where they stand. Everybody who works for you must know where they stand, what their boss thinks about them, what the company thinks about them. This idea of false kindness is pure nonsense, pure nonsense.

• 32:22Stephen J. Dubner?

  Jack Welch was not everyone's favorite flavor. Some said he was abrasive, that his cost cutting was inhumane. Others said he got lucky, turning GE into more of a finance company during what turned out to be a huge stock market run-up. Whatever the case, his tenure as CEO, from a performance perspective, was extraordinary.

• 32:46Speaker 11

  We were doing $26 billion in sales with $1.4 billion in profit. And we had 420,000 points.

• 33:00Speaker 11

  Okay, that was the early 1980s. Twenty years later, we were doing $150 billion in sales, plus or minus. And we were making $15 billion. And we had 300,000 employees instead of 420. So either we were fat before and we needed to move, or something's different.

• 33:24Stephen J. Dubner?

  It's a sample set of exactly one, but Jack Welch is evidence that it's possible for an insider to take over and kickstart a legacy firm. But what if GE had brought in an outsider? Maybe they would have done even better. For a firm in need of big change, you'd think that an external CEO might have all sorts of advantages, wouldn't you?

• 33:48Speaker 01

  The truth is just the opposite. The research slightly favors the objective, internal person to make the big changes.

• 33:56Stephen J. Dubner?

  That, again, is Jeff Sonnenfeld from Yale.

• 33:59Speaker 01

  They know where the problems are, where the bodies are buried. They also know where the opportunities are. An objective, smart, honest, intelligent insider is generally a much better pick than somebody from the outside.

• 34:13Stephen J. Dubner?

  Here are some numbers to back up what Sonnenfeld's saying. A 2009 academic study, which analyzed established public companies from 1986 to 2005, found that internally-promoted CEOs led to at least a 25% better total financial performance than external hires. A 2010 study by Booz and Company similarly found that in seven of the 10 previous years, insider CEOs delivered higher market returns than external hires. And yet, external hiring seems to be on the rise. In 2013, between 20% and 30% of boards replaced outgoing CEOs with external hires.

• 34:56Stephen J. Dubner?

  A few decades ago, that number was only 8% to 10%. Outside hires also tend to be more expensive. Their median pay is $3 million more than for inside hires. So, an external hire will, on average, cost you more and perform worse. And yet, that's the trend.

• 35:16Speaker 01

  What has happened in this oh-so-troubling governance days of this new millennia is insiders are often disparaged way too quickly as boards have taken on with the messianic zeal, a belief that whoever our savior is for the next CEO, it ought to be somebody from the outside. Because, hey, if this company's not performing perfectly, we can't take one of these knuckle-dragging drones from within to save us. With the outside, you have no idea if that person has gotten a lot of credit because of a biased relationship with the search firm, or maybe that person had been part of a successful operation in a strong-performing company and is benefiting from the afterglow of other people's work. Whereas in the inside, a person, you know when they've tripped.

• 35:58Speaker 01

  So, often, we give too much attention to mistakes from an insider. But an insider, we can judge how they've learned, how they've come back from setbacks and mistakes. And an insider tends to be a much better choice.

• 36:12Stephen J. Dubner?

  In 2014, Microsoft, one of the biggest companies in the world, found itself searching for a CEO. Steve Ballmer had announced he was stepping down. He'd been at Microsoft forever, the 30th employee hired. And he was just its second CEO after co-founder Bill Gates. A lot of names were mentioned as Microsoft searched for its next CEO. Many of them were high-profile outsiders. One name rarely mentioned was Satya Nadella. He was a relatively low-profile insider, a computer scientist who'd been at the firm since 1992. And yet, Nadella was the ultimate choice.

• 36:51Stephen J. Dubner?

  You make no secret of it that a lot of people were hoping for an outsider to be appointed CEO of Microsoft, but you're a lifer. I gather there wasn't a lot of enthusiasm internally when you were named.

• 37:03Speaker 09

  As you said, I'm a consummate insider, but the one thing that I've tried to do, being someone who's grown up in Microsoft, is have as objective and outside in view.

• 37:14Speaker 01

  He was a very humble guy.

• 37:15Stephen J. Dubner?

  That, again, is CEO watcher Jeff Sonnenfeld.

• 37:19Speaker 01

  He was never going for the bright lights and trumpets. There was no grandiosity about him, and he was quietly but prophetically building up the cloud business that wasn't, you know, Bill Gates or Steve Ballmer's front burner topic, and yet he saw what was coming. And as CEO, one of the things he's done is by increasing market cap, since he's been in there in just, what, three years, just over three years, by $250 billion.

• 37:50Stephen J. Dubner?

  That $250 billion figure was accurate when we spoke with Sonnenfeld, but that was a few months back. As of today, Microsoft's market cap has increased by more than $400 billion since Nadella took over. Its share price more than doubling.

• 38:04Speaker 01

  But that tells only a small part of the story because he did come into a culture that had become very bureaucratic. It had become possessed by very strong turf issues. And you might say, well, how did he do it? Just talking with insiders in there, there's an absolute genuine collaborative decision-making on anything large or small, that it isn't driven by fiefdoms, nothing by imperial decree. There's an accessibility and a friendliness, almost a playfulness that he's brought in to a company where you just wouldn't have thought it was possible at this life stage to do it. What he did to revive the culture is really is incredible.

• 38:47Stephen J. Dubner?

  Nadella himself attributes his management's success to one word.

• 38:51Speaker 09

  Empathy.

• 38:52Stephen J. Dubner?

  He wasn't always so empathic.

• 38:54Speaker 09

  I always asked myself, you know, at whatever, 25, when I was interviewing and somebody says, "What would you do if you see a baby on the street crying and after having fallen down?" I answered with, you know, thinking this is some trick question, maybe there's some algorithm that I'm missing, and said, "I'll call 911," only to have that manager get up and walk me out of the room saying, you know, "That's the absolute bullshit answer." And if you see a baby falling down, you pick them up and hug them. And I was devastated because I remember thinking about it and I said, "How could I not get that?"

• 39:35Stephen J. Dubner?

  By Nadella's own admission, it took an even more dramatic event for him to get it.

• 39:41Speaker 09

  On the 13th of August in 1996 at 11:29, all life changed.

• 39:48Stephen J. Dubner?

  His wife, Anu, an architect, had just given birth to their first child, Zain. He had a severe case of cerebral palsy.

• 39:57Speaker 09

  It took me multiple years to even understand what had happened because in some sense, I was more about like, "Why did this happen to us? What happened to me?" And it's only by observing my wife, you know, really step up, give up her career and do all the things she was doing to care for Zain, that's when I realized nothing happened to me. In fact, really something has happened to my son and it's time for me to step up and see life through his eyes and do what I should do as a parent and as a father. So that's, I think, perhaps the biggest lesson for me around empathy. And it's only developed through your life's experience.

• 40:43Speaker 09

  It's not something that's really endowed on you, but as long as, but every passing year, with perhaps every passing mistake you make, you develop more of a sense of being able to see life through other people's eyes is going to make you a more effective parent, more effective colleague, and a more effective partner.

• 41:10Stephen J. Dubner?

  So you can see why the Microsoft board was impressed enough with Nadella to make him CEO, despite being a relatively low-profile insider. And that choice, so far at least, has paid off. But the fact is that many, many CEO searches look for a very, let's say, a very typical sort of candidate. I talked about this with the Stanford economist Nicholas Bloom.

• 41:36Speaker 04

  By the time you get to people with basically, you know, great education, charming individuals, you know, some kind of prior experience, they're all in the frame for leadership.

• 41:46Stephen J. Dubner?

  It sounds as though you're raising then a central problem, or challenge at least, which is if everybody's always looking for CEOs who fit the CEO mold, then you're going to continue recruiting and installing a bunch of well-educated white men from middle or upper-middle-class backgrounds, which is, you know, I think we'd all agree is A, potentially very discriminatory, but B, potentially idiotic, because you're reducing your pool of potentially excellent people. So how do you deal with that?

• 42:19Speaker 04

  Imagine if you were making a new type of soup, and you decided to invent tomato soup. There's already 100 different, you know, types of tomato soup out there. But if instead you went for something different, you know, hedgehog and chili soup, most people would think it's horrible. They'd never go near it. But, you know, 1 in 100 consumers would think, that's kind of cool, and try it out. And you'd have a market, much as it is with CEOs. You actually really want diversity, because you actually want to be different from your competitors. And that enables you to have the edge, it enables you to innovate. So sure, there's going to be a lot of, you know, white men CEOs. But given there's a lot of white men CEOs out there, actually, there'd be a lot of payoff to having, you know, something different, because you have a different angle. And that's where you can make money in business.

• 43:00Speaker 12

  Are we actually going to find that people are starting to hire people with different views and different backgrounds and different experiences who we really believe are going to change the system and not just perpetuate it with different players?

• 43:13Stephen J. Dubner?

  That's Ellen Pao.

• 43:14Speaker 12

  I am the Chief Diversity and Inclusion Officer at the KPOR Center and a venture partner at KPOR Capital. And I'm also CEO and co-founder of Project Include, a nonprofit oriented towards giving everyone a fair chance to succeed in tech.

• 43:29Stephen J. Dubner?

  Pao herself had a brief and stormy tenure as CEO, interim CEO technically, at Reddit. Some of the changes she made deeply upset the Reddit community.

• 43:39Speaker 12

  At the end of the day, I think the board didn't have the stomach for it. And they told me that they wanted me to reach either 350 million or 500 million users by the end of the year. And I just said, no, like, no company has done that. So that, you know, I can't commit to doing that. And that ended up being the reason why they asked me to leave.

• 44:02Stephen J. Dubner?

  From her experience within firms and as a venture capitalist, Pao has found that the CEO playing field is quite unlevel, tilted especially against women.

• 44:13Speaker 12

  There's a perception that if you are pregnant, that you're no longer as good of a founder or as committed of a CEO. And we've seen story after story, I don't think there's any scientific research about it, but of, you know, CEOs hiding their pregnancies because they don't want to be perceived as less of an employee or less of a leader. And, you know, I had a coworker who, I think she tried to hide her pregnancy for like, five months.

• 44:39Stephen J. Dubner?

  We'll look more closely at gender and leadership in an upcoming episode about what's called the Glass Cliff. It'll feature Carol Bartz, the former Autodesk and Yahoo CEO we heard from earlier.

• 44:51Speaker 05

  The guys that I worked with called me Carl because they didn't want their wives to know they were traveling with a female.

• 44:57Stephen J. Dubner?

  When Bartz took over Yahoo in 2009, the company was in a lot of trouble. She only lasted two and a half years.

• 45:04Speaker 05

  Well, I was in a limo, driving into New York City, when I got a call from Roy Bostock, the chairman of the board, and told me I was fired. I was literally 20 minutes away from where he was physically located. He didn't have the nerve to see me face to face. I do not believe that that would have happened to a man. He didn't have the nerve. Now, I like to think he didn't have the nerve because he knew I would have probably punched him out. But, um.

• 45:42Stephen J. Dubner?

  And was he right?

• 45:44Speaker 05

  Might be right. I don't know.

• 45:49Stephen J. Dubner?

  Why did Carol Bartz, with such an excellent track record as CEO of Autodesk, fail as CEO at Yahoo? Is it because she was an outsider? Was it a strategic issue? A personality issue? Maybe a timing issue? Or maybe Carol Bartz's failure had nothing to do with Carol Bartz. Maybe Yahoo was just a company being blown sideways in a tech tornado where display ads were cratering and Google was killing everybody else in search. Bartz's successors didn't have a very good time either. Yahoo was at one point the world's most popular web destination with a market cap of more than $110 billion.

• 46:32Stephen J. Dubner?

  Last year, it was sold to Verizon for $4.5 billion. So maybe we should be cautious about ascribing too much blame or credit to a given CEO. There are a lot of factors to consider in any firm's success or failure. And, as we've learned today, there's a huge variance in the backgrounds and styles and skills of different CEOs. There seems to be no secret sauce whatsoever, unless maybe it's luck. That said, we also learned that when it's time to pick a CEO, the numbers do

• 47:13Stephen J. Dubner?

  seem to suggest that the best bet is a stable and experienced insider.

• 47:20Speaker 03

  Even the day before, they told me that I was going to be CEO. I didn't think that I was going to be CEO. So there wasn't a plan to become CEO. The plan was to just keep doing a very, very good job and focus on running the job that I had and making sure the company was in a good place. I think one thing just led to another.

• 47:42Stephen J. Dubner?

  Indra Newy of PepsiCo is easily the most experienced stable insider we've run across in our reporting on CEOs.

• 47:50Speaker 01

  At one point, she was Chief Administrative Officer, Chief Financial Officer, and Chief Operating Officer, basically all at once, and then took on the tasks of her Christmas at one point, become also Chief Technology Officer. Indra is an unbelievably brilliant person.

• 48:06Stephen J. Dubner?

  So coming up next time on Freakonomics Radio, what's it like to take over a huge multinational food and beverage company just as the world decides that your food and beverages are a threat to humanity? And just as a global recession hits?

• 48:22Speaker 03

  One had to learn in a hurry how to run this company through extreme periods of adversity. And there's no book you can read. You have to develop the book as you go along. And that's what was really, really, really tough.

• 48:37Stephen J. Dubner?

  Injured Newey on how to run a company instead of getting run over by it. That's next time on Freakonomics Radio. Freakonomics Radio is produced by WNYC Studios and Dubner Productions. This episode was produced by Max Miller. Our staff also includes Alison Hockenberry, Merritt Jacob, Greg Rosalsky, Stephanie Tam, Burek Karuthers, Harry Huggins, and Brian Gutierrez. For this series, David Herman did the sound design with help from Dan DeZula. And the music you hear throughout our episodes was composed by Luis Guerra. You can subscribe to Freakonomics Radio on Apple Podcasts or whichever podcast app you use. You should also check out our archive at Freakonomics.com, where you can stream or download every episode we've ever made.

• 49:22Stephen J. Dubner?

  You can also read the transcripts and find links to the underlying research. We can also be found on Twitter, Facebook, or via email at [email protected]. Thanks for listening.

• 49:48Stephen J. Dubner?

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• 50:19Stephen J. Dubner?

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• 50:57Speaker 13

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• 51:26Speaker 14

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