Tuesday, April 8, 2014

The Outsiders: The One Thing CEOs Need To Do Well

From time to time I've sat on endowment committees with truly smart investors.  I don't pretend to be one of those myself, but quarter after quarter I watched with them as the money managers came and went, the stocks and bonds went up and down, the markets rose and fell, the pundits huffed and puffed--and I listened really hard to what these investors inevitably and consistently said:  Most of the value in a portfolio is created in the allocation of assets.  In other words, the very first thing we did as an endowment committee was to set a risk profile and chose our asset classes.  That turned out to be the single thing that drove the most value long term.

You'd have thought it would have dawned on me that this powerful idea applied to operating businesses as well--the GEs, GMs, and Apples of the world--but no, sometimes it takes a sledgehammer.  And that's what I got hit with last weekend when I read William N. Thorndike, Jr.'s terrific 2012 book, The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success.  (Thanks to my friend, Henry Ames, for gifting this great read to me.)

Thorndike opens with a simple question: "Who's the greatest CEO of the last fifty years?"  Some people might answer (incorrectly) Steve Jobs; others (like me, who are old enough to be a little confused on his dates: Alfred Sloan).  But the consensus answer is undoubtedly Jack Welch.  Welch ran GE for 20 years, achieved an annual compound return of 20.9%, and outperformed the S&P by 3.3 times.  Welch also played at business like Lawrence Taylor played linebacker (ok, for those of you who picked Steve Jobs: Ray Lewis) with a kind of high-energy, smashmouth style that got him magazine covers and lots and lots of press.  Welch was a hard-charging, gifted CEO, but compared to a guy named Henry Singleton, Thorndike says, Welch "wasn't even in the same zip code."

I don't want to spoil the book, but Singleton ran his business for almost 30 years and outperformed the S&P by over 12 times.  He's one of only eight CEOs that Thorndike could identify whose businesses a) beat their peers and b) beat Jack Welch.  It's a highly select group, not immediately obvious in the traditional business mythos, but profiled one chapter each in The Outsiders.

The secret to the success of these elite CEOs, of course, is asset allocation.  This isn't about operating the business (which is the activity that tends to get all the press) but about deploying capital; do I invest internally, acquire, pay dividends, pay down debt or repurchase stock?  It is a calm, thoughtful, analytical discipline.  The author also says it's probably the most important responsibility of any CEO, and (spoiler alert:) Warren Buffet, one of the featured CEOs, observed that few leaders arrive prepared for this essential task.  "To stretch the point, it's as if the final step for a highly talented musician was not to perform at Carnegie Hall, but instead, to be named Chairman of the Federal Reserve."

Here's the part of Thondike's findings that seems especially refreshing in a world where our business press constantly gravitates to the newest, shiniest object.  The best CEOs of the last 50 years were:
humble, analytical, and understated.  They were devoted to their families, often leaving the office early to attend school events.  They did not typically relish the outward-facing part of the CEO role.  They did not give chamber of commerce speeches, and they did not attend Davos.  They rarely appeared on the covers of business publications and did not write books of management advice.  They were not cheerleaders or marketers or backslappers, and they did not exude charisma.
I copied a table that Thorndike included in the book (just one of many really good illustrations) because I thought I might want to use it in a presentation one day.

Remembering, too, that Jack Welch was incredibly successful, I took this chart to be less an indictment of his style and more a reminder that thoughtful, low-key, even introverted CEOs have every bit as good a chance for success, and often better, than their high-octane counterparts.  In other words, Thorndike suggests, you can go with your iconic CEOs, or you can go with your iconoclastic CEOs.  The latter are the real rock stars of the business world.

The author even heads-off the predictable response--"But business is different now than it used to be!"--by taking a look at life after the 2008 crash, and occasionally weaves in bits of a number of the more interesting reads that have come along in the last few years, including Dan Kahneman's Thinking, Fast and Slow.

This is a keeper.  Fact-based.  Counter-intuitive.  Thoughtful.  Useful.  It goes up on the shelf next to The Innovator's Dilemma, The Art of Profitability, Certain Trumpets, The Visible Hand, My Years With General Motors and What I Talk About When I Talk About Running.