March 06, 2024
Think of CEOs who have made strong rates of return for investors and built durable businesses. What strategies do you associate with their success?
Investor and author William Thorndike studied eight CEOs who outperformed the market and their peers. The group included big names, like Warren Buffet and Katharine Graham, but also other leaders who are virtually unknown today. One example is Henry Singleton, an MIT-educated electrical engineer who led Teledyne Technologies from 1960 to 1986.
Thorndike noticed that these eight iconoclastic leaders all took a similar approach to capital allocation. They focused on investing their companies’ profits to repurchase their own stock when prices were optimal. But they generally avoided very large acquisitions, accruing debt, and paying dividends.
In this episode, you’ll learn how effective capital allocation strategies, like the ones used by these leaders, can generate wealth for shareholders.
Thorndike is the author of The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success.
Key episode topics include: strategy, strategic planning, entrepreneurship, operations and supply chain management, leadership, capital allocation, debt, dividends, stock buybacks, acquisitions.
HBR On Strategy curates the best case studies and conversations with the world’s top business and management experts, to help you unlock new ways of doing business. New episodes every week.
HANNAH BATES: Welcome to HBR On Strategy, case studies and conversations with the world’s top business and management experts, hand-selected to help you unlock new ways of doing business. Think of the CEOs who made the strongest rates of return for investors and built the most durable businesses. But also others who are virtually unknown, like Henry Singleton – an electrical engineer who ran Teledyne Technologies from 1960 to 1986. In this episode, you’ll learn how effective capital allocation strategies can generate wealth for shareholders. You’ll also learn why many of these CEOs are still unknown today, despite their great success. This episode originally aired on HBR IdeaCast in April 2014. And just a note — we recorded this by phone. While the audio quality is not great, the conversation is. I think you’ll enjoy it. Here it is.
SARAH GREEN: Welcome to the HBR IdeaCast. I’m Sarah Green from Harvard Business Review. I’m talking with William Thorndike, the author of the book The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. Will, thanks so much for talking with us today.
WILLIAM THORNDIKE: Thank you, Sarah.
SARAH GREEN: So it’s interesting to me that the book starts with a CEO you’ve actually– most people– have probably never heard of. A guy named Henry Singleton. Why did you start with him, who is he, and why is he so important?
WILLIAM THORNDIKE: Yeah. Well, Henry Singleton was the genesis for this whole project. I work in the private equity industry, and every other year we host a conference for our CEOs. About 10 years ago, I raised my hand and said I would do one of the talks at that conference. I decided to focus on Henry Singleton, who I’d heard a little bit about. Henry Singleton had a very unusual background for a CEO. He was a MIT trained mathematician and engineer, he got a Ph.D. In electrical engineering from MIT. While he was there he programed the first computer on the MIT campus, and he proceeded to have a very successful career in science. He developed an inertial guidance system for Litton Industries that’s still in use in commercial and military aircraft. He did a whole range of things. And then later in his career– in his mid 40s– he became the CEO of a ’60s era conglomerate called Teledyne. He ran that business for almost 30 years– 28 years– and over the course of that period of time, he generated extraordinary returns for his shareholders and substantially better returns than the other conglomerates of that era. So my talk focused on trying to understand what the sources of that out performance were. Henry Singleton created a template that it turned out the other CEOs in the book followed, specifically around a series of actions he took in the area of capital allocation.
SARAH GREEN: So it’s interesting because when you’re talking about iconoclastic CEOs, the idea of there being a template is a little bit surprising. When you’re talking about such unconventional people, were you surprised that there were certain things they have in common?
WILLIAM THORNDIKE: That was the greatest surprise in doing the book. Basically I did the book one chapter a year working with second year students at the Harvard Business School, who helped me with the research and some of the analytical work. My expectation as the project went along after that first year– after Henry Singleton– was that it might over time be a group biography format. Similar to Profiles in Courage or a book called The American Political Tradition. But after about the fifth chapter– fifth CEO– it became clear that there was a much stronger than anticipated pattern across the group. Each of the CEOs had to meet two tests. Each had to have better relative performance compared to the market– than Jack Welch had during his tenure– and then each had to meaningfully outperform their peer group. And in order to do that, by definition they needed to do things differently than their peers. But it turned out that the actions they took were remarkably similar across the group. So that was the most surprising finding, was the strength of that pattern.
SARAH GREEN: So to back up just for a moment, why index against Jack Welch?
WILLIAM THORNDIKE: Well he I think, is a de facto gold standard for CEO excellence. His returns are very, very good. He ran GE for 20 years, and over that period of time generated a 20% compound return for GE shareholders. Which is pretty extraordinary. And he’s just an extremely well known, constantly in the public eye figure. So I think he’s a de facto gold standard for CEO excellence. So that’s the reason for including him.
SARAH GREEN: OK. Now what were some of those actions that these different iconoclastic CEOs had in common?
WILLIAM THORNDIKE: Basically capital allocation. The framework I think that’s most useful to think about that, is that CEOs need to do two things well to be successful in the long term. They need to optimize the profits of the business that they’re running. They need to run the operation sufficiently, that’s obviously critical. But secondly and equally important, they need to deploy or invest those profits over time. And that second activity is called capital allocation. Over long periods of time, it has an enormous impact on shareholder returns. So if two companies have identical operating results but different approaches to capital allocation, over long periods of time– so the average tenure the CEOs in this book was north of 20 years– they’ll drive very, very different returns for shareholders. And so the framework there, is there’s three basic ways a company can raise capital. They can tap their existing profitability– their existing profits– they can raise equity, or they can sell debt. And there are only five things they can do with it. They can invest in their existing operations, they can make acquisitions, they can pay a dividend, they can pay down debt, and they can repurchase stock. That’s it, those are all the choices. And over long periods of time, those decisions have a significant impact for shareholders. OK, so getting back to your question. What this group did, is they were very substantial re-purchasers of their own stock, very opportunistically. All of them bought in– with one exception– bought in at least 30% of their shares outstanding. They made occasional very large acquisitions, they were a selective users of debt, and they generally avoided dividends.
SARAH GREEN: And why do you think that that pattern was so effective?
WILLIAM THORNDIKE: Well it translates into– I guess I would describe it as a patient and opportunistic approach to investing the firm’s profits. And so over long periods of time, doing those things I just described and effectively buying things when they are low– so repurchasing your stock when it’s multiple is inexpensive or purchasing other companies at attractive prices– and similarly being in a position to sell when prices are higher. So to either sell stock or to sell businesses. Over long periods of time, that has a very, very significant impact on shareholder returns. There are some interesting examples in the book of CEOs who did that very well– the outsider CEOs– and then peers who did less well.
SARAH GREEN: Well I guess I’m interested in perhaps knowing why– for some of our listeners who may not have an investing background– why would something like buying back your own stock be ultimately useful for a company?
WILLIAM THORNDIKE: That’s a good question. I would say if you look at the general pattern stock repurchases today, that pattern I think is unlikely to produce compelling long term returns. So in the typical case today, a company that’s pursuing repurchases will get an authorization from its board for a certain amount of capital that it can then use to repurchase stock. It will then proceed to purchase stock in even amounts over a quarterly period of time, or maybe a semiannual period of time. Over some sort of a regular schedule. And that pattern is very different than the pattern the outsiders used in repurchasing stock. Their pattern was to wait very long periods of time with no repurchase activity, and then when the stock was priced at a very low P/E multiple– at an attractive price– they would buy in significant amounts of stock. So it was very different. And the reason that’s good for shareholders– the remaining shareholders– is you’re basically retiring shares of the company at prices below what it would be worth in a control sale. So for the remaining shareholders, you end up owning more of that existing business– and its future profitability– then you would otherwise.
SARAH GREEN: So it’s a model that’s really very focused on the company as a vehicle to create wealth for shareholders is that correct?
WILLIAM THORNDIKE: Yes, that’s correct.
SARAH GREEN: You know Will, one of the things I noticed in the book is that you really call on a diverse array of different kind of outsider CEOs, as you call them. All the way from someone like Warren Buffett– very well known– someone like Katharine Graham of the Washington Post, who has often been overlooked. And they come from an enormous diversity of backgrounds and in an enormous diversity of industries. So if someone out there is hoping to follow the model that you discuss in the book, how likely is it that that person will actually be able to apply the model that you lay out here?
WILLIAM THORNDIKE: That’s a good question. I think the model is very robust. If you look at the industries represented in the book, the companies that these CEOs ran competed in industries ranging from insurance, to manufacturing, to media, to defense, and consumer products. So a very wide varieties of industries, and a variety of stages of development. Some of them were CEOs who were involved from the very early stages in building companies, others came in later into very mature businesses and were stewards. And it’s interesting you– as you mentioned Buffett is without question the best known CEO in the book. And his record speaks for itself. But the variety of backgrounds I think is very interesting. So there were some commonalities across the group in terms of background. All of them were first time CEOs, half of them under 40 when they took the CEO seat, only two of them had MBAs. One was an astronaut in his life before entering business. Katharine Graham was a widow. Warren Buffett was a professional investor who’d never run a company before. And they shared an interesting set of personal characteristics in addition to some of the specific business actions they took. So they were, as a group, humble and frugal by nature. And sort of patient and pragmatic, in terms of their mindset. They were not overly charismatic, and they were not active seekers of the limelight. They did not speak at Davos. So Buffett is far and away the best known. Many of the other CEOs are virtually unknown today. Singleton would be an example of that. He’s just not well known, except among a handful of sophisticated investors who were involved in investing at the time he was running Teledyne.
SARAH GREEN: Well Will, thank you for taking some time today to shed some light on some of these really interesting CEO careers with us today.
WILLIAM THORNDIKE: Thanks very much Sarah.
HANNAH BATES: That was investor and author William Thorndike in conversation with Sarah Green on the HBR IdeaCast. Thorndike’s book is The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. We’ll be back next Wednesday with another hand-picked conversation about business strategy from the Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review. We’re a production of the Harvard Business Review. If you want more podcasts, articles, case studies, books, and videos like this, find it all at HBR.org. This episode was produced by Anne Saini, and me, Hannah Bates. Ian Fox is our editor. Special thanks to Maureen Hoch, Adi Ignatius, Karen Player, Ramsey Khabbaz, Nicole Smith, Anne Bartholomew, and you – our listener. See you next week.
