Who’s the greatest CEO of the last fifty years? If you’re like most people, the overwhelming likelihood is that you answered, “Jack Welch,” and it’s easy to see why. Welch ran General Electric, one of America’s most iconic companies, for twenty years, from 1981 to 2001. GE’s shareholders prospered mightily during Welch’s tenure, with a compound annual return of 20.9 percent.
The metric that the press usually focuses on is growth in revenues and profits. It’s the increase in a company’s per share value, however, not growth in sales or earnings or employees, that offers the ultimate barometer of a CEO’s greatness.
Welch’s tenure coincided almost exactly with the epic bull market that began in late 1982 and continued largely uninterrupted until early 2000. During this remarkable period, the S&P averaged a 14 percent annual return, roughly double its long-term average.
Singleton, in contrast, ran Teledyne for almost thirty years, and the annual compound return to his investors was an extraordinary 20.4 percent.
Using our definition of success, Singleton was a greater CEO than Jack Welch. His numbers are simply better: not only were his per share returns higher relative to the market and his peers, but he sustained them over a longer period of time (twenty-eight years versus Welch’s twenty) and in a market environment that featured several protracted bear markets.
CEOs need to do two things well to be successful: run their operations efficiently and deploy the cash generated by those operations.
Basically, 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.
Call it Singletonville, a very select group of men and women who understood, among other things, that: • Capital allocation is a CEO’s most important job. • What counts in the long run is the increase in per share value, not overall growth or size. • Cash flow, not reported earnings, is what determines longterm value. • Decentralized organizations release entrepreneurial energy and keep both costs and “rancor” down. • Independent thinking is essential to long-term success, and interactions with outside advisers (Wall Street, the press, etc.) can be distracting and time-consuming. • Sometimes the best investment opportunity is your own stock. • With acquisitions, patience is a virtue . . . as is occasional boldness.
As figures P-1 and P-2 show, on average they outperformed the S&P 500 by over twenty times and their peers by over seven times
All were first-time CEOs, most with very little prior management experience. Not one came to the job from a high-profile position, and all but one were new to their industries and companies. Only two had MBAs. As a group, they did not attract or seek the spotlight. Rather, they labored in relative obscurity and were generally appreciated by only a handful of sophisticated investors and aficionados.
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. Most CEOs are hedgehogs—they grow up in an industry and by the time they are tapped for the top role, have come to know it thoroughly.
In the 1986 Berkshire Hathaway annual report, Warren Buffett looked back on his first twenty-five years as a CEO and concluded that the most important and surprising lesson from his career to date was the discovery of a mysterious force, the corporate equivalent of teenage peer pressure, that impelled CEOs to imitate the actions of their peers. He dubbed this powerful force the institutional imperative
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. All also enjoyed eye-popping, credulity-straining performance over very long tenures (twenty-plus years on average).
This freshness of perspective is an age-old catalyst for innovation across many fields. In science, Thomas Kuhn, inventor of the concept of the paradigm shift, found that the greatest discoveries were almost invariably made by newcomers and the very young (think of the middle-aged former printer, Ben Franklin, taming lightning; or Einstein, the twenty-seven-year-old patent clerk, deriving E = mc2).
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.
At the core of their shared worldview was the belief that the primary goal for any CEO was to optimize long-term value per share, not organizational growth. This may seem like an obvious objective; however, in American business, there is a deeply ingrained urge to get bigger. Larger companies get more attention in the press; the executives of those companies tend to earn higher salaries and are more likely to be asked to join prestigious boards and clubs. As a result, it is very rare to see a company proactively shrink itself. And yet virtually all of these CEOs shrank their share bases significantly through repurchases. Most also shrank their operations through asset sales or spin-offs, and they were not shy about selling (or closing) underperforming divisions. Growth, it turns out, often doesn’t correlate with maximizing shareholder value.
Tom Murphy and Capital Cities Broadcasting
focus on industries with attractive economic characteristics, selectively use leverage to buy occasional large properties, improve operations, pay down debt, and repeat.
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. Under Murphy, Capital Cities combined excellence in both operations and capital allocation to an unusual degree. As Murphy told me, “The business of business is a lot of little decisions every day mixed up with a few big decisions.”
in January 1986, Murphy, in his masterstroke, bought the ABC Network and its related broadcasting assets (including major-market TV stations in New York, Chicago, and Los Angeles) for nearly $3.5 billion with financing from his friend Warren Buffett. The ABC deal was the largest non–oil and gas transaction in business history to that point
There are two basic types of resources that any CEO needs to allocate: financial and human.
There is a fundamental humility to decentralization, an admission that headquarters does not have all the answers and that much of the real value is created by local managers in the field.
“Decentralization is the cornerstone of our philosophy. Our goal is to hire the best people we can and give them the responsibility and authority they need to perform their jobs. All decisions are made at the local level. . . . We expect our managers . . . to be forever cost conscious and to recognize and exploit sales potential.”
When he saw something that he liked, however, Murphy was prepared to make a very large bet, and much of the value created during his nearly thirty-year tenure as CEO was the result of a handful of large acquisition decisions, each of which produced excellent long-terms returns. These acquisitions each represented 25 percent or more of the company’s market capitalization at the time they were made.
Henry Singleton and Teledyne
The conventional wisdom today is that conglomerates are an inefficient form of corporate organization, lacking the agility and focus of “pure play” companies. It was not always so—for most of the 1960s, conglomerates enjoyed lofty price-to-earnings (P/E) ratios and used the currency of their high-priced stock to engage in a prolonged frenzy of acquisition.
As he once told Financial World magazine, “If anyone wants to follow Teledyne, they should get used to the fact that our quarterly earnings will jiggle. Our accounting is set to maximize cash flow, not reported earnings.”
The conventional wisdom was that repurchases signaled a lack of internal investment opportunity, and they were thus regarded by Wall Street as a sign of weakness. Singleton ignored this orthodoxy, and between 1972 and 1984, in eight separate tender offers, he bought back an astonishing 90 percent of Teledyne’s outstanding shares.
One of the most important decisions any CEO makes is how he spends his time—specifically, how much time he spends in three essential areas: management of operations, capital allocation, and investor relations.