What We’re Reading and Why

2018-11-08T15:41:10+01:00August 29th, 2018|Book Club|

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

Who would you say is the most impressive CEO you’ve come across?

Many point to the easy charm and confidence of well-mannered leaders as virtues to be celebrated. Others instead go by numbers – market share growth; the pace of expansion; successful empire builders.

This book takes a different perspective.

Whilst the ability to build great businesses with revolutionary products and services is a key requisite, there is perhaps something even more important at stake. William Thorndike argues that it is a CEO’s understanding of capital allocation that separates the good from the great. We would agree.

Chief Executives have no greater role than determining how to spend their company’s cash flow – whether reinvesting in the business, spending it on acquisitions or returning it to shareholders. Running through eight case studies, it becomes clear that these uniquely successful ‘Outsider’ CEOs share a consistent philosophy that guides them.

Firstly, each has an unswerving focus on ‘tight aggressive’ capital allocation. This involves deep due diligence on prospective opportunities, a high bar for expected returns but the courage to bet big if required. Thorndike’s CEOs approached share repurchases in this way. Rather than mindlessly repurchasing shares each quarter, they waited for long periods of time before pouncing when they perceived their stock to be too cheap, buying large chunks in a single quarter.

Secondly, they looked to run decentralised, lean businesses. Thorndike refers to this as ‘delegation to the point of anarchy’, but this policy of empowerment incentivises mid-level managers to take ownership through control of their own P&L. For the family-owned businesses we so commonly encounter in emerging markets, this can often be difficult to find.

And finally, these eight CEOs prioritised per share value over the growth in sales and earnings. Cash flow metrics matter most.

Whilst one can question the author’s methodology of reverse engineering the qualities that drive long-term shareholder value (a similar flaw seen in Jim Collins’ “Good to Great”), there are important lessons for emerging market management teams.

First, is a clear understanding of the effective amount of capital required to drive revenue and earnings growth. Rather than being incentivised by sales, earnings and balance sheet growth, return on invested capital (ROIC) and free cash flow targets offer a superior benchmark against which CEOs should be assessed. Following a painful 10-year period of balance sheet repair, many emerging market management teams have learnt this the hard way.

Second, is an unemotional attachment to non-core assets. Thorndike refers to the post Cold War restructuring at General Dynamics. CEO Bill Anders, a former astronaut and fighter pilot, sold their prestige F-16 business to Lockheed because the price was right – all despite a deep personal attachment. Many emerging market management teams can struggle with this, instead choosing to expand laterally to satisfy future family succession problems. This not only takes up unnecessary management bandwidth but can cloud their focus on returns on incremental capital.

Third, is the need to appreciate the outside perspective on governance. Different economies, different cultures and different sectors all require a deeper understanding of what an optimal governance structure should look like. Indeed most, if not all, of the eight ‘Outsider’ CEOs would have likely failed the generic governance scorecard rating process that is so prevalent today. Instead, we would champion a tailored and bespoke approach that fosters a healthier environment to drive superior capital allocation.

Thorndike argues that pragmatism, flexibility and opportunism are key attributes to seek. And one final word of warning – “Capital allocation ability tends to correlate with frugality and a flashy corporate headquarters is often a bad sign.”

This is food for thought as we hit the road over the coming weeks.

What else is on my bedside table

Shoe Dog: A Memoir by the Creator of Nike – Phil Knight

“Hard work is critical, a good team is essential, brains and determination are invaluable, but luck may decide the outcome.” 

One of the best business books I’ve read. An engaging and enthralling memoir of how Phil Knight assembled a team of misfits and oddballs to create one of the most valuable brands in the world. The story covers the 18 year period between 1962 and 1980 when Nike evolved from a Japanese sneaker distributor to a publicly listed branded behemoth. Candid, honest and emotional – read this before it gets the inevitable Hollywood treatment.

Chop Wood, Carry Water – Joshua Medcalf

“Dream BIG. Start small. Be ridiculously faithful.” 

Whether you’re an amateur golfer who can’t quite make your putting work or a wannabe fitness fanatic who has an allergy to the gym – this 100-page book will help it all make sense. The story is of a young American with a lifelong goal of becoming a Samurai warrior, and the mindset required to help achieve this. Focussing on the process, rather than the outcome is the central message which helps shape the mental state for you to rise to the occasion, whatever that might be.