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

By Marc D. Mintz, CPA, Marc Mintz & Associates, LLC

Published in the New Jersey CPA Magazine: September-October 2015 edition

Who is the greatest CEO of the last 50 years? This question begins The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, authored by William N. Thorndike Jr., founder and managing member of Housatonic Partners private equity firm. The Outsiders presents a compelling quantitative proposition that neither high visibility nor intense direct operational control is a requisite trait for the most exceptional CEOs. Instead, the most successful chief executive officers are master investors who recognize capital allocation is a CEO’s most important job. Warren Buffett of Berkshire Hathaway is a perfect example of this.

In identifying the greatest CEOs, Thorndike seeks companies that have provided the largest compounded annual shareholder returns over decades. Devoting a chapter to each of these eight well-known, publicly traded entities—and their often lesser-known CEOs—the outsiders’ average returns outperformed the S&P 500 index by a factor of 20 and their industry peers by a multiple of seven. These CEOs share the following common attributes:

• They have a laser focus on per share value.
• They possess a talent for allocating both capital and human resources.
• They maintain a strong belief that free cash flow determines a company’s long-term value.
• They advocate very lean corporate structures with an emphasis on decentralization.
• They reject the hottest new management techniques.

These independent-thinking CEOs believe that decentralizing decision making is the best way to release entrepreneurial energy, maintain low-cost structures and keep employees’ egos in check. They primarily spend their time analyzing options for raising and deploying capital and, under certain circumstances, shrinking capital when market conditions dictate.

As profits are generated, a business is presented with certain options for deploying this newly found capital: (1) investing in existing operations; (2) acquiring other businesses; (3) issuing dividends; (4) retiring debt; and (5) repurchasing stock.

Astute CEOs can grow shareholders’ equity by effectively allocating capital under the unique circumstances of the day. Repurchase stock only when the price is cheap; acquire other businesses when this same stock is overvalued. Invest in continuing operations when you can achieve an adequate rate of return; pay shareholder dividends when capital cannot be effectively deployed.

According to Albert Einstein, “The most powerful force in the universe is compound interest.” The outsider CEOs have seized this mantra and applied it to the shareholders’ equity on their companies’ balance sheets. Mastering the timing and techniques for deploying shareholder capital has made Warren Buffet the second richest man in the world. Likewise, the owners of Berkshire Hathaway stock, and the other seven companies featured in this book, have all been the financial beneficiaries of these truly remarkable capital allocators.

While the lessons provided by these outsiders may appear to apply mostly to publicly traded corporations, there are many worthwhile ideas that CPAs can use when advising their employers and clients. Investing in one’s own business can often be the most productive use of capital. This is especially relevant in today’s environment of historically low interest rates. Condition yourself to think beyond being merely a manager in your business, but think like an investor. Strive to create a culture within your organization that makes customers and clients want to do business with your firm. Avoid pressure to act in lock-step with your competitors; instead, seek creative means to establish new services that provide enhanced value. Carefully deploy resources and act boldly when opportunity presents itself. Seek to expand through strategic acquisition, and always look to find clarity when complex situations arise. These techniques will allow you to increase the value of both your advice and your business.