Book Summary: The Outsiders: Eight Unconventional CEOs, by William N. Thorndike
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- 1-Page Summary
- Chapter 1: Tom Murphy and Capital Cities Broadcasting
- Chapter 2: Henry Singleton and Teledyne
- Chapter 3: Bill Anders and General Dynamics
- Chapter 4: John Malone and TCI
- Chapter 5: Katharine Graham and the Washington Post
- Chapter 6: Bill Stiritz and Ralston Purina
- Chapter 7: Dick Smith and General Cinema
- Chapter 8: Warren Buffett and Berkshire Hathaway
- Checklist for Outsiders
- Conclusion: Relevance of the Lessons
1-Page Book Summary of The Outsiders: Eight Unconventional CEOs
The author, a founder of an investment firm, studied companies that outperformed their peers and the larger market over extended periods of time. He ended with eight CEOs and companies with standout performance in the latter half of the 20th century. Looking deeper into their management practices, he found virtually identical patterns to their management style that were unorthodox but directly caused their outsized results. These CEOs and their management practices are the subject of The Outsiders.
The author found uncannily strong patterns among the outsider CEOs that distinguished them from typical CEOs. This concerned three areas:
- Their approach to capital allocation
- Their management practices
- Their personality traits
In all three areas, outsider CEOs departed from common wisdom about how to operate a company and behave as a CEO.
This departure from conventional thinking makes logical sense. By doing the same things as everyone else, you’re restricted to average performance. You need to do unorthodox things to get unorthodox results.
In general, CEOs have to do two things to succeed:
- Run operations efficiently to generate cash.
- Deploy the cash productively.
Most CEOs and most management books focus on the former. In contrast, Henry Singleton of Teledyne and the other outsider CEOs in the book focused on the latter. Rather than seeing themselves as company operators, the outsider CEOs saw themselves as investors and capital allocators first and foremost.
Despite the importance of capital allocation, little training is devoted to it. Business schools don’t feature capital allocation in curricula, and CEOs are promoted from functional roles (like product or marketing) without strong experience with investment in the business. Outsider CEOs saw it as their core job.
How do outsider CEOs deploy capital differently?
As a baseline, businesses can deploy cash in five basic ways—invest in the existing business, acquire other businesses, pay dividends to shareholders, pay down debt, or buy back stock. They can also raise money by issuing debt or raising equity. These are all tools in capital allocation, and the specific usage of these tools determines a company’s performance.
How to decide between these options? Universally, outsider CEOs were rational—they calculated the return on each investment project, then made the most profitable choice. They ignored conventional wisdom and what their peers were doing.
Compared to their peers, outsider CEOs tended to allocate capital differently:
- They aggressively bought back company stock when it was cheap (for instance, when price-to-earnings ratio was in single digits). This would increase earnings per share and, consequently, price per share.
- They rarely issued shares to raise funds, preferring to avoid dilution.
- They rarely issued dividends, seeing this as a tax-inefficient way of rewarding shareholders. Dividends are essentially taxed twice, first as corporate tax on earnings, then as personal tax on capital gains.
- They were judicious about acquisitions. They didn’t acquire companies out of empire-building ego, with little care for cost. Instead, they bought companies only when it was a good deal; many had hard rules for what to buy, for instance based on a maximum P/E ratio or projected rate of return.
- This didn’t mean timidness—outsider CEOs were capable of making large, bet-the-company acquisitions when they felt it was a high-probability bet. Every CEO in the book made an acquisition worth at least 20% of their company’s enterprise value.
Outsider CEOs thought about their companies as investors and made cool, rational decisions based on what provided the best returns. Ego and a desire to build empires were never part of the decision.
In contrast, typical CEOs issued shares to fund costly acquisitions, preferred not to buy back stock or raise debt, and paid dividends frequently. In the conglomerate era, they aggressively acquired companies believing they could improve profits through scale or synergies; this was often a mirage that never materialized. All these activities tend to result in lower performance by the author’s favorite metric—price-per-share.
Note that the optimal choices vary from company to company, from industry to industry, and between different time periods. The point is not to blindly mirror what the outsider CEOs did—it’s to examine all of the tools in your toolkit, and choose the best one based on rational analysis.
Beyond capital allocation decisions, the outsider CEOs ran their businesses in unorthodox ways.
In their management of people and business units, outsider CEOs were relentlessly decentralized. They hired entrepreneurial operators for their business lines and left them alone. They kept a skeleton staff at headquarters, which reduced overhead and anxiety about office politics—the way to get ahead in the company was to outperform in your business unit.
- Teledyne employed over 40,000 people but had fewer than 50 at its headquarters.
- Warren Buffett of Berkshire Hathaway rarely expects managers of his portfolio companies to contact him unless they have questions.
In contrast, typical companies tend to bulk up headquarters, featuring layers of vice presidents and MBAs. Not only does this increase overhead, but it also encourages office politics.
Decentralization also came in the form of spin-offs and tracking stocks. Instead of being buried within a large conglomerate, spin-offs gave individual business units more autonomy and better-aligned incentives with management.
To outsider CEOs, cash was vital to the business, since it could be redeployed in their capital allocation strategies. Therefore, outsider CEOs cut operating expenses to a minimum. They avoided typical corporate perks like private cars and airline seats and kept headcount lean and efficient. When they acquired companies, they instilled this lean culture into the new company.
Focus on Cash Flow
Outsider CEOs resisted focusing on reported earnings, which present a muddled reflection of company performance because of capital expenditures, acquisitions, and other accounting artifacts. Instead, they focused on cash flow and then-innovative metrics like EBITDA (earnings before interest, taxes, depreciation, and amortization). This affected their operations deeply, from how they financed acquisitions to their compensation schemes for employees.
This relentless focus on cash flow also allowed them to avoid counterproductive distractions, such as costly acquisitions for the sake of growth that would later prove unprofitable.
Focus on Shareholder Returns
Typical CEOs let their egos get involved in strategic decisions. They enjoy empire building, growing revenue and headcount without concern for profit or long-term outcomes.
In contrast, outsider CEOs focused on shareholder value as their top priority. Having low egos, they didn’t hesitate to shrink the size of the company if it meant better returns to shareholders. For instance, Henry Singleton of Teledyne actively spun out businesses, believing they would independently perform better than under one large umbrella. This reduced the size of Teledyne but improved total shareholder performance.
Minimal Interaction with Investors
Outsider CEOs saw investor relations as a waste of time. They spent little time talking to Wall Street and managing expectations. Instead, they preferred to spend their time on the business. Most of the companies were situated outside the financial Northeast, in places like Omaha and Denver, where they would be insulated from the conventional wisdom of Wall Street.
No Particular Stroke of Luck
Outsider CEOs outperformed because of how they managed their businesses, not because of idiosyncratic strokes of luck, like intellectual property advantages or groundbreaking new ideas. Other than management, they didn’t have any discernible advantages over their peers, and so their outsized performance can be attributed directly to their management and capital allocation strategies.
In contrast, some high-profile CEOs like Steve Jobs or Mark Zuckerberg had highly unusual circumstances. They had powerful new ideas taking advantage of technology trends, and they executed the ideas relentlessly. These situations are unlike those facing most business managers, and so lessons of a Steve Jobs or Zuckerberg are rarely generalizable to the business community at large.
Strong COOs as Partners
Among outsider CEOs, there was a pattern of having COOs who focused on day-to-day operations, while the CEO focused on long-term strategy and capital allocation. In essence, the COO generated the free cash flow, and the CEO spent it.
- Capital Cities Broadcasting: Tom Murphy was CEO and the capital allocator. Dan Burke was COO and managed their media stations.
- Teledyne: Henry Singleton was CEO and the capital allocator. George Roberts was President and enforced results at its portfolio companies.
- Washington Post: Katharine Graham was CEO. Dick Simmons was COO and demanded operational excellence from its newspaper and media properties
Outsider CEOs tended to be strategically flexible, changing company strategy as the circumstances required. Rather than adhering to a preset strategy, outsider CEOs evaluated all possible options at each point in time, then chose the option that was best.
For example, General Dynamics aggressively sold business lines like Cessna during one phase of the company’s turnaround, then decades later reversed course and acquired large businesses like Gulfstream when the environment had changed.
Likewise, at one time, share buybacks might be the best use of cash; in another time, using high-priced stock to buy companies might be preferable.
The outsider CEOs tended to negotiate directly instead of through a layer of advisers.
- When running Ralston Purina, Stiritz made his acquisitions through direct contact with the sellers, avoiding auctions whenever he could.
- Warren Buffett avoids auctions for businesses....
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The Outsiders: Eight Unconventional CEOs Summary Introduction
If you’re asked who the greatest CEO of the last century was, one name might naturally come to mind: Jack Welch. During his 20-year tenure as CEO of GE from 1981 to 2001, GE stock had a compounded annual return of 20.9 percent. $1 invested in GE stock in 1981 would have turned into $48 20 years later.
As a result, Jack Welch has been lionized as the classical power-CEO. He was a famously active manager, diving deep into business units and traveling among GE’s locations. He communicated regularly with Wall Street and focused intently on managing GE’s stock price. He earned a public persona as a charismatic high-performance manager, gracing the covers of business magazines and authoring management books like Winning.
But is Jack Welch really the greatest CEO of the century? According to the author of The Outsiders, no—not even close.
There are two common issues with assessing the performance of CEOs like Jack Welch:
- The macroeconomic context greatly affects stock price. Therefore, the performance of the CEO needs to be compared relative to the rest of the market—namely, returns of peer companies and of the broader market over the same period of time. If a company can outperform its peers consistently, this suggests a real difference in managerial abilities rather than in the external environment. Jack Welch ran GE during one of the greatest extended bull runs in US stock market history, during which the S&P had a 14% annual return. In this context, Welch’s performance, while still impressive, is less distinguished.
- People disagree on the metric by which CEOs are compared. Often, the business press emphasizes vanity metrics like growth in revenue or earnings, or total headcount. The author argues this would be like fixating on the tallest NBA players or the heaviest football linebackers. In reality, **only one metric in business really matters—the company’s per share...
The Outsiders: Eight Unconventional CEOs Summary Chapter 1: Tom Murphy and Capital Cities Broadcasting
Capital Cities Broadcasting was a media company owning television stations, radio stations, and print publications. Outsider CEO Tom Murphy was CEO from 1966 to 1996.
In 1966, the market capitalization of Capital Cities was 6% that of CBS, the dominant media business in the country.
By 1996, when Capital Cities sold to Disney, it had rocketed past CBS and was now worth three times as much as CBS. It had acquired media giant ABC, which was dubbed by the press as akin to a “minnow swallowing a whale.” Relative to CBS, Capital Cities had grown nearly 50 times as much in the same period.
The strategy was simple and repeatable: buy media properties with attractive economics, improve operations to generate more cash, and use the cash to buy more media properties. Capital Cities had a management playbook that made it very effective at increasing revenue and cutting costs at its newly acquired companies. This created a “perpetual motion machine for returns.”
From 1966 to 1996, Capital Cities showed a 19.9% annual return rate, compared to the 10.1% for the S&P 500 and 13.2% return for leading media companies.
$1 invested at the beginning would have been worth $204 by 1996. This outperformed the S&P by 16.7 times, and his peers by almost 4 times.
Tom Murphy served in World War II and graduated from Harvard Business School in 1949. He worked as a product manager in consumer packaged goods for Lever Brothers until 1954, when his father’s friend Frank Smith told him about a TV station in Albany he’d purchased from bankruptcy. With no broadcasting experience, Murphy left to run the station day-to-day, with Smith running the business from downtown New York.
Murphy’s strategy was to improve programming to raise revenue and manage costs to reduce expenses. After a few years of losses, Murphy turned the station into a profitable cash generator. In 1957, they bought a second station in North Carolina, then a third one in Providence, and continuously from then on.
When Smith died in 1966, Murphy became CEO of Capital Cities. Murphy in...
The Outsiders: Eight Unconventional CEOs Summary Chapter 2: Henry Singleton and Teledyne
Teledyne is an industrial conglomerate founded in 1960, currently involved in businesses ranging from aerospace electronics to digital imaging.
Founder Henry Singleton served as CEO from 1960 to 1986, taking it through three phases with very different activities:
- Rapid expansion of the conglomerate through acquisitions
- Aggressively buying back shares with the company’s free cash flow
- Spinning out its subsidiaries when performance began stagnating
From 1963 to 1990, Teledyne showed a 20.4% annual return rate, compared to 11.6% for the S&P 500 and 11.6% for major conglomerates.
$1 invested at the beginning would have been worth $181 by 1990. This outperformed the S&P by 12 times, and his peers by nearly 9 times.
Henry Singleton was born in 1916. He attended MIT for college and received a PhD in electrical engineering. He won first place in the Putnam Math Competition and was nearly a chess grandmaster—clearly a smart guy.
After graduating, he became a research engineer at a series of aviation companies. At Litton Industries, he led a business group that grew to $80 million in revenue and became the company’s largest division.
In 1960, at age 43, he left Litton to co-found Teledyne with a colleague. They began by acquiring three electronics companies and using this platform to win a large naval contract. Within a year, they became a public company.
In this era of conglomerates, companies expanded quickly through acquisitions. Since private equity didn’t yet exist, there was less competition for acquisitions, and acquired companies often traded for lower P/E multiples than their buyers had in public markets. As a result, conglomerates had a virtuous cycle for acquisitions—buying cheap companies raised short-term profits, which increased stock prices, which in turn was used to buy more companies.
Singleton took advantage of these dynamics. In 8 years ending in 1969, he purchased 130 companies in a wide range of industries, including specialty metals and insurance. Most companies were purchased using Teledyne...
The Outsiders: Eight Unconventional CEOs Summary Chapter 3: Bill Anders and General Dynamics
General Dynamics is an aerospace and defense corporation. After the end of the Cold War, it and many other defense companies faced a large contraction of spending as US national defense priorities shifted. Incoming CEO Bill Anders successfully led a turnaround that made General Dynamics the industry’s profit leader, instilling fundamentals that continue to this day.
From 1991 to 2008, General Dynamics showed a 23.3% annual return rate, compared to 8.9% for the S&P 500 and 17.6% for major conglomerates.
$1 invested at the beginning would have been worth $30 by 2008. This outperformed the S&P by 6.7 times, and its peers by 1.8 times.
In 1989, the Berlin Wall fell, and with it fell the US defense industry’s business model. Accustomed to selling large weapons systems such as missiles and bombers, the defense industry now found its wares obsolete amidst new national priorities. Within 6 months, the price of leading defense companies had fallen 40%.
General Dynamics was one of the worst affected companies. In 1991, it had $10 billion of revenue but negative cash flow, as well as $600 million of debt, and thus had a market capitalization of just $1 billion. That year, Bill Anders joined as CEO.
Bill Anders: 1991-1994
Anders was an air force fighter pilot and astronaut who held the rank of major general at NASA and was well-respected at the Pentagon. At 45, he left government for the private sector, first for General Electric and then for conglomerate Textron. An independent thinker and blunt communicator, he was a misfit for bureaucratic cultures.
In 1989, he was made an offer to join General Dynamics, first as vice-chairman for one year and then to rise to CEO. He spent the year studying the industry with fresh eyes, where he came upon his strategic insight: during the Cold War, defense companies had become bloated with excess capacity. Now that much of their wares weren’t needed, defense companies had two options: 1) shrink down dramatically to retain margins, or 2) acquire businesses to grow.
In turn, **his strategy...
The Outsiders: Eight Unconventional CEOs Summary Chapter 4: John Malone and TCI
Tele-Communications Inc. (TCI) was a cable television provider founded in 1958. It grew to be the largest cable company in the country, owning both cable providers and content programming. It was acquired by AT&T in 1999 for $43.5 billion in stock and, through a series of transactions, would ultimately become Comcast.
As CEO from 1972 to 1991, John Malone pursued a virtuous cycle strategy—grow subscriber count through acquisitions of cable providers, which would give scale to negotiate lower fees with content providers, which would make acquisitions of cable companies further cheaper.
From 1973 to 1998, Teledyne showed a 30.3% annual return rate, compared to 14.3% for the S&P 500 and 20.4% for public cable companies.
$1 invested at the beginning would have been worth $900 by 1998. This outperformed the S&P by 40 times, and his peers by 5 times.
John Malone was born in 1941 and earned bachelor’s degrees from Yale in economics and electrical engineering, as well as graduate degrees in operations research from Johns Hopkins. He worked at Bell Labs, studying financial strategies in monopoly markets. Unhappy with the bureaucratic culture at AT&T, he joined McKinsey as a consultant.
While at McKinsey, he studied the cable industry, and he immediately saw an attractive opportunity:
- The cable industry had stable subscriber bases, which led to predictable revenue and thus accurate forecasting and strategic planning.
- The nature of the business allowed tax maneuvers to reduce taxes on cash flow. Essentially, they could use debt to build new cable systems and depreciate the costs. The depreciation charges and interest expenses were both tax-deductible, which would decrease net income and thus taxes. A cable company with healthy cash flow could thus pay little in taxes; furthermore, it could repeat this cycle indefinitely, continuously taking on debt to acquire more cable systems.
- The cable industry was growing extremely quickly, with subscribers growing 20-fold over a matter of years in the late 1960s and early...
The Outsiders: Eight Unconventional CEOs Summary Chapter 5: Katharine Graham and the Washington Post
The Washington Post was owned by Eugene Meyer, whose daughter was Katharine Graham. Her husband, Philip Graham, was hired by Meyer to lead the Washington Post from 1946 to 1963. However, Philip committed suicide in 1963, and Katharine was expected to take over management.
An inexperienced executive, Katharine hadn’t worked for 20 years when she took the CEO role. But through wise decisions around both editorial and business, the help of strong executives, and a key advisor by the name of Warren Buffett, she led the Post to be the most successful newspaper company of its class.
From 1971 to 1993, the Washington Post Company showed a 22.3% annual return rate, compared to 7.4% for the S&P 500 and 12.4% for public newspapers.
$1 invested at the beginning would have been worth $89 by the end. This outperformed the S&P by 18 times, and her peers by six times.
In 1963, Katharine Graham became CEO of the Washington Post. At the time, the Post had grown to include Newsweek magazine and three TV stations. She spent a few years learning the ropes.
In 1967, she made an unconventional staffing choice—she replaced her veteran editor-in-chief with a young firebrand, Ben Bradlee. Changing from a veteran to a newcomer was an odd choice, but Graham believed she needed someone with a better grasp of the 1960s zeitgeist. Bradlee’s energy would prove vital in raising the profile of the Post’s newsroom in its stories.
In 1971 and 1972, the Post clashed with the Nixon administration over stories critical of the presidency. This included the breakthrough investigation of the Watergate scandal. Despite the Nixon administration’s threats to impede the Post with regulatory scrutiny, Graham pushed forward and published the stories. These elevated the stature of the Washington Post, putting it on equal footing with the New York Times.
In 1971, Graham took the Washington Post Company public to raise money for acquisitions. She started by buying the Trenton Times, which was a #2 paper in a competitive market and showed mediocre performance. This...
The Outsiders: Eight Unconventional CEOs Summary Chapter 6: Bill Stiritz and Ralston Purina
Ralston Purina was a consumer packaged goods company producing commercial animal feed, consumer pet food, and human foods. When Stiritz joined as CEO in 1981, Ralston had a muddled focus (having purchased a hockey team and ski resort) and a stagnant stock price. Stiritz revitalized the company with discipline, divesting unprofitable business units and acquiring new genuinely synergistic businesses. In 2001, Ralston merged with Nestle in a transaction worth $10.4 billion.
From 1981 to 2001, Ralston showed a 20.0% annual return rate, compared to 14.7% for the S&P 500 and 17.7% for peer companies.
$1 invested at the beginning would have been worth $38 by 2001. This outperformed the S&P by 2.5 times, and his peers by 50%.
In the 20th century, consumer packaged goods companies like Heinz and Kellogg largely moved together as a pack. They were considered stable blue-chip stocks, paying out dividends and resisting recessions. During the 1960s and 1970s, they acquired aggressively in pursuit of synergy and vertical integration, ending up in industries like restaurants and agriculture.
Ralston Purina had done the same. With its core in agricultural feed, it had ended up with broad interests in a fast food chain (Jack in the Box), crop farms, a hockey team (the St. Louis Blues), and a ski resort. In 1980, when CEO Hal Dean stepped down, its stock price was the same as a decade prior.
During the board’s search for CEO, an internal executive Bill Stiritz submitted an unsolicited plan for revitalizing the company—sell businesses that were performing poorly, and reorganize the company around its high-margin consumer brands. The board director read the plan and knew it was the right direction. Stiritz got the job.
Stiritz had spent his early career at Pillsbury as a field rep and at an advertising agency. This would provide on-the-ground experience in both distribution and marketing. In 1964, at 30 years old, he joined Ralston Purina in the consumer products division (pet foods and cereals), considered one of the weakest divisions...
The Outsiders: Eight Unconventional CEOs Summary Chapter 7: Dick Smith and General Cinema
General Cinema was a movie theater company founded in 1922 by Phillip Smith, who expanded drive-in theaters throughout New England and the Midwest. When he died in 1962, his son Dick Smith took over as CEO. Dick further expanded the company’s theater locations, then diversified into unrelated businesses such as beverage bottling and retail. While diversifying acquisitions often end in failure, Smith executed them with finesse, leading to fantastic performance when the company’s divisions were sold at premium prices in the 2000s.
From 1962 to 2005, General Cinema (and its spinoffs) showed a 16.1% annual return rate, compared to 9% for the S&P 500 and 9.8% for GE.
$1 invested at the beginning would have been worth $684 by the end. This outperformed the S&P by 15.8 times, and GE by 11.4 times.
In 1962, when Dick Smith was 37 years old, he took over as CEO of General Cinema. He had been working in the family business after graduating from college and World War II.
Movie theaters had strong economics:
- It had negative working capital, since moviegoers paid instantly but movie studios were paid on 90 day terms.
- It had low capital requirements—a theater took little to maintain once it was built.
Smith’s first move was to expand the company’s theater footprint. He innovated in three ways:
- He expanded into suburban shopping malls, realizing that demographic trends were pointing to population growth in these areas.
- He expanded quickly by leasing land to develop theaters on, instead of purchasing the land under it. He realized that the theaters’ strong, predictable cash flow would make this financially viable, and it reduced the upfront investment needed for new locations.
- He increased the number of screens per theater to increase audiences and concession sales.
Diversification into Beverages
By the late 1960s, he figured that theater growth would likely plateau at some point, so he began looking to diversify into other businesses. His ultimate goal was to have three legs in the company, each a...
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The Outsiders: Eight Unconventional CEOs Summary Chapter 8: Warren Buffett and Berkshire Hathaway
Saving the best for last, the author ends with Warren Buffett’s staggering returns over the 50-plus year history of Berkshire Hathaway. Starting with buying a textile company in 1965, Buffett grew Berkshire Hathaway into one of the world’s largest companies.
Over the years, Buffett excelled in all manners of investments—in both public and private companies, with ownership of both minority and total stakes. He famously made use of insurance float to fund investments in higher-return companies, held a small basket of companies for very long periods of time, and acted aggressively when everyone else was ducking for fear.
From 1965 to 2011, Berkshire Hathaway showed a 20.7% annual return rate, compared to 9.3% for the S&P 500.
$1 invested at the beginning would have been worth $6,265 by 2011. This outperformed the S&P by a staggering 100 times.
Born in 1930 in Omaha, Nebraska, Warren Buffett was the son of a stockbroker and the grandson of a grocery store owner. His early entrepreneurial activities included paper routes and reselling soft drinks.
When he was 19, he read The Intelligent Investor by Benjamin Graham, which converted him into value investing—buying companies that were cheap relative to their intrinsic value (which was based on the company’s balance sheet). He began investing the profits from his ventures, worth about $10,000 in today’s dollars.
When pursuing his MBA, he chose to go to Columbia, where Graham was a professor. After graduating, Buffett asked Graham for a job at his investment firm, but Graham declined. Buffett returned to Omaha to work as a stock broker, where he continued researching investments. Here he happened on GEICO, an insurance company that featured competitive advantages and a great value for the price. He invested most of his money in GEICO.
In 1954, Graham finally offered Buffett a job, and Buffett continued researching underpriced public companies, which were often cheap, low-quality companies (Buffett called them “cigar butts”). When Graham closed his firm in 1956 to focus on other...
The Outsiders: Eight Unconventional CEOs Summary Checklist for Outsiders
Here’s a 10-step checklist for outsiders:
- The CEO should lead capital allocation decisions, not delegate them to advisers or employees.
- Determine the hurdle rate—the minimum return necessary to approve a project. The hurdle rate should generally exceed the cost of capital (usually in the midteens or higher).
- For all investment options available, calculate returns and risk profiles. Higher-risk projects should have higher returns to compensate.
- Keep it simple—understand the key assumptions of the project that drive returns. Be conservative.
- Be cautious about calling a project “strategic”—it often means “low return.”
- Make sure you calculate the return for stock buybacks. This should be the hurdle for all acquisitions.
- Make sure you calculate after-tax returns, since different projects may have different tax properties. Consult tax counsel.
- Determine acceptable cash and...
The Outsiders: Eight Unconventional CEOs Summary Conclusion: Relevance of the Lessons
We’ve covered 8 standout CEOs and their companies, mostly in the latter half of the 20th century. But how applicable are the lessons here? Are they still relevant in the modern day? And are the lessons relevant for small businesses or managers? The author argues yes to both.
The author argues the principles in this book are timeless, studying two examples: Pre-Paid Legal, and Exxon.
Modern Example: Pre-Paid Legal
Pre-Paid Legal (known today as LegalShield) provides legal insurance—for a fixed annual premium, customers have their unexpected legal costs covered, including expenses for litigation, wills, and trusts.
Growing quickly through the 1990s, its revenue flattened. Despite the lack of revenue growth, its stock price grew by 4 times. How did Pre-Paid Legal achieve this? As you might expect, the answer came in its capital allocation decisions:
- They optimized free cash flow.
- Recognizing that the industry was mature and further investment would likely have low returns, the CEO instead repurchased shares aggressively, buying back over 50% of shares.
The company sold for $650 million to private equity in 2011.
Modern Example: Exxon
From 1977 to 2011, ExxonMobil showed a 15% annual return for investors, exceeding the overall market and competitors. The cause, once again, was intelligent capital allocation:
- ExxonMobil maintained discipline around requiring a minimum 20% return on projects. This meant some contrarian decisions, such as pausing unprofitable production during low energy prices, even when Wall Street analysts complained it reduced short-term financials.
- They repurchase shares when it seems economically profitable, buying back 25% of shares in a recent 5-year period.
- They made acquisitions patiently and opportunistically. For over a decade, Exxon hadn’t made a significant acquisition, until it purchased Mobil in 1999, a transaction worth half its enterprise value.
- They enforced a company culture of frugality, returns, and low ego.
- The CEO Tillerson rarely interacted with Wall...
Shortform Exercise: Consider Your Outsider Management
Reflect on the patterns found in outsider CEOs and how they might apply to your management.
What are some of the most surprising habits of outsider CEOs that you don't do yourself or you don't see commonly done?