CEO SPECIAL ......................Math-loving CEOs often take unconventional decisions

 Math-loving CEOs often take unconventional decisions

Not many people around the world would have heard of Henry Singleton. A mathematician and scientist by training, who ended up as the CEO, Teledyne, a 60s-era conglomerate at 41, Singleton was someone ace investor Warren Buffet looked up to. That's not what makes him interesting. He'll go into the history books for having created incredible shareholder value during this time at Teledyne. William Thorndike, founder and managing director, Housatonic Partners, a Boston headquartered private equity firm, says that Singleton showed all the traits that made him an 'outsider.'

During his tenure as CEO, Singleton made 130 acquisitions between 1961-1969 when the company's stock price was at multiples of 25-45, buying companies against his stock at 12 times earnings so all the acquisitions were very accretive. Then when the multiples on the stocks fell, he focused on optimising operations, running a lean, decentralised organisation. Finally, during the recession in the mid-70s, he aggressively repurchased his stock at single digit price-earning ratios. "He generated phenomenal returns for his shareholders and consistently outperformed his peers," says Thorndike.

It was at a company conference where he'd volunteered to speak that Thorndike first got interested in Henry Singleton's approach to capital allocation. This set the template for further research, conducted with a number of  Harvard Business School students over the next eight years resulting in his bestselling book, The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint For Success. The eight CEOs don't meet the stereotypical CEO profile but meet two crucial conditions: better performance relative to the market (outperforming the S&P index twentyfold) and significantly outperforming their peers (sevenfold).
"All the 'outsider' CEOs had some common threads — all of them were first time CEOs, they were frugal, humble by nature, patient, pragmatic and highly rational, quantitative oriented individuals," says Thorndike. Interestingly, only two MBAs made the cut, with the group largely comprising engineers; all of them going against the stereotypical image of a CEO.

"These traits translated into very specific business decisions which were unconventional relative to their peers, but common across this group of CEOs," says Thorndike. These were factors like generally paying low dividends, high levels of stock purchases over time, a pattern of very occasional but very large acquisitions, extreme attention to minimising taxes and very decentralised organisational structures.

Based on studying CEOs like Katharine Graham of The Washington Post Company, Bill Anders of General Dynamite and Berkshire Hathway's Warren Buffet, Thorndike offers what he calls a radically rational blueprint for success for CEOs which can allow companies to institutionalise this kind of a culture. This is an intense unshakable focus on optimising long term value and share growth versus overall revenues or employees or profit. All sorts of specific decisions and actions flow from this simple, powerful shared focus and mindset, he says.

"All these CEOs modelled and exemplified a very specific way of taking business decisions, especially capital allocation decisions -how to invest the company's free cash flows," he says. These decisions centered on cost focus and quantifying returns on investment decisions and systematically focusing on those with the best risk adjusted returns. This idea of rationality became imbued in the culture of company and often evidenced itself in the development of unique metrics. These metrics focused on two things, free cash flow as against reported earnings and optimising per share outcomes," he says. In other words, free cash flow per share and ultimately stock price per share as against overall growth or size. Admittedly, it's easier said than done.

"It's very simple to explain what to do in this area of capital allocation but in reality, it isn't easy to implement. It's like telling someone that they should have been buying stock in March 2009 because from our vantage point it looks like a clear decision to have been investing more aggressively. But if you remember that time, it was scary," says Thorndike, adding that people who are focused on data and are doing the math are more likely to make decisions that are otherwise unconventional.< ..

Two of the outsider CEOs profiled, Buffet and TCI's John Mallone, probably had the most active times of their career during this period. "What Mallone and Buffet did during the 24 month period following the fall of Lehman Brothers was in stark contrast to the rest of corporate America which stayed on the sidelines, cautious, healing their balance sheets and generally inactive.

"It's hard to be unconventional. But focus on the data," he says, dishing out a final bit of advice. Make the case for an investment decision or whatever action you are taking based on a conservative assessment of the returns the investment would generate and build the logic from that point and try and tune out the extraneous noise from other market participants and the media. 

By Priyanka Sangani, ET CD 1AUG14