This book describes eight CEOs and concludes that the best CEOs are “master capital allocators”.
Why are they called outsiders? Because, they are not founders of these companies. They were also first-time CEOs, and most of them were new to the industry. So, who are these eight brilliant CEOs?
CEOs mentioned in the book
- Tom Murphy of Capital Cities Broadcasting
- Henry Singleton of Teledyne
- Bill Anders of General Dynamics
- John Malone of TCI
- Katharine Graham of Washington Post Company
- Bill Stiritz of Ralston Purina
- Dick Smith of General Cinema
- Warren Buffet of Berkshire Hathaway
Let me summarise my key takeaways from the book:
What makes one an outstanding CEO
- Allocate capital in the most efficient way, only to projects that earn reasonable returns above cost of capital. Capital allocation decision was never delegated.
- Had knowledge not just about their respective industries, but also about others. This enabled them to make connections across fields and innovate.
- Operations were highly decentralised. High autonomy to business heads, except for capital allocation.
- Focus on free cash flows, and not accounting earnings
- Focus on profitable growth, and not on expanding business empire by acquisitions to increase sales
- Long-term perspective on running the business, even if it means short-term fall in earnings. They thought like investors/ owners, and not like employees who were given the task of running companies. They focused on maximising long-term value per share. During the term they held office, these CEOs outperformed peers and S&P 500 by a wide margin.
- Be ready to sell under-performing businesses.
- Opportunistically buying businesses. Remain on the sidelines during market euphoria.
- Opportunistically buying back shares (when share prices were low). Unlike many, these CEOs never used buybacks to prop up the share price.
- They hated dividends, whenever it was tax-inefficient.
- Focus on running operations frugally. Never had flashy headquarters. Had very less employees in HQ.
- Never diversify into unrelated businesses. Just focus on core operations.
- Rarely communicated with equity analysts / bankers and media. Never gave earnings guidance.
Warren Buffet, in fact, recommended the book in his letter to shareholders in 2012. The success stories described in the book look amazing in hindsight. But, can we spot them prospectively? The author thinks so, and has given a checklist, taking cues from Atul Gawande’s Checklist Manifesto.
“Outsiders” is definitely a highly engaging read. I highly recommend it.