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

by William N. Thorndike Jr.

Stiritz proceeded to sell other noncore businesses, including the company’s soybean operations and miscellaneous restaurant and food service operations, leaving Ralston as a pure branded products company.

To rectify this and to minimize taxes, Stiritz became an early user of spin-offs. In a spin-off, a business unit is transferred from the parent company into a new corporate entity. Shareholders in the parent company are given equivalent pro rata ownership in the new company and can make their own decisions about whether to hold or sell these shares. Importantly, spin-offs highlight the value of smaller business units, allow for better alignment of management incentives, and, critically, defer capital gains taxes.

When asked to summarize what made Stiritz different, Mauboussin told me, “Effective capital allocation . . . requires a certain temperament. To be successful you have to think like an investor, dispassionately and probabilistically, with a certain coolness. Stiritz had that mindset.”

Stiritz was the pioneer among consumer packaged goods CEOs in the use of debt. This was heresy in an industry that had long been characterized by exceptionally conservative financial management. Stiritz, however, saw that the prudent use of leverage could enhance shareholders’ returns significantly. He believed that businesses with predictable cash flows should employ debt to enhance shareholder returns, and he made active use of leverage to finance stock repurchases and acquisitions, including his two largest, Energizer and Continental. Ralston consistently maintained an industry-high average debt–to–cash flow ratio during his tenure, as figure 6-2 shows.

Stiritz believed that Ralston should only pursue opportunities that presented compelling returns under conservative assumptions, and he disdained the false precision of detailed financial models, focusing instead on a handful of key variables: market growth, competition, potential operating improvements, and, always, cash generation. As he told me, “I really only cared about the key assumptions going into the model.

Stiritz was fiercely independent, and actively disdained the advice of outside advisers. He believed that charisma was overrated as a managerial attribute and that analytical skill was a critical prerequisite for a CEO and the key to independent thinking: “Without it, chief executives are at the mercy of their bankers and CFOs.” Stiritz observed that many CEOs came from functional areas (legal, marketing, manufacturing, sales) where this sort of analytical ability was not required. Without it, he believed they were severely handicapped. His counsel was simple: “Leadership is analysis.”

He was well known for showing up alone to important due diligence meetings or negotiations where the other side of the table was crowded with bankers and lawyers. Stiritz relished this unorthodox approach. A then junior banker at Goldman Sachs told me of a late-night due diligence session during the RJR Nabisco sale process when Stiritz came to a conference room at the Goldman offices alone, armed only with a yellow legal pad, and proceeded to walk through the key operating assumptions one by one before making a final bid and going to bed. He actively enjoyed the investment process and, after selling Ralston, vigorously managed an investment partnership consisting primarily of his own capital.

He was always a fox-like sponge for new thinking regardless of its origin. John McMillin, a longtime industry analyst, once wrote, “Some people are innovators and some people borrow ideas from others. Stiritz is both (and that’s meant as a compliment).”8 He consciously carved out blocks of time in his schedule to wrestle with the key issues in the business alone, without distraction, whether on a Florida beach or in his home office in St. Louis.

The business world is strewn with the wreckage of companies that tried unsuccessfully to purchase businesses outside of their industry. Such diversifying acquisitions are notoriously difficult to execute (think Time Warner and AOL), and yet Smith, a relatively inexperienced nepotism beneficiary, became a master of them.

pioneered the use of lease financing to build new theaters, dramatically reducing up-front investment. This innovation allowed Smith to grow General Cinema’s theater circuit rapidly with minimal capital investment.

When I met with Smith in his office, he showed me the 1962 annual report, his first as CEO, in which he refers repeatedly to cash earnings (defined as net earnings plus depreciation) as the key metric in evaluating company performance, not net income. This may well be the first use in American business parlance of that now standard term.

These otherworldly returns had their origin in that aging New England textile company, which today has a market capitalization of $140 billion and virtually the same number of shares. Buffett bought his first share of Berkshire for $7; today it trades for over $120,000 a share. How, from such an unlikely starting point, Buffett effected this remarkable transition and how his background as an investor shaped his unique approach to managing Berkshire is a compelling story.

It is hard to overstate the significance of this change. Buffet was switching at midcareer from a proven, lucrative investment approach that focused on the balance sheet and tangible assets, to an entirely different one that looked to the future and emphasized the income statement and hard-to-quantify assets like brand names and market share. To determine margin of safety, Buffett relied now on discounted cash flows and private market values instead of Graham’s beloved net working capital calculation. It was not unlike Bob Dylan’s controversial and roughly contemporaneous switch from acoustic to electric guitar.

Buffett’s exceptional results derived from an idiosyncratic approach in three critical and interrelated areas: capital generation, capital allocation, and management of operations.

In both insurance and investing, Buffett believes the key to longterm success is “temperament,” a willingness to be “fearful when others are greedy and greedy when they are fearful.”

As Buffett said when he finally closed Berkshire’s textile business in 1985, “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”6

Buffett’s approach to managing Berkshire’s stock investments has been distinguished by two primary characteristics: a high degree of concentration and extremely long holding periods. In each of these areas, his thinking is unconventional.

The other distinguishing characteristic of Buffett’s approach to portfolio management is extraordinarily long holding periods. He has held his current top five stock positions (with the exception of IBM, which was purchased in 2011) for over twenty years on average. This compares with an average holding period of less than one year for the typical mutual fund. This translates into an exceptionally low level of investment activity, characterized by Buffett as “inactivity bordering on sloth.”

The majority of Berkshire’s major public market investments originated in some sort of industry or company crisis that obscured the value of a strong underlying business.

The second pattern is timing investments to coincide with significant management or strategy changes.

He summarizes this approach to management as “hire well, manage little” and believes this extreme form of decentralization increases the overall efficiency of the organization by reducing overhead and releasing entrepreneurial energy.13

Berkshire’s many iconoclastic policies all share the objective of selecting for the best people and businesses and reducing the significant financial and human costs of churn,

In Daniel Kahneman’s excellent recent book, Thinking, Fast and Slow, he lays out a model for human decision making that evolved from his thirty years of Nobel Prize–winning research.1 Kahneman’s paradigm features two distinct systems. System 1 is the purely instinctive pattern recognition mode that is instantly engaged in any situation and arrives at decisions very quickly using rules of thumb. System 2 is the slower, more reflective track that employs more complex analysis. System 2 can override system 1. The problem is that it takes more time and effort to engage system 2, and for that reason, it is underutilized in many of us.

To do this, they needed to ignore the quarterly earnings treadmill and tune out Wall Street analysts and the cacophony of cable shows like Squawk Box and Mad Money, with their relentless emphasis on short-term thinking. When Tom Murphy insisted on a huge spike in capital expenditures for a new printing plant or when John Malone bought expensive cutting-edge cable boxes in the late 1990s, they were consciously penalizing short-term earnings to improve their customers’ experiences and defend long-term competitive positions. This long-range perspective often leads to contrarian behavior. In contrast to its controversial decision to reduce production, ExxonMobil, alone among the major energy companies, resolutely maintained its spending on exploration during the financial crisis with a view toward optimizing long-term value. When other large players retrenched from the Canadian oil sands after energy prices plunged in early 2009, ExxonMobil moved forward with a large exploration project in Alberta even though it would penalize near-term earnings.

What separated these CEOs (and the performance of their companies) was two distinctly different mind-sets. The outsider CEOs, like Stonecipher and Tillerson, tended to dance when everyone else was on the sidelines and to cling shyly to the periphery when the music was loudest. They were intelligent contrarians willing to lean against the wall indefinitely when returns were uninteresting.

There is no strict formula here, no hard-and-fast rules—it does not always make sense to repurchase your own stock or to make acquisitions or to sit on the sidelines. The right capital allocation decision varies depending on the situation at any given point in time.

Although the outsider CEOs were an extraordinarily talented group, their advantage relative to their peers was one of temperament, not intellect.

Fundamentally, they believed that what mattered was clear-eyed decision making, and in their cultures they emphasized the seemingly old-fashioned virtues of frugality and patience, independence and (occasional) boldness, rationality and logic.