In a book called The Outsiders - Eight Unconventional CEOs and their Radically Rational Blueprint for Success, the author William Thorndike asks the question, who have been the best CEOs ever? And what metric should be used to gauge them?
Thorndike doesn’t choose Jobs or Welch or Gates. Instead, he selects the 8 CEOs whose company’s share price appreciated the most compared to the S&P 500. While Welch grew GE share price at 20% compounded, he did so when the S&P 500 grew at 14% annually. Great CEOs, he argues, grow their business value in headwinds and tailwinds.
Of the 8 chosen CEOs, Warren Buffet of Berkshire Hathaway is the only name I recognized. The other companies included some household names, but most I didn’t recognize: Capital Cities, Teledyne, General Dynamics, TCI, Washington Post, Ralston Purina, General Cinema. Yet, all of these companies witnessed decades of growth and appreciation far above market performance.
Among these 8 CEOs, Thorndike states they have one common attribute. They are iconoclastic.
In the 1986 Berkshire Hathaway annual report, Warren Buffett looked back on his first twenty-five years as a CEO and concluded that the most important and surprising lesson from his career to date was the discovery of a mysterious force, the corporate equivalent of teenage peer pressure, that impelled CEOs to imitate the actions of their peers.
He dubbed this powerful force the institutional imperative and noted that it was nearly ubiquitous, warning that effective CEOs needed to find some way to tune it out…How? They found an antidote in a shared managerial philosophy, a worldview that pervaded their organizations and cultures and drove their operating and capital allocating decisions.
This octuplet of CEOs challenged their companies not necessarily to generate the most revenue, employ the most people, lease the most beautiful offices, acquire the largest competitors, or be on the cover of the most magazines - or in today’s era, raise the most money at the highest valuation - but become the most valuable using the the smallest amount of capital. As Tom Murphy, CEO of Capital Cities said, “The goal is not to have the longest train, but to arrive at the station first using the least fuel.”
And to be the fastest, most efficient train, great CEOs must understand capital allocation. Paraphrasing the author, CEOs have five choices for deploying capital: investing in operations, acquisition, issuing dividends, paying down debt, or repurchasing stock. And three alternatives for raising it: generating cash flow, issuing debt, or raising equity.
Early stage founders will mostly invest in operations and occasionally acquire other companies. The others are quite rare. So the main responsibility of the startup CEO is to determine which operational initiatives to pursue and how much capital to invest behind them. Thorndike argues that each of these iconoclastic CEOs had a disciplined and metrics-driven process for deciding which projects to pursue.
Secondly and equally importantly, the startup CEO must be able to provide the capital the business requires to pursue the CEO’s chosen initiatives.
The third imperative is to hire the best team and operate a decentralized organization where as much of the decision-making as possible is pushed down to managers, who understand their part of the business best.
Understanding how these eight CEOs compounded the value of their companies several hundred times over is fascinating. While the stories of many of the iconic leaders have been told, these quieter stories of masterful management provide just as much, if not more, insight into how to build an enduring and exceptionally valuable company.