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

by William N. Thorndike Jr.

Gawande advises that these lists are best kept to ten items or fewer, and we will conclude with a checklist drawn from the experiences of these outsider CEOs, to aid in making effective resource allocation decisions (and hopefully avoiding value-destroying ones).

1. The allocation process should be CEO led, not delegated to finance or business development personnel. 2. Start by determining the hurdle rate—the minimum acceptable return for investment projects (one of the most important decisions any CEO makes). Comment: Hurdle rates should be determined in reference to the set of opportunities available to the company, and should generally exceed the blended cost of equity and debt capital (usually in the midteens or higher). 3. Calculate returns for all internal and external investment alternatives, and rank them by return and risk (calculations do not need to be perfectly precise). Use conservative assumptions. Comment: Projects with higher risk (such as acquisitions) should require higher returns. Be very wary of the adjective strategic—it is often corporate code for low returns. 4. Calculate the return for stock repurchases. Require that acquisition returns meaningfully exceed this benchmark. Comment: While stock buybacks were a significant source of value creation for these outsider CEOs, they are not a panacea. Repurchases can also destroy value if they are made at exorbitant prices. 5. Focus on after-tax returns, and run all transactions by tax counsel. 6. Determine acceptable, conservative cash and debt levels, and run the company to stay within them. 7. Consider a decentralized organizational model. (What is the ratio of people at corporate headquarters to total employees—how does this compare to your peer group?) 8. Retain...

Warren Buffett has proposed a simple test of capital allocation ability: has a CEO created at least a dollar of value for every dollar of retained earnings over the course of his tenure? Buffett’s metric captures in a single number the collective wisdom and folly of decision-making over the course of an entire career. Sadly, it is a tougher test than it sounds and not surprisingly, these outsider CEOs passed with flying colors, as table A-1 demonstrates. TABLE A-1 Outsider CEOs and the Buffett test