The extraordinary "outsiders" in Thorndike's book could not be more different. They are not fixated on Wall Street. They see Wall Street as a distraction. For them, customers and employees are their top priority. If customers and employees are happy, shareholders will be happy. These outstanding CEOs plan for the long term, and let their performance speak for itself. Of course, they know that as a publicly traded company, they are exposed to a lot of short-term noise, but they choose not to pay attention to it. They build dominant companies with enduring cultures. Thorndike draws on Jack Welch as an example of a charismatic and outgoing CEO who has long been considered the perfect blueprint for a CEO. Welch was CEO of GE from 1981 to 2001, and during his tenure, the stock achieved a CAGR of 20.9%. That's a very impressive return, even during one of the longest bull markets in history. But the truly exceptional CEOs in Thorndike's book have achieved even higher returns over longer periods of time. Exceptional CEOs differ from other CEOs in three different ways. 1) They are masters at capital allocation 2) They run very decentralized organizations 3) They are independent-minded and humble Truly extraordinary CEOs do most things differently than their peers, which helps explain their performance. “It is impossible to produce superior performance unless you do something different” (Sir John Templeton, Investment Maxims)
Capital allocation The truly exceptional CEOs choose capital allocation as their most important job. These CEOs are investors rather than managers. Every CEO has a toolbox when it comes to capital allocation. There are three sources of capital and five ways a CEO can allocate capital, as shown below. Exceptional CEOs are masters at using the right source of capital at the right time and investing capital where it will produce the best returns for shareholders. Sources of cash Free cash flow Debt Equity
Uses of cash Acquisitions Capex Dividends Share buybacks Debt reduction
Most senior managers in a company are promoted to CEO because of their strong performance over many years in functions such as operations or marketing. Many managers are promoted to the role of CEO because they are successful in corporate politics. On your first day as CEO, you have sole 20
