The Outsiders – Eight conventional CEOs and their radically rational blueprint for success
I finished listening to the book – “The Outsiders – Eight conventional CEOs and their radically rational blueprint for success“. Why this book? Supposedly Warren Buffet recommended this book in his shareholders letter. The book talks about 8 CEOs who had a radically different capital allocation strategy.
My concern with such books is that for every successful CEO with radically different capital allocation method, I am sure there will be one who would have failed. So we could possibly be glorifying success.
Another concern was that they were about CEOs from a different era and I didn’t even know the names of most of the companies they were talking about (except Warren Buffet). Well, this is not really a concern. What I meant is that I couldn’t connect much with these experiences.
They CEOs and their company were:
- Tom Murphy from Capital Cities Broadcasting
- Henry Singleton from Teledyne
- Bill Anders from General Dynamics
- John Malone from TCI
- Katherine Graham from The Washington Post Company
- Bill Stiritiz from Ralston Purina
- Dick Smith from General Cinema
- Warren Buffet from Berkshire Hathaway.
Since most of these names are unfamiliar, I had to read this article to recollect the names 🙂
Finally, I also feel that single book which talks about a particular company or a business leader is much better than this case study model. While it takes long time to read, I feel I am able to put myself in the feet of the leader and understand the problem at hand. This book looks like a bunch of case studies in MBA class and I couldn’t grasp the gravity of the situation they were facing.
Having said that, this book is very unique. It is trying to quantify CEO success. Their emphasis on shareholder value maximization is radically different than typical assessment such as charisma, vision etc.
Here is what I could connect with leaders in this book:
- Independent thinking: All 8 leaders didn’t follow the herd. They did the analysis independently and were acting with their conviction. It requires courage to be different.
- Data & Analysis: Power of data and analysis is often missing even in a data driven world like ours. It is very convenient to rely on gut feelings and these leaders put extra effort to use data.
- Capital Allocation: I didn’t realize that capital allocation is in itself an art and an valuable tool for leaders of the organization. Good to see multiple types of capital allocation strategies talked about in the book. Obviously share repurchases were most talked about. CEO toolkits include:
- Invest in existing operations
- Acquisition of other businesses
- Issuing dividend
- Paying down debt
- Share repurchase
- Joint ventures
- (This was done by raising capital by issuing debt, raising equity or using internal cash flow)
- Focus on Cash flow: While the focus on Cash flow has been rightly emphasized I am genuinely curious if any of the Silicon Valley Unicorns would ever be considered as “managed well” on cash flows.
- Process oriented: I did like the fact that having a thought process approach was followed by most of them. For example, in of the firms (I don’t remember which one), there was a clear methodology that they wouldn’t invest in projects where the RoI is less than 15%.
- Hands off Operations: While these CEOs take on the thinking role of deploying the capital, they were comfortable handing off operations and execution by building a great decentralized organization.
The checklist mentioned in the end of the book is as follows:
- Allocation process should be CEO led and not outsourced to finance or business development
- Determine Hurdle rate – minimum acceptable rate for any investments (mid-teens or higher)
- Calculate returns for all internal and external options and rank them by returns & risks
- Calculate the return for stock repurchases; Ensure that investment / acquisition returns are better this
- Focus on after tax returns (have a tax counsel)
- Determine acceptable cash and debt levels and run the company within them
- Decentralized org model – Ratio of corporate headquarters employees to whole company
- Retain capital in the business only if you can get returns higher than hurdle rate
- If no high return projects, consider dividends; However dividends are tax inefficient and difficult to revert decision
- If stock prices are high, it is ok to sell businesses or stock