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The Outsiders : Book Summary And Notes.

The Outsiders by William Thorndike asks a simple question: What should a CEO focus on to maximize shareholder returns? The answer is both obvious and utterly unexpected:

capital allocation

Thorndike profiles eight extraordinary CEOs, each of which delivered over a decade of shareholder returns that handily beat those the competition, the S&P 500 index, and even GE during the tenure of the legendary Jack Welch.

In general, these leaders were young, first time CEOs who managed to ignore conventional wisdom and forge their own coolly rational paths to exceptional returns. Introverted, cerebral, frugal and quantitative, the “Outsiders” led their companies by painstakingly figuring things out on their own.

What habits defined this eclectic group of executives? In many ways, each was an acolyte of Warren Buffett, building a rapidly growing company through the power of compounding. Like a child pushing a slowly growing snowball down a hill until gravity takes over and it begins to expand with its own unstoppable momentum, these CEOs built successful companies one careful capital allocation decision at a time. Indeed,

“The Snowball” (to borrow the title of Alice Schroeder’s biography of Warren Buffett – see also “The Flywheel” in Good to Great) is an apt metaphor for the philosophy advocated in this book.

A typical public company CEO spends 20% of their time communicating with Wall Street, focusing on quarterly earnings and revenue growth. In contrast, the Outsider CEOs all but ignored Wall Street, and were obsessed with maximizing the per-share value of their companies.

Who in your industry seems to be measuring themselves with different metrics?

The Outsider CEOs viewed their jobs as relatively simple: grow the snowball. Outsider companies are deeply decentralized, with a tiny headquarters staff (think two dozen staff at HQ and thousands of employees in the field) and authority and accountability pushed down the hierarchy.

In contrast, capital allocations decisions are tightly centralized, and the main responsibility of the CEO. Autonomous business units send money up to the CEO, who then allocates each dollar based on where it can earn the highest risk-adjusted return. The CEO is ultimately responsible for growing the diameter of the snowball, and pushes it wherever the opportunities for compounding appear
most promising.

All capital expenditure projects must offer a risk-adjusted, after-tax return higher than a hurdle value (perhaps 20%) the CEO sets – one of the most important elements of their job.

Returns on projects must be more attractive than the return from doing share buybacks, a technique that nearly all of the Outsiders employed regularly and with dazzling results for their shareholders. Outsider CEOs were decidedly contrarian.

They were “greedy when others were fearful, and fearful when others were greedy,” to quote Warren Buffett. When their stock traded at lofty multiples, they used it to acquire companies or divested over-valued divisions.

Each of these options was fueled by an obsessive focus on generating hard cash returns on each dollar spent, day in and day out.

What’s hyped in your industry? what would it look like to do the opposite?

In short, Outsider CEOs ran their companies to maximize cash flow, and deployed that cash to produce as high a shareholder return as possible. Sound simple? It’s interesting to see how few business people actually think this way. Thorndike points out that no top business school teaches a course on Capital Allocation, and he’s probably on to something.

So, this is the short summary of the “Good To Great Book By Jim Collins” . hope you liked it. If you find this informative then also check out some more book summaries like:

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