In his book, William Thorndike discusses 7 other case studies besides Teledyne and compares them with Jack Welch’s performance at GE (who is not among “The Outsiders”). The table below from Strategy for Executives summarises the performance of the Super 8 capital allocators:
|CEO||Company||Period as CEO||Stock’s Compound Annual Growth Rate (CAGR)||Factor by which the stock outperformed the S&P 500|
|Jack Welch||GE||1981-2001||20.9%||3.3 Times|
|Tom Murphy||Capital Cities||1966-1996||19.9%||16.7 Times|
|Henry Singleton||Teledyne||1960-1989||20.4%||12 Times|
|Bill Anders||General Dynamics||1991-1993||23.3%||6.7 Times|
|John Malone||TCI||1973-1998||30.3%||40 Times|
|Katharine Graham||The Washington Post||1971-1993||22.3%||18 Times|
|William Stiritz||Ralston Purina||1981-2001||24%||4 Times|
|Dick Smith||General Cinema||1962-2005||16.1%||16 Times|
|Warren Buffet||Berkshire Hathaway||Since 1965||20.7%||Over 100 Times|
This chart from the book (via Kyle Eschenroeder) shows what the 8 Outsider CEOs had in common:
Towards the end of the book, Thorndike has a capital allocator’s checklist. Here’s a summary:
- The allocation process should be CEO led, not delegated to finance or business development personnel.
- Start by determining the hurdle rate—the minimum acceptable return for investment projects (one of the most important decisions any CEO makes).
- Calculate returns for all internal and external investment alternatives, and rank them by return and risk
- Calculate the return for stock repurchases. Require that acquisition returns meaningfully exceed this benchmark.
- Focus on after-tax returns, and run all transactions by tax counsel.
- Determine acceptable, conservative cash and debt levels, and run the company to stay within them.
- Consider a decentralized organizational model.
- Retain capital in the business only if you have confidence you can generate returns over time that are above your hurdle rate.
- If you do not have potential high-return investment projects, consider paying a dividend. Be aware, however, that dividend decisions can be hard to reverse and that dividends can be tax inefficient.
- When prices are extremely high, it’s OK to consider selling businesses or stock. It’s also OK to close under-performing business units if they are no longer capable of generating acceptable returns.