Book Review: The Outsiders

I’ll keep this short, since the book is efficient to the point where recapping would largely be less-elegant rewriting and I haven’t had much time to write over the past few weeks since I finished it so the details are not as fresh in my memory as I would like them to be.

This was an incredible book that spotlights CEOs and companies often overlooked by the general public, diving into company specifics rather than simplistic & convenient anecdotes found in other business books. As someone who does not usually work on the financial or business development side of organizations, it was an interesting look into the responsibilities and decisions made by CEOs, COOs and other business-side leaders.

This book is all about capital allocation and the understanding that the CEO position is ultimately responsible for increasing shareholder value. The CEOs illustrated in this book shirked the circus of playing politics on Wall Street, realizing that their time was better spent on focusing on their company and that the desires of outsiders did not often align with the best strategies for their company. The author, William N. Thorndike, describes the CEOs as iconoclastic and often at odds with the strategy du jour followed by most of their peers. Each chapter is a deep dive into a particular company and CEO. These are not biographies, but rather a recounting of actions taken by the CEO and the reasons behind them. The CEOs are in different industries and operating within different marketing conditions. There were a few themes all these CEOs followed:

  • Decentralize operations
    • Give responsibility to department or group heads who can focus on their team needs
    • Reducing overhead from centralized staff
    • Clear responsibility of CEO to focus on capital allocations and top-level operations
  • Internal hurdle rate
    • All internal projects must prove to provide a rate of return above a certain threshold. If it can’t be realistically projected to do so, it is not considered.
    • Acquisitions must provide a rate of return above this threshold as well
  • Frugality
    • Reduce all unnecessary spending!
    • Improve margins by reducing unnecessary overhead
    • “Necessary spending” is less than you think
    • “The Edifice Complex”, i.e. don’t spend money building lavish headquarters
  • Don’t pay dividends
    • Returning capital is not the best way to improve shareholder value
    • It isn’t tax-efficient
    • Money is better spent invested back into the company
  • Minimize taxes
    • Paying taxes means lowering the capital that can be utilized to maximize returns
  • Buyback shares when opportunity strikes
    • Market downturns, company out of style
  • Sell organizations when prices are high
    • Seems obvious, but when shares are trading at high multiples, take the opportunity to sell parts of the company to get the highest price
  • Charisma does not make a CEO
    • CEOs ultimately need to be excellent at running smooth operations and deploying capital
  • Choose to deploy capital where it will provide the biggest return
    • Many factors contribute, but at any time it may be stock repurchasing, acquisition, company spin-offs, raising debt or internal projects!
  • Be an owner
    • The CEO should think like a long-term investor or owner, rather than a highly-paid employee
    • Having a large stake in the companies success aligns with the interests of shareholders
  • C.R.E.A.M.
    • Cash flow rules all, and is ultimately the metric a CEO should optimize for
    • Allows investment into various vehicles for improving rates of return

All these rules seem simple and obvious! But the author describes these CEOs as outsiders, operating in opposition to most of their peers. He describes a peer pressure type of situation felt by other CEOs at the time to tame Wall Street, distracting those CEOs with short-term returns and keeping in favor with analysts rather than doing what’s best for the company. Thorndike describes them best:

Fundamentally, they believed that what mattered was clear-eyed decision making, and in their cultures they emphasized the seemingly old-fashioned virtues of frugality and patience, independence and (occasional) boldness, rationality and logic.