Outsiders By Design
If shareholder returns are the ultimate measure of chief executive success, eight CEO's are in a class of their own. Investment manager William Thorndikedug deep into the weeds to find these iconoclastic CEO's for The Outsiders: Eight Unconventional CEO's and Their Radically Rational Blueprint for Success. Although their companies spanned industry and time horizons throughout the last 50 years, Thorndike’s research uncovered striking similarities between the approaches of these CEO's.
The wisdom of The Outsiders suggests a new approach to the role of the chief executive. Less emphasis on charismatic leadership. More thought to careful deployment of firm resources. All of the individuals listed avoided the “institutional imperative,” coined by Warren Buffett, as a nearly ubiquitous phenomenon impelling CEO’s to imitate the actions of their peers. Each also ran a highly decentralized organization, developed unusual cash flow based metrics, and made use of significant share repurchases. They were deeply independent, avoiding Wall Street and outside advisers, focusing on developing a culture for independent thinkers to contribute and thrive.
The business leaders profiled as The Outsiders and their respective companies are as follows: Tom Murphy (Capital Cities Broadcasting), Henry Singleton (Teledyne), Bill Anders (General Dynamics), John Malone (TCI), Katherine Graham (Washington Post Company), Bill Stiritz (Ralston Purina), Dick Smith (General Cinema), and Warren Buffett (Berkshire Hathaway). As a group, these eight CEOs outperformed the S&P 500 by an average of over twenty times and their peers by seven times. They shared old-fashioned values of frugality, humility, independence, and were iconoclasts.
The first deviant decision made by The Outsiders was to embrace capital allocation as the main role of CEO. While CEO’s are traditionally celebrated for their operational excellence and charisma with investors and the media, these CEO’s realized the importance of deciding how to use the money their companies created to beget more money. The Outsiders prided themselves on a focus on the shareholder. Thus, they spent most of their waking days focused on answering this question of capital allocation, not media and investor relations.
Despite their personal decisions to focus on capital allocation as CEO, operational excellence was still considered a company priority. In fact, each of The Outsiders required operational excellence, as it directly affected the amount of cash they would be able to allocate in their main role. Thus, each of the CEO’s relied heavily on strong management teams (typically COOs, or a like position) who they could trust to create a culture of efficiency in existing operations and acquired companies. This CEO admittance of reliance was an innately humble trait of all these CEOs, who recognized their subordinate’s ability to do their jobs. This trickled down to make The Outsider companies some of the most decentralized in history.
Within the capital allocation process, the shareholder focus continued as The Outsiders looked for innovative ways to maximize returns for shareholders. One highly unpopular method in public perception, shares repurchases, was utilized by seven of eight Outsiders to an exorbitant degree, from anywhere from 40% — 60% of all total shares outstanding. Although more common in today’s business world, share repurchases were then considered counter intuitive, as most executives looked to avoid shrinking their company. However, The Outsiders relished the opportunity and proactively shrunk themselves when they could buy shares in the open market at prices that they thought were low. This served a double purpose of increasing per share value for the remaining investors and paying larger real returns to their selling investors, at a lower tax rate.
Each of these CEO’s made use of their own financial metrics, which were independently created based on things considered most important, generally focused around available cash (and never the Wall Street darling, EPS). Through EBITDA for John Malone, Cash Earnings for Dick Smith, or Insurance Float for Warren Buffett, The Outsiders got an understanding of their financial situation in a meaningful manner to better consider potential acquisitions. These metrics, along with regular back of the envelope return calculations, helped The Outsiders wait long periods of time in between acquisitions in diligent search for a company which fit well with the metrics provided, and at the right price.
Pat Mulcahy, lieutenant of operations at Ralston Purina said, “We knew what we needed to focus on. Simple as that.” When acquisitions were considered, The Outsiders were excellent at removing ego from the equation and using surgeon-like discipline in vetting through possible targets. Continuing the doctor analogy, the executives in this book erred on the side of caution, viewing acquisitions through avoidance of value-destruction (don’t kill the patient) first and foremost. This discipline led to typically small value-accretive acquisitions, which steadily compounded upon each other. Eventually, each one made a large well-calculated acquisition that equaled 25% or more of their firm’s enterprise value.
The comparison of the “fox” and the “hedgehog” helps to define these CEOs. The “fox” knows many things, and the “hedgehog” knows one thing, but exceptionally well. Although the traditional CEO is a hedgehog, all of The Outsiders were definitive “foxes”. These CEO’s used familiarity with different industries to adapt innovative solutions cross functionally. In this brief, I will tell the unique stories of the eight companies of The Outsiders, with attention to detail paid to their backgrounds, and the overlap of their unconventional, yet value-creating decisions.
To read the full brief, go to the Titans website here.
