Other highlights (35)
“It’s almost impossible to overpay the truly extraordinary CEO . . . but the species is rare. —Warren Buffett You are what your record says you are. —Bill Parcells Success leaves traces. —John Templeton”
“In assessing performance, what matters isn’t the absolute rate of return but the return relative to peers and the market. You really only need to know three things to evaluate a CEO’s greatness: the compound annual return to shareholders during his or her tenure and the return over the same period for peer companies and for the broader market (usually measured by the S&P 500).”
“much of what distinguished Singleton from his peers lay in his mastery of the critical but somewhat mysterious field of capital allocation—the process of deciding how to deploy the firm’s resources to earn the best possible return for shareholders.”
“CEOs need to do two things well to be successful: run their operations efficiently and deploy the cash generated by those operations.”
“CEOs have five essential choices for deploying capital—investing in existing operations, acquiring other businesses, issuing dividends, paying down debt, or repurchasing stock—and three alternatives for raising it—tapping internal cash flow, issuing debt, or raising equity.”
“The heads of many companies are not skilled in capital allocation. Their inadequacy is not surprising. Most bosses rise to the top because they have excelled in an area such as marketing, production, engineering, administration, or sometimes, institutional politics. Once they become CEOs, they now must make capital allocation decisions, a critical job that they may have never tackled and that is not easily mastered. To stretch the point, it’s as if the final step for a highly talented musician was not to perform at Carnegie Hall, but instead, to be named Chairman of the Federal Reserve.1”
“Buffett stressed the potential impact of this skill gap, pointing out that “after ten years on the job, a CEO whose company annually retains earnings equal to 10 percent of net worth will have been responsible for the deployment of more than 60 percent of all the capital at work in the business.””
“If you think of capital allocation more broadly as resource allocation and include the deployment of human resources, you find again that Singleton had a highly differentiated approach. Specifically, he believed in an extreme form of organizational decentralization with a wafer-thin corporate staff at headquarters and operational responsibility and authority concentrated in the general managers of the business units.”
“It is impossible to produce superior performance unless you do something different. —John Templeton”
“Atul Gawande uses the term positive deviant to describe unusually effective performers in the field of medicine. To Gawande, it is natural that we should study these outliers in order to learn from them and improve performance.”
“They were positive deviants, and they were deeply iconoclastic. The word iconoclast is derived from Greek and means “smasher of icons.” The word has evolved to have the more general meaning of someone who is determinedly different, proudly eccentric.”
“Isaiah Berlin, in a famous essay about Leo Tolstoy, introduced the instructive contrast between the “fox,” who knows many things, and the “hedgehog,” who knows one thing but knows it very well.”
“Foxes, however, also have many attractive qualities, including an ability to make connections across fields and to innovate, and the CEOs in this book were definite foxes.”
“The CEOs in this book all managed to avoid the insidious influence of this powerful imperative. How? They found an antidote in a shared managerial philosophy, a worldview that pervaded their organizations and cultures and drove their operating and capital allocating decisions.”
“Each ran a highly decentralized organization; made at least one very large acquisition; developed unusual, cash flow–based metrics; and bought back a significant amount of stock. None paid meaningful dividends or provided Wall Street guidance. All received the same combination of derision, wonder, and skepticism from their peers and the business press.”
“The business world has traditionally divided itself into two basic camps: those who run companies and those who invest in them. The lessons of these iconoclastic CEOs suggest a new, more nuanced conception of the chief executive’s job, with less emphasis placed on charismatic leadership and more on careful deployment of firm resources.”
“these CEOs thought more like investors than managers. Fundamentally, they had confidence in their own analytical skills, and on the rare occasions when they saw compelling discrepancies between value and price, they were prepared to act boldly. When their stock was cheap, they bought it (often in large quantities), and when it was expensive, they used it to buy other companies or to raise inexpensive capital to fund future growth. If they couldn’t identify compelling projects, they were comfortable waiting, sometimes for very long periods of time (an entire decade in the case of General Cinema’s Dick Smith). Over the long term, this systematic, methodical blend of low buying and high selling produced exceptional returns for shareholders.”
“This fox-like outsider’s perspective helped these executives develop differentiated approaches, and it informed their entire management philosophy. As a group, they were deeply independent, generally avoiding communication with Wall Street, disdaining the use of advisers, and preferring decentralized organizational structures that self-selected for other independent thinkers. . . .”
“exceptional relative performance demands new thinking, and at the center of the worldview shared by these CEOs was a commitment to rationality, to analyzing the data, to thinking for themselves.”
“They were practical and agnostic in temperament, and they systematically tuned out the noise of conventional wisdom by fostering a certain simplicity of focus, a certain asperity in their cultures and their communications.”
“this led the outsider CEOs to focus on cash flow and to forgo the blind pursuit of the Wall Street holy grail of reported earnings. Most public company CEOs focus on maximizing quarterly reported net income, which is understandable since that is Wall Street’s preferred metric. Net income, however, is a bit of a blunt instrument and can be significantly distorted by differences in debt levels, taxes, capital expenditures, and past acquisition history.”
“This single-minded cash focus was the foundation of their iconoclasm, and it invariably led to a laser-like focus on a few select variables that shaped each firm’s strategy, usually in entirely different directions from those of industry peers. For Henry Singleton in the 1970s and 1980s, it was stock buybacks; for John Malone, it was the relentless pursuit of cable subscribers; for Bill Anders, it was divesting noncore businesses; for Warren Buffett, it was the generation and deployment of insurance float.”
“Growth, it turns out, often doesn’t correlate with maximizing shareholder value.”
“Henry Singleton, in a rare 1979 interview with Forbes magazine: “After we acquired a number of businesses, we reflected on business. Our conclusion was that the key was cash flow. . . . Our attitude toward cash generation and asset management came out of our own thinking.” He added (as though he needed to), “It is not copied.””
“Tom Murphy and Dan Burke were probably the greatest two-person combination in management that the world has ever seen or maybe ever will see. —Warren Buffett”
“Murphy’s goal was to make his company more valuable. As he said to me, “The goal is not to have the longest train, but to arrive at the station first using the least fuel.””
“The formula that allowed Murphy to overtake Paley’s QE2 was deceptively simple: focus on industries with attractive economic characteristics, selectively use leverage to buy occasional large properties, improve operations, pay down debt, and repeat.”
“As Murphy put it succinctly in an interview with Forbes, “We just kept opportunistically buying assets, intelligently leveraging the company, improving operations and then we’d . . . take a bite of something else.””
“Capital Cities under Murphy was an extremely successful example of what we would now call a roll-up. In a typical roll-up, a company acquires a series of businesses, attempts to improve operations, and then keeps acquiring, benefiting over time from scale advantages and best management practices.”
“These companies typically failed because they acquired too rapidly and underestimated the difficulty and importance of integrating acquisitions and improving operations.”
“Murphy’s approach to the roll-up was different. He moved slowly, developed real operational expertise, and focused on a small number of large acquisitions that he knew to be high-probability bets.”
““The business of business is a lot of little decisions every day mixed up with a few big decisions.””
“Theirs was an excellent partnership with a very clear division of labor: Burke was responsible for daily management of operations, and Murphy for acquisitions, capital allocation, and occasional interaction with Wall Street.”
“He exemplifies the central role played in this book by exceptionally strong COOs whose close oversight of operations allowed their CEO partners to focus on longer-term strategic and capital allocation issues.”
“There are two basic types of resources that any CEO needs to allocate: financial and human. We’ve touched on the former already. The latter is, however, also critically important, and here again the outsider CEOs shared an unconventional approach, one that emphasized flat organizations and dehydrated corporate staffs.”
