The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success

by William N. Thorndike Jr.

Welch was both an active manager and a master corporate ambassador. He was legendarily peripatetic, traveling constantly to visit GE’s far-flung operations, tirelessly grading managers and shuffling them between business units, and developing companywide strategic initiatives with exotic-sounding names like “Six Sigma” and “TQM.”

He has also written two books of management advice with typically combative titles like Straight from the Gut.

Henry Singleton

His success did not stem from Teledyne’s owning any unique, rapidly growing businesses. Rather, much of what distinguished Singleton from his peers lay in his mastery of the critical but somewhat mysterious field of capital allocation—the process of deciding how to deploy the firm’s resources to earn the best possible return for shareholders.

So let’s spend a minute explaining what capital allocation is and why it’s so important and why so few CEOs are really good at it. . . . CEOs need to do two things well to be successful: run their operations efficiently and deploy the cash generated by those operations. Most CEOs (and the management books they write or read) focus on managing operations, which is undeniably important. Singleton, in contrast, gave most of his attention to the latter task.

Basically, CEOs have five essential choices for deploying capital—investing in existing operations, acquiring other businesses, issuing dividends, paying down debt, or repurchasing stock—and three alternatives for raising it—...

If you think of capital allocation more broadly as resource allocation and include the deployment of human resources, you find again that Singleton had a highly differentiated approach. Specifically, he believed in an extreme form of organizational decentralization with a wafer-thin corporate staff at headquarters and operational responsibility and authority concentrated in the general managers of the business units.

These managerial standouts, the ones profiled in this book, ran companies in both growing and declining markets, in industries as diverse as manufacturing, media, defense, consumer products, and financial services. Their companies ranged widely in terms of size and maturity. None had hot, easily repeatable retail concepts or intellectual property advantages versus their peers, and yet they hugely outperformed them.

The residents of Singletonville, our outsider CEOs, also shared an interesting set of personal characteristics: They were generally frugal (often legendarily so) and humble, analytical, and understated.

These geniuses are the Isaac Newtons of business, struck apple-like by enormously powerful ideas that they proceed to execute with maniacal focus and determination.

It is impossible to produce superior performance unless you do something different. —John Templeton

This group of happily married, middle-aged men (and one woman) led seemingly unexciting, balanced, quietly philanthropic lives, yet in their business lives they were neither conventional nor complacent. They were positive deviants, and they were deeply iconoclastic.

Like Singleton, these CEOs consistently made very different decisions than their peers did. They were not, however, blindly contrarian. Theirs was an intelligent iconoclasm informed by careful analysis and often expressed in unusual financial metrics that were distinctly different from industry or Wall Street conventions.

Foxes, however, also have many attractive qualities, including an ability to make connections across fields and to innovate, and the CEOs in this book were definite foxes. They had familiarity with other companies and industries and disciplines, and this ranginess translated into new perspectives, which in turn helped them to develop new approaches that eventually translated into exceptional results.

Each ran a highly decentralized organization; made at least one very large acquisition; developed unusual, cash flow–based metrics; and bought back a significant amount of stock. None paid meaningful dividends or provided Wall Street guidance. All received the same combination of derision, wonder, and skepticism from their peers and the business press. All also enjoyed eye-popping, credulity-straining performance over very long tenures (twenty-plus years on average).

The times, like now, were so uncertain and scary that most managers sat on their hands, but for all the outsider CEOs it was among the most active periods of their careers—every single one was engaged in either a significant share repurchase program or a series of large acquisitions (or in the case of Tom Murphy, both). As a group, they were, in the words of Warren Buffett, very “greedy” while their peers were deeply “fearful.”

As a result, the outsiders (who often had complicated balance sheets, active acquisition programs, and high debt levels) believed the key to long-term value creation was to optimize free cash flow, and this emphasis on cash informed all aspects of how they ran their companies—from the way they paid for acquisitions and managed their balance sheets to their accounting policies and compensation systems.

When Murphy became the CEO of Capital Cities in 1966, CBS, run by the legendary Bill Paley, was the dominant media business in the country, with TV and radio stations in the country’s largest markets, the top-rated broadcast network, and valuable publishing and music properties. In contrast, at that time, Capital Cities had five TV stations and four radio stations, all in smaller markets. CBS’s market capitalization was sixteen times the size of Capital Cities’. By the time Murphy sold his company to Disney thirty years later, however, Capital Cities was three times as valuable as CBS. In other words, the rowboat had won. Decisively.

The formula that allowed Murphy to overtake Paley’s QE2 was deceptively simple: focus on industries with attractive economic characteristics, selectively use leverage to buy occasional large properties, improve operations, pay down debt, and repeat.

Murphy’s approach to the roll-up was different. He moved slowly, developed real operational expertise, and focused on a small number of large acquisitions that he knew to be high-probability bets. Under Murphy, Capital Cities combined excellence in both operations and capital allocation to an unusual degree. As Murphy told me, “The business of business is a lot of little decisions every day mixed up with a few big decisions.”

He exemplifies the central role played in this book by exceptionally strong COOs whose close oversight of operations allowed their CEO partners to focus on longer-term strategic and capital allocation issues.

There are two basic types of resources that any CEO needs to allocate: financial and human.

The latter is, however, also critically important, and here again the outsider CEOs shared an unconventional approach, one that emphasized flat organizations and dehydrated corporate staffs.

The hallmark of the company’s culture—extraordinary autonomy for operating managers—was stated succinctly in a single paragraph on the inside cover of every Capital Cities annual report: “Decentralization is the cornerstone of our philosophy. Our goal is to hire the best people we can and give them the responsibility and authority they need to perform their jobs. All decisions are made at the local level. . . . We expect our managers . . . to be forever cost conscious and to recognize and exploit sales potential.”

The company’s guiding human resource philosophy, repeated ad infinitum by Murphy, was to “hire the best people you can and leave them alone.” As Burke told me, the company’s extreme decentralized approach “kept both costs and rancor down.”

As Burke said in describing his early years in Albany, “Murphy delegates to the point of anarchy.”

The company’s hiring practices were equally unconventional. With no prior broadcasting experience themselves before joining Capital Cities, Murphy and Burke shared a clear preference for intelligence, ability, and drive over direct industry experience.

“The system in place corrupts you with so much autonomy and authority that you can’t imagine leaving.”

“I’ve worked at a lot of corporate events over the years, but Capital Cities was the only company where you couldn’t tell who the bosses were.”

As he once told Financial World magazine, “If anyone wants to follow Teledyne, they should get used to the fact that our quarterly earnings will jiggle. Our accounting is set to maximize cash flow, not reported earnings.”2 Not a quote you’re likely to hear from the typical Wall Street–focused Fortune 500 CEO today.

One of the most important decisions any CEO makes is how he spends his time—specifically, how much time he spends in three essential areas: management of operations, capital allocation, and investor relations.

As he told Financial World magazine in 1978, “I don’t reserve any day-to-day responsibilities for myself, so I don’t get into any particular rut. I do not define my job in any rigid terms but in terms of having the freedom to do whatever seems to be in the best interests of the company at any time.”

“My only plan is to keep coming to work. . . . I like to steer the boat each day rather than plan ahead way into the future.”

The other approach, the one favored by the CEOs in this book and pioneered by Singleton, is quite a bit bolder. This approach features less frequent and much larger repurchases timed to coincide with low stock prices—typically made within very short periods of time, often via tender offers, and occasionally funded with debt. Singleton, who employed this approach no fewer than eight times, disdained the “straw,” preferring instead a “suction hose.”

Anders believed industry players needed to move aggressively to either shrink their businesses or grow through acquisition.

1. Anders, borrowing a page from his former GE colleague Welch, believed General Dynamics should only be in businesses where it had the number one or number two market position. (This was strikingly similar to the Powell Doctrine of the same era, which called for the United States to only enter military conflicts that it could win decisively.)

The company would exit commodity businesses where returns were unacceptably low. 3. It would stick to businesses it knew well. Specifically, it would be wary of commercial businesses—long an elusive, holy grail–like source of new profits for defense companies.

Anders moved aggressively to correct this focus and instill an emphasis on shareholders and on metrics like return on equity.

“Cash return on capital became the key metric within the company and was always on our minds.”3 This was a first for the entire industry, which had historically had a myopic focus on revenue growth and new product development.

The key to these phenomenal returns was the company’s highly effective (if unusual by defense industry standards) approach to allocating its human and capital resources. In the area of operations, Anders and his successors focused on two primary priorities: decentralizing the organization and aligning management compensation with shareholders’ interests.

Operating managers were held responsible—in Chabraja’s words, “severely accountable”—for hitting their budgets and were left alone if they did so.

As with Anders’s sale of the company’s F-16 business, Chabraja’s equity sale underscores the important point that the best capital allocators are practical, opportunistic, and flexible.

Indeed, Malone’s entire future career can be thought of as an extended exercise in hyperefficient value engineering, in maximizing output in the form of shareholder value and minimizing noise from other sources, including taxes, overhead, and regulations.

Terms and concepts such as EBITDA (earnings before interest, taxes, depreciation, and amortization) were first introduced into the business lexicon by Malone.

As Malone sought to achieve scale by growing his subscriber base, three primary sources of capital were available to him in addition to TCI’s robust operating cash flow: debt, equity, and asset sales. His use of each of these sources was distinctive.

Establishing and maintaining an unconventional [approach] requires . . . frequently appearing downright imprudent in the eyes of conventional wisdom.

On the broader topic of resource allocation, one of Graham’s defining managerial traits was a unique ability to identify and attract talent to her company and her board.

Ralston Purina was fairly typical of this group. In the early 1980s, Ralston was a Fortune 100 company with a long history in agricultural feed products. During the 1970s under CEO Hal Dean, the company had followed the same path as its peers, taking the enormous cash flow provided by its traditional feed businesses and engaging in a diversification program that left it with a melange of operating divisions,

“bullseye.” Within days, that candidate, Bill Stiritz, had the job.

He immediately began to remove the underpinnings of his predecessor’s strategy, and his first moves involved actively divesting businesses that did not meet his criteria for profitability and returns.