We recently finished reading Will Thorndike’s “The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success.” The book profiles eight corporate CEOs who have produced stock price performance during their tenure that handily beat both the broad market and their respective peer groups.
So who are these supernova corporate executives? Thorndike demonstrates that despite a barrage of publicly surrounding certain “celebrity CEOs,” some of the best corporate leaders are not household names, but rather are “humble, unassuming, and often frugal outsiders.” The profiled outsiders include Tom Murphy (Capital Cities Broadcasting), Henry Singleton (Teledyne), Bill Anders (General Dynamics), John Malone (TCI), Katherine Graham (The Washington Post), Berry Stiritz (Raulston Purina), Dick Smith (General Cinema) and Warren Buffett (Berkshire Hathaway). As the graph below depicts, “the outsiders” approach to business leadership as been incredibly powerful:
Interestingly, while many of the outsiders had notably different backgrounds, they demonstrated strikingly similar approaches to corporate governance. At the heart of their success was a focus on capital allocation. As Warren Buffett noted, “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 have become CEOs, they must now make capital allocation decisions, a critical job that they 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.”
Thorndike elaborates on the outsiders approach:
“Their specific actions stemmed from a broader, shared mindset and added up to nothing less than a new model for CEO success, one centered on the optimal management of firm resources. Although the outsider CEOs were an extraordinarily talented group, their advantage relative to their peers was one of temperament, not intellect. Fundamentally, they believed that what mattered was clear-eyed decision making, and in their cultures they emphasized the seemingly old-fashioned virtues of frugality and patience, independence and (occasional) boldness, rationality and logic.“
In sharp contrast to many conventional CEOs, the outsiders “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.”
Thorndike’s observations surrounding executive leadership as primarily an asset allocation role, not necessarily an operational role, deeply resonates with our natural proclivities. However, we also acknowledge that “the outsider” approach is not foolproof. The risks associated with placing large leveraged bets, and the difficulties inherent in pursuing a path with little social proof are very real, and not to be underestimated. As we work to refine our own corporate identity, we suspect that we’ll revisit the lessons captured in Thorndike’s book many times in the years ahead.