Some More Thoughts on Successful Firms and CEOs

A blueprint for successful organisations is based around ensuring

- a disciplined approach to capital expenditure by using key indicators like EBITDA (earnings before interest, tax, depreciation & amortisation) & IRR (internal rate of return), discounted cash flow, etc
- as capital allocation is senior management's most important task, it is centralised, ie investment with involvement
- management is decentralised so that entrepreneurial energy is released; this, also, keeps both costs and "rancour" down
- maximising share value is more important than growth or size
- cash flow is a better determinant of long-term value than reported earnings
- independent thinking (including contrarian) is essential for long-term success
- interaction with outsiders, like media, analysts, etc is kept at a minimum as it can be distracting and time-consuming
- sometimes the best investment opportunity is in your own organisation, ie buy-backs
- with acquisitions, occasional boldness and patience are virtues, eg willing to wait for the right deal
- opportunistic, flexible and diversified to handle business cycle swings, eg booms and busts
- performance-based, eg compensation
- effective tax plan, ie minimising tax liabilities (individual and corporate)
- focus on long term, eg revenue generation rather than cost cutting
- minimal overheads, eg small corporate headquarters/office, small but talented Boards (usually under 10 members) who have major investments in the organisation

Some of the personal characteristics of the most successful American senior managers include

- frugal, eg eschewed perks like corporate planes, upmarket offices, etc
- low key, ie more humble than charismatic, not high-profile, avoid the spotlight, etc
- analytical & rational with a disciplined approach, eg capital expenditure
- understated, eg using conservative assumptions
- independent, ie don't follow the herd (institutional imperative - see elsewhere) and a mindset willing to challenge everything, like assumptions, etc
- innovative, ie the ability to make connections across different fields, disciplines, industries, organisations, etc
- a combination of conservatism and boldness, ie know when to be bold
- devoted to their families, eg happily married
- limited managerial experience, ie most CEOs from outside the industry
- opportunistic & flexible, eg focus on what is in the best interest of the organisation, buy and sell at the right price
- encourage staff to act like owners, eg focus on long-term like culture, capital investment, organisational structure, etc
- have a mindset more like investors than business people, ie capital allocation
- "hire well, manage little", eg decentralised management
- many are outsiders to the industry they succeed in, ie willing to challenge conventions, norms; refer unorthodox approaches; contrarian in their approaches to aspects such as financial metrics

(NB Their genius was recognising enormously powerful ideas that they would proceed to execute with maniacal focus and determination. They approached things with fresh eyes and a deep-seated commitment to rationality.)

"...at their core, they are rational and pragmatic, agnostic and clear eyed. They do not have ideology..."
William Thorndike, 2012

"...it is impossible to produce superior performance unless you do something different..."
John Templeton as quoted by William Thorndike, 2012

Also, these top performing managers like to work with highly talented but small Boards whose members have significant interest like shareholding in the organisation

This is based on the performance of 8 outstanding US CEOs eg
i) Tom Murphy (Capital Cities)
ii) Henry Singleton (Teledyne)
iii) Bill Anders (General Dynamics)
iv) John Malone (TCI)
v) Katharine Graham (The Washington Post)
vi) Bill Stiritz (Ralston Purina)
vii) Dick Smith (General Cinema)
viii) Warren Buffett (Berkshire Hathaway)

These CEOs outperformed S&P 500 by over 20 times and their peers by over 7 times. They performed considerably better than the legendary Jack Welch with GE (1981 - 2001). He delivered a compound annual return of 20.9%; while the S&P averaged 14%, ie only 3.3 times S&P (not 20 times).

Australia's experience

Australia's best performing companies all have long-term CEOs despite the fact 1/4 of CEOs in ASX 200 have served less than 2 years and the average tenure is now less than 5.

Yet a long-term CEO appears to be crucial for consistent and sustained performance. Obviously a poor performing organisational will change its CEO often (Patrick Durkin, 2016).

 

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