Introduction
In the world of business, we often hear about legendary CEOs like Jack Welch, who led General Electric to great heights. However, William Thorndike's book "The Outsiders" challenges our preconceptions about what makes a truly exceptional business leader. This eye-opening work introduces us to a group of CEOs who achieved extraordinary results by following unconventional paths.
Thorndike's central argument is that the most successful CEOs aren't always the ones who follow traditional management practices or grab headlines. Instead, they're often quiet, independent thinkers who prioritize long-term value creation over short-term gains. These "outsider" CEOs outperformed their peers and the broader market by significant margins, yet many of them remain relatively unknown.
The Measure of Success
Thorndike proposes a straightforward method for evaluating CEO performance: compound annual return to shareholders compared to both the S&P 500 and industry peers. Using this metric, he reveals that some of the most celebrated CEOs, like Jack Welch, don't perform as impressively as we might expect. Welch, for instance, outperformed the S&P 500 by 3.3 percent during his tenure at GE.
In contrast, the book introduces us to CEOs like Henry Singleton, who outperformed the S&P 500 by a staggering 20.4 percent. This discrepancy raises an intriguing question: What did these lesser-known CEOs do differently to achieve such remarkable results?
Case Study 1: Henry Singleton - The Idiosyncratic CEO
Henry Singleton's story serves as a prime example of the "outsider" CEO approach. Born in 1916, Singleton co-founded Teledyne, a company that began as a semiconductor manufacturer and grew into a diverse industrial and aerospace conglomerate. Under his leadership, Teledyne achieved extraordinary returns: a dollar invested in the company in 1963 would have been worth $180.94 by 1990, outperforming comparable investments by nine times.
Singleton's Unconventional Strategies
Discriminate Diversification: Unlike many of his contemporaries who acquired failing companies to turn them around, Singleton focused on purchasing high-performing businesses that were already market leaders. This approach minimized risk and maximized potential returns.
Niche Focus: Singleton had a keen eye for specialized, high-margin products. He preferred businesses that sold products "by the ounce rather than the ton," focusing on quality and profitability over sheer volume.
Strategic Use of Stock: In the early 1960s, Singleton recognized that Teledyne's stock was overvalued, trading at nearly 60 times earnings. He capitalized on this by using the overvalued stock to acquire more subsidiaries, effectively expanding the company's portfolio at a discount.
Decentralization Over Synergy: While many conglomerates of the era sought to create synergies between their various businesses, Singleton took a different approach. He treated each subsidiary as an independent entity, pushing managerial responsibility down to the lowest possible level. This lean management style was evident in the fact that at its peak, Teledyne had over 40,000 employees but only 50 corporate staff.
Pioneering Share Buybacks: When the market cooled on conglomerates in the late 1960s, Singleton believed Teledyne's shares were undervalued. He initiated large-scale share buybacks, a practice that was uncommon at the time. Between 1972 and 1984, he repurchased an astonishing 90 percent of outstanding shares, spending $2.5 billion in the process. This strategy paid off handsomely, resulting in a 40-fold increase in earnings per share.
Flexible Time Management: Singleton's approach to his role as CEO was equally unconventional. He avoided getting bogged down in day-to-day responsibilities, preferring to keep his schedule open to respond to emerging challenges and opportunities. He eschewed long-term planning in favor of on-the-fly strategizing, allowing him to adapt quickly to changing circumstances.
Singleton's success demonstrates that even a large, diversified conglomerate can maintain agility and outperform competitors with the right leadership approach. His willingness to buck trends and think independently was key to Teledyne's extraordinary performance.
Case Study 2: Katharine Graham - The Reluctant Media Mogul
Katharine Graham's journey to becoming one of the most successful CEOs in media history is a testament to the power of fresh perspectives in business leadership. Unlike many CEOs who spend their careers climbing the corporate ladder, Graham found herself thrust into the role of CEO of the Washington Post Company following the unexpected death of her husband, Philip Graham.
At 46 years old, with four children and having been out of the workforce since the birth of her first child, Graham felt completely unprepared for her new role. However, it was precisely this outsider perspective that allowed her to lead the company with a unique combination of competence and innovation. During her tenure, Graham delivered a remarkable 22 percent compound annual return to shareholders, significantly outperforming both the S&P 500 (7.4 percent) and her industry peers (12.4 percent).
Graham's Unconventional Approaches
Standing Her Ground: In 1975, the Washington Post faced a major challenge when its staff went on strike, backed by the powerful pressmen's union. Instead of capitulating to union demands, Graham took a bold stance. She assembled a skeleton crew that kept the paper running throughout the 139-day strike, eventually forcing the union to accept significant concessions. This was a rare instance of a major newspaper successfully breaking a strike. The resulting leaner cost structure, combined with the demise of a rival paper, led to a substantial increase in both profitability and circulation.
Resisting Acquisition Frenzy: During the bullish 1980s, when many media companies were on buying sprees, snapping up regional papers left and right, Graham chose a different path. She made only three strategic acquisitions, none of which were other newspapers. Her purchases proved to be remarkably prescient:
- A cellular telephone company
- An investment in educational testing materials
- A stake in cable television
These acquisitions gave the Washington Post Company footholds in three emerging markets, effectively diversifying the company's portfolio and setting it up for future growth.
Effective Capital Allocation: Graham's approach to managing the company's finances was notably conservative. The Washington Post maintained a strong balance sheet with low levels of debt and dividends, which Graham believed were tax-inefficient. She deployed cash cautiously and strategically. For instance, while other newspapers invested heavily in new printing technology, the Post continued to use letterpress printing until the costs of new printing plants had stabilized. This patience allowed the company to upgrade its technology at a lower cost.
Capitalizing on Downturns: Graham's aversion to debt proved to be a significant advantage during the economic downturn of the 1990s. While her competitors struggled with overleveraged balance sheets, the Washington Post had cash available to invest in undervalued assets. Graham used this opportunity to purchase a string of cable television and educational businesses at bargain prices, further strengthening the company's diverse portfolio.
Graham's success as a CEO came from her willingness to challenge industry norms and trust her instincts. Her patience, caution, and ability to go against the grain allowed her to outperform even seasoned industry veterans.
Key Lessons from The Outsiders
Question Conventional Wisdom: Both Singleton and Graham achieved their remarkable results by challenging the status quo in their respective industries. They weren't afraid to take unconventional approaches when they believed it was in the best interest of their companies.
Focus on Capital Allocation: A common thread among the CEOs profiled in "The Outsiders" is their skill in allocating capital. They understood that how a company uses its resources is often more important than its day-to-day operations.
Think Long-Term: These CEOs prioritized long-term value creation over short-term gains. They were willing to make decisions that might not have immediate payoffs but would benefit the company in the long run.
Maintain Financial Flexibility: Both Singleton and Graham maintained conservative balance sheets, which gave them the flexibility to capitalize on opportunities when they arose, especially during economic downturns.
Embrace Your Outsider Status: Graham's success demonstrates that coming from outside the industry can be an advantage, allowing for fresh perspectives and innovative approaches.
Decentralize Decision-Making: Singleton's approach of pushing responsibility down to the lowest possible level allowed Teledyne to remain agile despite its size.
Be Opportunistic: Both CEOs were adept at recognizing and capitalizing on opportunities, whether it was Singleton's use of share buybacks or Graham's strategic acquisitions.
Final Thoughts
"The Outsiders" challenges us to reconsider what makes a truly great CEO. It's not always the charismatic leaders who grab headlines or follow conventional business school wisdom. Often, it's the quiet, independent thinkers who achieve the most remarkable results.
The book's central message is that daring to do things differently can lead to extraordinary gains. By focusing on niche opportunities, investing discriminately, and trusting their own instincts over shareholder pressure or industry trends, these outsider CEOs were able to deliver exceptional returns.
As we navigate an increasingly complex and rapidly changing business landscape, the lessons from "The Outsiders" become even more relevant. The ability to think independently, allocate capital wisely, and take a long-term view may well be the key to success in the coming decades.
Ultimately, "The Outsiders" serves as both an inspiration and a practical guide for current and aspiring business leaders. It reminds us that sometimes the best path to success is the one less traveled, and that true innovation often comes from those willing to challenge the status quo.