Unconventional CEOs: William Thorndike’s book “The Outsiders”

“An outstanding book about CEOs who excelled at capital allocation.” This endorsement from Warren Buffett places “The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success” by William Thorndike at the top of his recommended reading list. At its core, “The Outsiders” doesn’t just offer another perspective on leadership; it challenges conventional wisdom. Thorndike skillfully profiles eight unconventional CEOs who, against the tide of traditional management practices, have outperformed their peers and achieved unprecedented shareholder returns.

Most CEOs are groomed through operational roles; their proficiency is in managing business operations. However, Thorndike posits that a Top CEO’s most crucial role is not operational prowess, but capital allocation. This notion forms the backbone of “The Outsiders.”

Imagine two CEOs. CEO A is a bit like the captain of a ship, always busy, always at the helm, ensuring everything runs smoothly. CEO B, on the other hand, is more like a savvy investor, constantly thinking about where to best place his chips for the biggest win.

Most CEOs we hear about are like CEO A – experts in running the daily show. But Thorndike introduces us to some real-life CEO Bs. These leaders believed their top job wasn’t just overseeing daily tasks but, more importantly, deciding where to invest the company’s money for best long-term value.

Capital allocation refers to how a CEO utilizes the company’s resources – whether to reinvest in existing business, make acquisitions, pay down debt, buy back shares, or pay out dividends. While it might seem like a boardroom exercise, it’s the cornerstone of a company’s long-term success.

The book brings eight CEOs into focus:

• Tom Murphy, Capital Cities Broadcasting

• Henry Singleton, Teledyne

• Bill Anders, General Dynamics

• John Malone, TCI

• Katharine Graham, Washington Post

• Bill Stiritz, Ralston Purina

• Dick Smith, General Cinema

• Warren Buffett, Berkshire Hathaway

These characters, with their unique strategies, returned on average 20.1% annually to shareholders during their respective tenures. This compared to 12% for the S&P 500 during the same timeframes. A small annual difference you might think, but compounding it over years resulted in them beating the S&P 500 by over twentyfold.

The timeframes vary for each CEO, as it is based on the individual durations of their leadership at their respective companies. The span of years covered in the book ranges from the 1960s to early 2000s.

But how did they produce this outperformance you might ask?

They preferred a decentralized approach to operations, pushing decision-making down to the frontline. Instead of a top-down approach where decisions were made from corporate headquarters, they empowered those at the grassroots level. This meant the people at the frontline, who interacted with the products, services, and most importantly, the customers, were given the power to make decisions. It’s like letting the fisherman decide the best way to catch fish rather than a boardroom of executives who might’ve never held a fishing rod!

While operations were decentralized, capital decisions were made centrally. All major money decisions – where to invest, which venture to fund, which assets to buy or sell – were made at the top. This ensured resources were efficiently allocated, often contrary to prevailing trends.

These CEOs weren’t hesitant to buy back shares when they believed their stock was undervalued or make strategic acquisitions, often funded through debt when interest rates were favorable.

Just as any wise old tree wouldn’t shed all its leaves in spring, these CEOs rarely gave away their profits as dividends. They retained the earnings, saving it for reinvestments, acquisitions, and buybacks.

These CEOs tended to shun the limelight. They rarely, if ever, took calls from analysts or appeared on magazine covers and TV Interviews. They were independent thinkers, often going against the grain of Wall Street’s beliefs.

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One of the most striking examples from the book is Henry Singleton of Teledyne. While conglomerates were in vogue and CEOs were busy making headlines, Singleton quietly built Teledyne with clever acquisitions.

As involvement in the semiconductor and aerospace industry was regarded as “innovative” during the 1960s, Teledynes stock price soared – trading over 60 times earnings at times. Leading us to one of Singleton’s key traits – his ability to switch tactics. He used this overvalued stock to make around 130 acquisitions, basically buying dollar bills for pennies. As the market turned bearish in the early 70s however, he halted the acquisitions, shifting focus to operational efficiency.

As Teledyne’s stock became undervalued, Singleton seized the opportunity to buy back over 90% of the company’s shares, driving an unprecedented increase in earnings per share. This nimbleness in capital allocation strategy underscores Thorndike’s central argument.

No discussion of capital allocation can bypass Warren Buffett. But Thorndike’s portrayal strips away the folklore, focusing on the concrete decisions that made Berkshire Hathaway a powerhouse.

Take, for instance, premium chocolate maker See’s Candies. At first glance, a candy company might seem a sweet but simple purchase. But for Buffett, this wasn’t about satisfying his sweet tooth. See’s had a strong brand loyalty, meaning it could raise prices without losing customers. It also required minimal additional investments to generate profits, allowing for high returns on capital. “Price is what you pay, value is what you get,” as Buffett stated to the readers of the Berkshire Hathaway letters when talking about the See’s acquisition. And it has provided great value to say the least. As of Buffett’s 2021 shareholder letter, he noted that the company had produced pre-tax earnings of over $2 billion since being acquired, against the initial investment of $25 million.

Then there’s GEICO. To the uninitiated, buying an insurance company might seem purely about diving into premiums and policies. Buffett saw beyond however. He wanted to access the “float” – the money insurance companies hold temporarily before paying out claims. This float was like a loan, but better; not only did Berkshire not have to pay interest on it, they also earned from it. Buffett utilized this float to fund further investments, turning the very mechanics of the insurance business into a cash-generating powerhouse.

Is the Outsider approach still relevant? The rapid evolution of technology, shifting consumer preferences, and the ever-looming specter of new market entrants are reshaping the corporate landscape at an unprecedented rate. Can CEOs, then, afford to be as detached from daily operations as many of Thorndike’s Outsiders did?

While the exact strategies might differ, the core principle remains relevant: CEOs need to prioritize capital allocation, whether in the 20th century or today. With industries being disrupted and traditional business models challenged, it’s the allocation of capital to the most promising, high-return operations that will dictate long-term success. As Warren Buffett says: “Over time, the skill with which a company’s managers allocate capital has an enormous impact on the enterprise’s value.”

“The Outsiders” offers a refreshing perspective, making a compelling case for why capital allocation should be at the heart of a CEOs primary focus. In a corporate world that often celebrates flamboyant leaders and headline-grabbing moves, Thorndike’s work is a reminder that it’s the quiet, deliberate, and often contrarian decisions that yield the most significant results. In a landscape brimming with opportunities and pitfalls, discerning where to place one’s bets is what separates the great CEOs from the merely good ones.

• Book, Thorndike: The Outsiders

• Podcast, Invest Like The Best: William Thorndike

• Podcast, Be Better Off Show: William Thorndike