The Outsiders

Will Thorndike: Yes, it started as a talk that I gave at a biannual conference that my firm, which is a private equity firm, hosts for the CEOs who run the companies that we're invested in, and it began as a profile of one of the eight CEOs in the book, Henry Singleton, and I had the great fortune to collaborate doing the research on that talk with a very talented second year student at the Harvard Business School, and that process sort of created a template for the other seven profiles in the book.

Rachel Salaman: And what was it that particularly interested you about this subject, to then turn it into a book?

Will Thorndike: Well again, starting with the Singleton project and chapter, Henry Singleton had these extraordinary results in his 28 years running a conglomerate called Teledyne from the early 1960s until the early 1990s, and he dramatically outperformed both the market, measured by the S&P 500, and his peer group. So what was interesting was figuring out the specifics of how he achieved that outperformance, the specific decisions he made and how those differed from the decisions his peers were making.

Rachel Salaman: In doing your research how difficult was it to find out how he made decisions?

Will Thorndike: Well, you know, the research process was pretty intensive, again working with this HBS student, we had access to all of the historic financials for Teledyne, Singleton's company, and then for all of the other 60s era conglomerates that were his peers. So it was a process of going back through 30 years of financial data to look at specific decisions around things like repurchasing stock, raising or paying down debt, the decision to pay or not pay dividends, acquisitions and so forth and so on. So it took some peeling back of the onion, but it was possible to go back and really get some detailed information on key decisions.

Rachel Salaman: And who did you write the book for? Who's the intended audience?

Will Thorndike: Yes, the book is written for CEOs and investors and people who aspire to one or both of those roles.

Rachel Salaman: Now you've talked about one of the CEOs you chose just now, Henry Singleton. How did you choose the eight Outsiders that you profile in the book?

Will Thorndike: Yes, so I was working with these HBS students, I was looking for a very specific pattern, so CEOs who met two criteria. First, they had to outperform the legendary Jack Welch, the long-time CEO of General Electric, in terms of their performance relative to the overall stock market, the S&P 500. So Jack Welch, who was a very, very good, very effective CEO, ran General Electric for 20 years, and he outperformed the S&P over that period in time by 3.3 fold. So all of these CEOs needed to exceed that hurdle, and then, as importantly, you could argue I think even more importantly, they needed to meet a second test, which was they needed to dramatically outperform their peer group. That's really a central idea in the book, I think the analogy is "duplicate bridge," so I'm a beginning bridge player, but there's an advanced form of bridge called "duplicate bridge" in which a group of teams gather in a room and they're dealt the exact same cards in the exact same sequence, so eliminating the role of luck, and then at the end of the evening the team with the highest point total wins, and it's a pretty pure test of skill. And the thesis of this book is that over 20 years, which is the average tenure of the CEOs in this book, all of the players in an industry are dealt very similar hands. So if one player dramatically outperforms their peer group that's worthy of study, and each of these eight met that test and dramatically outperformed their peers and contemporaries.

Rachel Salaman: Now in the subtitle of your book it says that these are eight unconventional CEOs. Are they unconventional in different ways or do they all share the same kind of unconventionality?

Will Thorndike: That's a very good question. So I think one of the key findings in the book was the strength of this pattern across the eight. So each of the eight made very similar decisions, particularly around this area of capital allocation, and those decisions were in each case very different than their peers, but very similar to the other Outsider CEOs. There were, however, different emphases within the group, different things that each of these CEOs might have specialized in. So, for instance, Henry Singleton bought back much more of his stock than anybody else, he bought back 90% of his shares over time. John Malone, the CEO of a cable television company in the United States called PCI, bought more companies, he was more active in acquisitions than the other CEOs. You know, Tom Murphy of Capital Cities/ABC, a large broadcasting company in the United States, ran an even more decentralized organization than the other CEOs. So each of them emphasized different components, but the uniformity of the general template across the group was pretty striking.

Rachel Salaman: Now I thought we could look at a few of the CEOs, not all eight of them, in this interview. Perhaps we could talk a bit more now about Henry Singleton. You've given us briefly his basic background. In the book you talk specifically about his approach to time management and how it was different from most of his peers. Could you elaborate on that?

Will Thorndike: Sure. So Singleton was by training a mathematician and scientist. He held a PhD from MIT, he programmed the first computer at MIT as part of his doctoral thesis earlier in his career. He'd won a medal in the United States, the Lowell Medal that's awarded to the top mathematician in the country, so he's a very high level mathematician and that was his initial training; he did not have an MBA. He relatively late in his career became a CEO in his mid-40s when he founded Teledyne, and he from the beginning had a very iconoclastic approach to managing Teledyne, and one of the primary areas of iconoclasm for him was he refused to spend any excess time with Wall Street analysts and bankers; he felt that that was not a productive use of his time. Similarly he spent very little time with the business media. So the estimates that are pretty common now, that CEOs of publicly traded companies tend to spend up to 20 percent of their time interacting with Wall Street and the business media, and Singleton just refused to allocate that amount of his time to those activities and instead spent it on figuring out how to grow the value of the company shares for shareholders.

Rachel Salaman: I think there's perhaps a lesson there for companies that spend a lot of time, and actually CEOs as well, on things like social media and getting the message out there, when in fact that time might be better spent actually improving the performance of their companies.

Will Thorndike: That's right. There's a great quote from a legendary investor named Benjamin Graham, who was a mentor of Warren Buffett; it's about how, in the short-term, the market is a voting machine. So in the short-term it can thus be influenced by time spent on those activities, interactions with the media, interactions with the Wall Street analyst community, and so forth and so on, but in the long-term the market is a weighing machine. So in the long-term what the market will focus on is the long-term growth and the profitability per share of companies. So this group of CEOs, and Singleton in particular, were less focused on optimizing the voting machine and more focused on optimizing the weighing machine.

Rachel Salaman: Is there anything else in particular that sets Singleton apart from the pack?

Will Thorndike: Yes. So all of these CEOs, one of the common threads across them is that they were active repurchasers of their own stock when it was trading at low prices. So when they thought it was attractively priced in the market they would themselves go in and buy substantial amounts of shares, and on average across the group they tended to buy in over their tenure 30 percent of the outstanding shares, I mean large chunks of the company. Singleton was head and shoulders above anybody else in the book, and over the course of his career he repurchased over 90 percent of Teledyne shares outstanding. Now, in the current environment, share buy-backs are a fairly common tool, but when Singleton was pioneering them in the early 70s through the early to mid-80s they were very new and very controversial, and Wall Street thought that they were a signal of a lack of growth opportunity in the company's core business. When he was aggressively buying in his shares there's all sorts of great media coverage in the "Wall Street Journal" and other business publications in the US, people trying to figure out just exactly why he was doing this and why it probably didn't make sense, but in the long-term obviously the returns generated from those repurchases were sensational.

Rachel Salaman: So you joke in the book that Singleton and the legendary investor, Warren Buffett, who you've mentioned already, you say they could have been separated at birth, and indeed Warren Buffett is perhaps the best-known CEO of your eight Outsiders. So in what ways was he similar to Singleton?

Will Thorndike: Yes. So I think there are a handful of pretty striking similarities, and they range from some of the things we've talked about, so as it relates to investor relations Buffett still spends no time with Wall Street analysts. He provides no earning guidance, he doesn't attend conferences, he spends almost no time on that. Over the last 15 or 20 years he's become a bit of an oracle or a pundit, so he's spent more time in the broader business media, but that's a fairly recent phenomenon over the 45 years he's been running Berkshire. For the vast majority of that time he spent almost no time with the media, so they had a similar approach to their time management as it relates to investor relations, external relations. They both ran highly decentralized operations, so Singleton at Teledyne had 40,000 employees and about 48 people in his corporate headquarters. Berkshire has 250,000 employees, actually slightly more than that, and 23 in their corporate headquarters. So they ran these remarkably decentralized organizations with very few people at corporate, and all of the authority and autonomy driven down to the local business unit levels. Neither of them were dividend payers, Buffett in 45 years has never paid a dividend; Henry Singleton paid a dividend in 1987 for the first time in 26 years as a public company, and that was front-page news in the "Wall Street Journal" at the time. Neither of them split their stock. I mean, Buffett famously… you know, the A-shares are still trading at about $130,000, he's never split those, although he has split the B-shares a little bit in recent years, and Teledyne never split its shares, it was the first, for most of the 70s and 80s it was the highest priced stock on the New York Stock Exchange, it traded in a sort of mid-$100 range, which at the time was unheard of. And for both of them, they recognize the value of insurance businesses as vehicles that allowed them to make investments in a very efficient manner. So there are a whole series of these similarities between the two, and both of them, not coincidentally, have phenomenal returns for their shareholders.

Rachel Salaman: And you include a quote from Buffett in the book, which is "Being a CEO has made me a better investor, and vice versa." What do you think he meant by that?

Will Thorndike: That's interesting. So what Buffett has said in interviews is that if you look at some of his pivotal early acquisitions at Berkshire, so taking the example of See's Candies; so in 1972 Buffett bought a small, dominant but small regional chocolate business, candy business, in California called See's Candies, and he's owned it ever since, and he's grown it enormously and it's been very successful, but he will tell you that the insights he learned around the effectiveness of advertising in consumer products, the importance of shelf space and distribution informed some of the most successful other investment he made on the public market side, in the stock market, over the ensuing 20 years. So those would include the Coca Cola investment, which was obviously the largest and most successful of his career, investments in Gillette and General Foods and a whole range of others; he has a recent investment in Kraft Foods, which would be another example of this, but the insight that he gained as an operating CEO in See's Candies helped him to see the advantages that those businesses had in an entirely different light.

Rachel Salaman: I suppose the lesson there is for CEOs to roll up their sleeves and get involved, and have a look at what their acquisitions are doing and learn from it?

Will Thorndike: That's right, and the flip side of that is that his being an investor gave him advantages for CEO, and what he means by that is that it gave him the background that allowed him to be an effective allocator of capital.

Rachel Salaman: Yes, I was going to ask you about that, because it is a major point in your book. What are your main points about capital allocation?

Will Thorndike: The basic point there is that there are two things that CEOs need to do well to be successful. The first is that they need to run their operations effectively and they need to maximize the long-term profitability of their businesses, and that's sort of the first prerequisite, everything flows from that, and that's what most of the best business books and articles focus on. But there's a second activity that's also very important, I think you can argue over the long-term it's equally important, which is that CEOs also need to be able to deploy or invest the profits from their business, and in doing that they basically have a handful of decisions or options available to them; they can invest in their existing operations, to grow them; they can acquire other companies; they can pay dividends; they can repurchase their shares; or they can pay down debt, and that's it. So over long periods of time the decisions CEOs make about how to allocate capital across those options, which levers to pull, have a disproportionately large effect on the long-term value of their shares. So a simple way to think about it is if you take two companies that today have the same levels of revenue and profitability but different approaches to capital allocation, they'll end up with dramatically different results for shareholders, share prices 10 and 20 years from now. So that process of capital allocation turns out to be very, very important, and most CEOs don't come to the CEO position with much experience at it.

Rachel Salaman: And it's something that all eight of your CEOs in this book have in common, isn't it, their approach to capital allocation?

Will Thorndike: It is. Yes, it is.

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Rachel Salaman: You mentioned Jack Welch earlier, the former CEO of General Electric, who is not included in this book. I thought it was interesting that in the book you put his management approach up against Warren Buffett's in a really interesting table. I wondered if you could pull out the main points that that table reveals?

Will Thorndike: Sure. First of all Jack Welch was a very effective CEO and Buffett in particular has great admiration for his abilities, but he had a very specific approach to managing GE and it featured lots of activity. So he was constantly introducing new strategic initiatives, whether it was total quality management or Six Sigma, constantly shifting and changing managers at different business units, spent a lot of time interacting with Wall Street and the business media, had a corporate headquarters with lots of talented people, thousands of them, a famous training program for managers. So there was a very distinctive approach and he's outlined that, he's written a couple of memoires and books of management advice, that's all been outlined, and the contrast with Buffett's style could not be starker. So Buffett runs this highly decentralized organization, he never changes managers, his whole strategy with acquisitions is centered around finding excellent CEOs at the business unit level and letting them continue to run their businesses with as little interference from corporate as possible. He almost never travels, his calendar is famously open, he schedules as few meetings and calls as possible, he spends as much of his time as he can reading and thinking, and he never conducts off-site strategy sessions or summit meetings and that sort of thing. So Buffett's approach is almost Zen-like in its calm relative to the frenetic activity that was characteristic of Welch's tenure, so two very different approaches.

Rachel Salaman: So how do you think people who are in less lofty management positions might learn from Warren Buffett's successful approach? So let's say a department head in a regional office of a national company, could they learn something from Warren Buffett?

Will Thorndike: Absolutely. I think a couple of the lessons that are highly transferable across different industries and different sized organizations include the importance in evaluating any business decision that involves resources, whether it's hiring a new salesperson, opening a branch office, adding to inventory; just taking the time to calculate the returns from that decision using conservative assumptions. The value of doing that across decisions, large and small, over long periods of time is enormously disproportionate. So just the discipline of doing that, and the analyzes don't need to be terribly detailed, honestly, they just need to be focused on the key assumptions, and then you only go forward with things that make sense from a returns perspective and you don't go forward with things that can't be defended on that basis. There's also I think a lesson around the value of giving autonomy and authority to local managers and to avoiding the creep of bureaucracy in organizations, that's a very important lesson, and I think that around the topic of acquisitions, the lesson across these that comes from these eight CEOs, is that those are hard to do well. You know, if you look at, depending on what study you choose, somewhere between two-thirds and three-quarters of all acquisitions destroy value for shareholders, for owners. So the pattern across these eight was they tended to do a smaller number of acquisitions, when they were truly compelling then they were willing to make very large bets. So they weren't constantly in the market, acquiring things, with the exception of John Malone, whose situation in the nascent cable industry in the US in the 1970s and 1980s was a little different, but generally across this group that was the pattern. I think there are lessons to be learned from that piece in particular.

Rachel Salaman: Another CEO from your list of eight that people may have heard of is the only woman on the list, who's Katharine Graham of the "Washington Post." Why is she included?

Will Thorndike: She's included because she comfortably exceeded the two benchmarks we talked about earlier, so her returns were dramatically better than Jack Welch's over her tenure at the "Washington Post," and she absolutely crushed her peer group, the other publically traded newspaper companies in the United States. So what's fascinating about her story is that all of these CEOs, all eight, were first time CEOs; it's one of the interesting findings in the book. Only two had MBAs, so that's interesting as well. Of the eight, the one with the least business experience by a wide margin is Katharine Graham, because the way she ended up as CEO of the Washington Post Company is that her husband, who was brilliant but a manic depressive, Philip Graham, committed suicide, tragically, in 1963, and at age 46 Katharine Graham, who had not worked in almost 20 years, she'd been focused on raising her family and a variety of other activities, became the CEO, the only female CEO of a Fortune 500 sized company. So she had almost no direct experience, no direct managerial experience, and so her results, which were extraordinary, are a really interesting case of someone coming into a role with little preparation and applying these principles successfully. For her one of the keys was very early on identifying a mentor who could be her key advisor and teacher really, sort of sensei, and in her case that was Warren Buffett, who in the early 70s accumulated a very large position in the Washington Post Company stock and Katharine Graham brought him onto her board.

Rachel Salaman: People put so much store by experience, don't they, but perhaps they should realize that a willingness to observe and learn might be just as important as experience?

Will Thorndike: That's right. I think, Rachel, that's a key point, that there's enormous value to fresh eyes and perspectives, and that experience obviously is, and can be, very valuable, but it can also come with conventional thinking. You know, someone who's grown up in an industry, has succeeded and progressed through an organization within an industry, will have been immersed to a degree in the conventions of that industry, and it makes it I think harder for them to think independently sometimes.

Rachel Salaman: So what are the main things people can learn from Katharine Graham's time at the "Washington Post"

Will Thorndike: Yes, let's see. So if you look at Katharine Graham's time at the "Washington Post," the company went public, that's when we can begin to track its results in the early 1970s, and then she stepped down as Chairman in the early 1990s, so she ran it for a little over 20 years, and at the very beginning and the very end of that tenure there were severe recessions; there was the early to mid-70s oil shock related recession, which was the most severe in the United States up until the most recent post-Lehman recession, and then there was the Gulf War recession of the early 90s, and for most of the period in between there was general prosperity in the economy and in the newspaper business. For most of that time in the middle there was a lot of acquisition activity in newspaper and media businesses, there was almost a feeding frenzy, and Katharine Graham, if you look at her activity, she was most active in terms of buying other companies and buying her own stock in the very early part of her tenure, during that first 74/75 recession, and at the very end of her tenure, in the early 1990s and the Gulf War recession. She was very active buying and acquiring businesses, related businesses generally, actually, outside of newspapers, and then she bought in 40 percent of her stock. In that middle period, when there was great prosperity in the industry and lots of acquisitions, she stood on the sidelines and was relatively inactive, and that combination of decisions, both the decision to buy her stock and other companies during the recessions, during the times of distress, and the decision to be a wallflower during the great party of the 1980s in the media industry, that created enormous value for her shareholders.

Rachel Salaman: In the subtitle of your book you call these CEO's methods "a radically rational blueprint for success." So if it's so rational why don't more CEOs use these approaches?

Will Thorndike: Yes, that's a good question. So I think it's simple to describe what it is that these CEOs did that created value, but that is not the same thing as being easy to implement or do. Again, Warren Buffett, on the 25th anniversary of taking over Berkshire Hathaway, in the annual report he laid out the key lessons he'd learned in his first 25 years as a CEO, and the first of those, the most important one, was the presence of something he called "the institutional imperative," and the institutional imperative, the way he described it, was an invisible force that impelled players in an industry to imitate each other, so the corporate equivalent of teenage peer pressure. So it's that force that makes it hard to think independently and unconventionally and to repurchase your own shares when no one else is doing that, to buy companies when everyone is concerned that the economy is spiraling downwards, or to not buy companies when everyone else is out acquiring at a very rapid rate. So it's very hard for all of the reasons, the behavioral finance profession had done a good job of explaining, it's hard to be iconoclastic, to be idiosyncratic.

Rachel Salaman: I suppose it's what, in the old days, they used to call "strength of character," isn't it? You know, believing in yourself and believing that you know what's best.

Will Thorndike: That's right. I think it relates to being able to step back and think for yourself. All of these CEOs did not delegate decision making around capital allocation to their finance department or business development personnel, they were actively involved in driving and directing those conversations and those decisions, and they went forward when they had conviction and they stayed on the sidelines when they didn't.

Rachel Salaman: At the end of the book you include a useful section that pulls out the lessons from all of these CEO stories, and we've talked about some of these already, of course, but are there any lessons that we haven't touched on yet?

Will Thorndike: We've talked a little bit about the approach to acquisitions, which I think is an important one. I think some of the common traits, the lessons that roll down, are the importance of always calculating returns, always doing the math, which we've talked about, and the focus on per share values. So in the long-term what matters for shareholders is the increase in value per share, not the growth in overall revenue or profitability, and so there is I think an inherent bias in human beings and particularly in CEOs that growth, getting bigger, is generally a good thing. I think one of the lessons from this book is that is not always the case, that if your objective is to grow value for shareholders often the right thing to do is to shrink, to repurchase shares or to exit businesses that are challenged strategically or to spin off businesses that aren't related to the core business, and their willingness to do that has created a lot of value over a long period of time, both for these eight CEOs and more generally across the market. Then lastly I think that one of the messages in the book is that independence of mind sort of trumps raw charisma when it comes to CEOs, so the ability to be charismatic and to have a bold strategic vision. In the long run I think the example of these eight would show that you'd much rather have someone who was independent minded and rational and logical in their decision making than a bold visionary who is spending a lot of time at the Davos Conference.

Rachel Salaman: Will Thorndike, thanks very much for joining us.

Will Thorndike: Thank you, Rachel.

Rachel Salaman: The name of Will's book again is "The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success."

I'll be back in a few weeks with another Expert Interview. Until then, goodbye.