I have just read William N. Thorndike’s brilliant The Outsiders, which identifies the traits and techniques of the CEOs that ran (or run) some of the best-managed companies of the last fifty years. A few of these names I had heard of (Buffett, John Malone, and Katharine Graham), and some I hadn’t (Bill Anders, Bill Stiritz, and Dick Smith), but all of the companies under these CEOs thrashed the S&P by a wide margin, and they did it by focusing on the following:
- Setting and keeping to a hurdle rate for investment projects
- Comparing expected investment returns to potential buyback return and choosing accordingly
- Minimising taxes relentlessly
- Determining and keeping to conservative cash and debt levels
- Decentralising to the extreme and running corporate HQ on a skeletal staff, or even just the barest bone (if possible)
- Divesting, when prices are too high to acquire
- Focusing on cash flow, not EPS or revenue
- Remaining sceptical of dividends, (tax inefficiency)
The Insiders
It is surprising to me how few of the world’s greatest companies would meet these criteria. The Coca-Colas and Johnson & Johnsons of this world would fail due to their focus on steadily increasing dividends and enormously bureaucratic structures (HR and Legal departments especially). Although us small shareholders love a dividend dropping onto the doormat (metaphorically these days), to an Outsider this often signifies an inferior use of capital and a tax inefficient one at that.
Rolls Royce, one of GB PLC’s bluest of blue chips, would fail due to its CEO’s “minimal awareness of the returns on capital his acquisitions have generated” (according to legendary American investment fund Sequoia in its Q4 letter). They point out that John Rishton’s diversifications have done nothing more than dilute the exceptional 20% returns on invested capital earned by Rolls’ core business (making jet engines).
Tesco, Britain’s biggest grocer, owned a fleet of corporate jets (at least four). This is most certainly not Outsider-style behaviour. Buffett famously dispensed with his (‘The Indefensible’) and they do tend to symbolise exactly the sort of egregious corporate lavishness a well-run company should not indulge in.
The Original Outsiders
So where are they now, these master allocators of capital and confirmed frugalists? Well, most are retired, but not all; here is the rundown:
- Tom Murphy (Capital Cities Broadcasting)
Now 89, he serves on the boards of Berkshire Hathaway, Johnson & Johnson, and IBM amongst others. - Harry Singleton (Teledyne)
The Texan engineer and brilliant conglomerateer passed on in 1999. - Bill Anders (General Dynamics)
The astronaut and businessman (yes, astronaut) retired from General Dynamics in 1994. - John Malone (TCI)
This man’s career is more complicated than a bucket of buttery spaghetti, but it is still going strong and he is currently Chairman of Liberty Global and the DirectTV Group. - Katharine Graham (The Washington Post Company)
The Publisher and bringer-down of Nixon (Watergate) passed on in 2001. The family enterprise is now Graham Holdings, which having sold the Washing Post Co. to Jeff Bezos, also recently completed an exchange of assets that brought to an end Berkshire’s long involvement with the company. - Bill Stiritz (Ralston Purina)
The octogenarian now runs Post Holdings, a 2.5 billion dollar company that operates in the consumer goods sector, which in this case means cereals, protein bars, pasta etc. Post has underperformed the S&P over three years and has not paid a dividend. It is moving away from breakfast cereals and into active nutrition and might be one to watch. - Dick Smith (General Cinema)
Smith stepped-down as CEO of Harcourt General (a publisher taken over by General Cinema) in 1999. Harcourt General was, in turn, taken over by Reed Elsevier in 2001. What shadows we are, what shadows we chase… - Warren Buffett (Berkshire Hathaway)
Buffett at 84 seems better than ever, still happily painting his canvas. Berkshire Hathaway is now a $350 billion dollar company and does not pay a dividend.
The New Outsiders? Perhaps worth considering in another post.
Disclosure: Long BRK.b.
Disclaimer: This post is not a recommendation to either buy or sell. Please consult your investment advisor.