The Outsiders | Eight Unconventional CEOs & Their Radically Rational Blueprint For Success by William N. Thorndlike, Jr.

I. Brief Summary

This book is a blueprint of what it takes to be an exceptional CEO who can perform extraordinarily over long periods of time. Jack Welch is one of the most celebrated CEOs who returned 20% over a period while S&P averaged 14% annual returns. However, Jack Welch didn't stand a chance against these 8 unconventional CEOs. They all outperformed Welch by significant margins. Each chapter may sound repetitive, but the redundancy of characteristics in each one of these CEOs highlights the underlying lessons. They all understood capital allocation is perhaps the only job the CEO is responsible for.

II. Big Ideas

• The book highlights and features these CEOs:
  • Capital Cities Broadcasting, Tom Murphy
  • Teledyne, Henry Singleton
  • General Dynamics, Bill Anders
  • TCI, John Malone
  • The Washington Post Company, Katharine Graham
  • Ralston Purina, Bill Stiritz
  • General Cinema, Dick Smith
  • Berkshire Hathaway, Warren Buffet
• Capital allocation is “the process of deciding how to deploy the firm’s resources to earn the best possible return for shareholders.”
• Outsiders are foxes, not hedgehogs. Isaiah Berlin, in a famous essay about Leo Tolstoy, introduced the instructive contrast between the “fox,” who knows many things, and the “hedgehog,” who knows one thing but knows it very well. Most CEOs are hedgehogsß—they grow up in an industry and by the time they are tapped for the top role, have come to know it thoroughly. There are many positive attributes associated with hedgehogness, including expertise, specialization, and focus. Foxes, however, also have many attractive qualities, including an ability to make connections across fields and to innovate, and the CEOs in this book were definite foxes. They had familiarity with other companies and industries and disciplines, and this ranginess translated into new perspectives, which in turn helped them to develop new approaches that eventually translated into exceptional results.
• All 8 CEOs mentioned in the book were unconventional in their own rights. Why?
  • Capital allocation is a CEO’s most important job.
  • What counts in the long run is the increase in per share value, not overall growth or size.
  • Cash flow, not reported earnings, is what determines long-term value.
  • Decentralized organizations release entrepreneurial energy and keep both costs and “rancor” down.
  • Independent thinking is essential to long-term success, and interactions with outside advisers (Wall Street, the press, etc.) can be distracting and time-consuming.
  • Sometimes the best investment opportunity is in your own stock.
  • With acquisitions, patience is a virtue…as is occasional boldness.
• They disdained dividends, made disciplined (occasionally large) acquisitions, used leverage selectively, bought back a lot of stock, minimized taxes, ran decentralized organizations, and focused on cash flow over reported net income.
• Each CEO ran decentralized operations but centralized capital allocation activities. They were great delegators but took responsibility for all major capital allocation decisions. They were comfortable to act without input from outside advisers, diverge from peers and ignore institutional imperative.
• Charisma is overrated. Unlike traditional CEOs, they were non-promotional and spent less time on investor relations. They did not provide earning guidance or participate in Wall Street conferences. They also possessed a great deal of humility.
• These executives combined patience with occasional boldness. They were comfortable waiting long periods of time without action until the right opportunity arrived.
• Denominator matters. The focus is always on maximizing value per share (not just total company value). They were careful with how they financed investment projects, opportunistic with share repurchases and avoided overpaying for acquisitions and capital projects.
• Always do the basic operations of math (not to confused with complex models employed by Wall Street). Each CEO always started by asking what the return was on investment opportunities. They focused on key assumptions and relied on conservative parameters. They did not rely on detailed spreadsheets and analyzed major opportunities themselves (as opposed to relying on subordinates, advisers or consultants).
• CEOs have five essential choices for deploying capital. Think of these options collectively as a tool kit. Over the long term, returns for shareholders will be determined largely by the decisions a CEO makes in choosing which tools to use (and which to avoid) among these various options. Stated simply, two companies with identical operating results and different approaches to allocating capital will derive two very different long-term outcomes for shareholders.
  • Investing in existing operations
  • Acquiring other businesses
  • Issuing dividends
  • Paying down debt
  • Repurchasing stock
• Three alternatives for raising capital:
  • Tapping internal cash flow
  • Issuing debt
  • Raising equity
• Characteristics of an outsider CEO:
  • Frugal
  • Humble
  • Analytical
  • Independent
  • Understated
  • Practical
• Furthermore, there are other several characteristics that were common in all 8 CEOs:
  • Devoted to their families
  • Rarely appeared on covers of business publications
  • Not marketers
  • Lack of charisma
  • First-time CEOs, most with very little prior management experience
  • New to their industries
  • Fresh perspective
  • Worked out of barebones offices
  • Actively avoided bankers and other advisers
  • Prefer decentralized organizational structures that self-select for other independent thinkers
  • High debt levels (except for Warren Buffet)
• The Outsider's checklist:
  • Your CEO should lead the process for capital allocation. It should not be delegated to business development or finance personnel.
  • Determine your hurdle rate. This is the minimum acceptable return for investment projects. It should be in reference to a set of opportunities available to the company. It should exceed the blended cost of equity and debt.
  • Calculate the expected returns on all internal and external investment alternatives. Rank them by return and risk. While these estimates do not need to be precise, they should impose conservative assumptions. Higher risk require higher expected returns.
  • Calculate the return for stock repurchases. Returns from acquisitions must exceed this benchmark. Repurchases can destroy value if prices are exorbitant.
  • Focus on after-tax returns and run all transactions by your tax counsel.
  • Determine the acceptable levels for debt and cash. Run your company within this conservative range.
  • Consider a decentralized organizational model. This is the ratio of corporate to total employees relative to your peer group average.
  • Retain capital in the business when you have confidence that you can generate returns that exceed your hurdle rate over time.
  • Consider paying a dividend when you do not have high return investment projects. Dividend decisions can be hard to reverse and sometimes tax inefficient.
  • When company prices are high, it is okay to consider selling your business, divisions and/or stock. It is also okay to close-under performing business units when they can no longer generate returns at acceptable levels.

III. Quotes

• The business of business is a lot of little decisions every day mixed up with a few big decisions.
• The lessons of these iconoclastic CEOs suggest a new, more nuanced conception of the chief executive’s job, with less emphasis placed on charismatic leadership and more on careful deployment of firm resources.
• There is a fundamental humility to decentralization, an admission that headquarters does not have all the answers and that much of the real value is created by local managers in the field.
• Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks. — Warren Buffett
• Success leaves traces. — John Templeton
• You are right not because others agree with you, but because your facts and reasoning are sound. — Benjamin Graham
• If you think of capital allocation more broadly as resource allocation and include the deployment of human resources, you find again that Singleton had a highly differentiated approach. Specifically, he believed in an extreme form of organizational decentralization with a wafer-thin corporate staff at headquarters and operational responsibility and authority concentrated in the general managers of the business units. This was very different from the approach of his peers, who typically had elaborate headquarters staffs replete with vice presidents and MBAs.
• After orbiting the moon, mundane business problems did not faze him.
• There are two basic types of resources that any CEO needs to allocate: financial and human.
• The system in place corrupts you with so much autonomy and authority that you can’t imagine leaving.
• What makes him a leader is precisely that he is able to think things through for himself. — William Deresiewicz
• In contrast, Murphy’s goal was to make his company more valuable. As he said to me, “The goal is not to have the longest train, but to arrive at the station first using the least fuel.”
• Better to pay interest than taxes.
• One of the most important decisions any CEO makes is how he spends his time—specifically, how much time he spends in three essential areas: management of operations, capital allocation, and investor relations.
• Independent thinking is essential to long-term success, and interactions with outside advisers (Wall Street, the press, etc.) can be distracting and time-consuming.
• The heads of many companies are not skilled in capital allocation. Their inadequacy is not surprising. Most bosses rise to the top because they have excelled in an area such as marketing, production, engineering, administration, or sometimes, institutional politics. Once they become CEOs, they now must make capital allocation decisions, a critical job that they may have never tackled and that is not easily mastered. To stretch the point, it’s as if the final step for a highly talented musician was not to perform at Carnegie Hall, but instead, to be named Chairman of the Federal Reserve. — Warren Buffett
• If everyone’s doing them, there must be something wrong with them.
• Leadership is analysis. — Stiritz
• Without it (analysis), chief executives are at the mercy of their bankers and CFOs. — Stiritz
• You shape your houses and then your houses shape you. — Winston Churchill
• What makes him a leader is precisely that he is able to think through things himself. — William Deresiewicz
• Hire well, manage little. — Warren Buffett
• Conglomerates were the Internet stocks of 1960s.
• Luck is the residue of design. — Branch Rickey
• Tax minimization was a central component of Malone's strategy at TCI.