William Thorndike, Jr.’s book, The Outsiders: Eight Unconventional CEOs and their Radically Rational Blueprint for Success, has been making the rounds at Burgundy. It has received high praise in the industry, from hedge fund manager Bill Ackman, Peyto CEO Darren Gee, and (perhaps unsurprisingly) Warren Buffett himself. The subject matter is all there in the subtitle; Thorndike examines eight outstanding CEOs from the past 50 years in an attempt to decode the secret to their companies’ superior long-term returns. They were evaluated relative to their peers and notably Jack Welch, CEO of General Electric. The spotlight was on:
- Tom Murphy – Capital Cities Broadcasting
- Henry Singleton – Teledyne
- Bill Anders – General Dynamics
- John Malone – TCI
- Katharine Graham – The Washington Post
- Bill Stiritz – Ralston Purina
- Dick Smith – General Cinema
- Warren Buffett – Berkshire Hathaway
Thorndike identifies some common themes among these individuals’ leadership styles. Most striking to me is the similarity between their management styles and the characteristics that we seek, as long-term investors, in high-quality companies.
Much is made of these CEOs’ independent thought and critical analysis. With examples from Murphy, Malone, and Stiritz, they approached acquisitions or sales with simple and conservative metrics, a focus on key assumptions or thesis, and very little reliance on advice from third parties. They were highly selective about the projects they might pursue. As Charlie Munger is quoted regarding the process at Berkshire Hathaway, “We don’t try to do acquisitions, we wait for no-brainers.”
Many of these executives were ruthlessly efficient with their time, and structured their companies to allow themselves to focus on their priority as CEO: capital allocation. Singleton, Murphy and Buffett ran highly decentralized businesses. They relied on remarkable Chief Operating Officers or managers at their subsidiaries to maximize profit margins from current operations. The resulting cash flows could then be redeployed in other high-return opportunities at the discretion of the CEO, creating a virtuous cycle. Even the structure of Berkshire’s Board of Directors (a relatively small group with personal liability, few incentives and a lot of personal capital invested) is exemplary in aligning management with shareholders.
With much math and many a graph on relative performance throughout, Thorndike ends with a concise summary of the traits of these outsider CEOs – fundamentally, they acted primarily as private investors. They dedicated the bulk of their time to analyzing their businesses, making independent capital allocation decisions and ultimately growing value per share (often supported by a rationale of opportunistic share repurchases). At Burgundy, these characteristics merit respect and we look for them when analyzing management teams. They were patient, contrarian and independent, applying a discipline focused on long-term returns. These are principles we follow in our research process. We tune out the noise and stick to conservative estimates that govern our buy and sell disciplines, waiting patiently for the right moment to act decisively.