The Outsiders: A Guide to Analyzing CEOs
A radically rational blueprint to studying CEOs, revealing the secrets of the most successful leaders
Dear reader,
Welcome to this edition of Investing Topics.
Analyzing CEOs is often a challenging and abstract task, especially when compared to the more factual, quantitative work of studying a business’s books. Even so, understanding a CEO’s incentives and decision-making is an important element of stock picking.
In today’s post, I’ve put together a framework to make this process easier and more approachable. Drawing inspiration from The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success by William Thorndike, Jr, I’ll walk you through what makes CEOs stand out and how you can find them.
What You’ll Read Today
Wall Street’s CEO
The Outsider CEO
Thorndike’s Blueprint
Wall Street’s CEO
When you picture a CEO, what comes to mind?
Probably someone high-profile, extravagant, and outgoing—an extrovert thriving on media attention. You imagine them on the covers of business magazines, giving keynote speeches, and attending conferences. Charismatic and friends with all, they’re surrounded by MBAs and traveling by corporate jet to meet with managers, analysts, and shareholders.
As Thorndike puts it, “the adjective rock star is often used to describe these fast-moving executives”.
But behind the glitz and glamour of these so-called “rock star CEOs” often lies a pattern of poor decision making. Too often, they focus excessively on appeasing shareholder, rely on appearances, and neglect their most critical responsibility: creating long-term shareholder value through effective capital allocation.
Thorndike breaks it down simply: to evaluate a CEO’s greatness, you only need to focus on three things:
“The compound annual return to shareholders during his or her tenure and the return over the same period for peer companies and for the broader market (usually measured by the S&P 500).”
For shareholders, nothing else should truly matter.
Yet, many CEOs seem more focused on fitting Wall Street’s expectations than meeting their company’s actual needs. The emphasis on growth at any cost, earnings per share (EPS), flashy acquisitions, or constant public praise typically isn’t what a company needs.
Thorndike discovered a pattern—a blueprint, if you will—of CEOs who consistently outperform their peers and the market.
They are known as the outsiders.
The Outsider CEO
The outsider CEO is the complete opposite of the rockstar. They avoid the spotlight, and often enter their industries with little to no prior experience. They are frugal, humble, and conservative, yet bold when opportunities arise. They reject lavish perks like limousines and private jets, and hold no sympathy for Wall Street. Unconventional in their approach, they dismiss the traditional focus on EPS and the expectation of recurring dividends.
The CEOs Thorndike studied all arrived at their management philosophies independently, but despite different industries and circumstances, they shared striking similarities. They favored a high degree of decentralization, focused on cash flow over earnings, and repurchased large amounts of stock. They didn’t pay significant dividends or offer Wall Street guidance.
These CEOs were met with skepticism from their peers and the media, but the outsiders simply ignored the criticism, staying true to their principles.
Above all, they understood that their role wasn’t just about management—it was about being investors. They recognized the critical importance of capital allocation.
Thorndike’s Blueprint
While Thorndike’s book provides valuable insights for studying CEOs, the individuals he discussed have long since retired (except for Warren Buffett, who’s still going strong at the age of 94). It’s now our task to identify the outsiders of today. Here are some criteria to watch for:
1. The CEO as Investor
The outsider CEO considers themselves an investor first, manager second. They view capital allocation as a critical task. To focus on long-term decisions, they might partner with a chief operating officer (COO) to handle day-to-day operations, or there may be clear signs of a long-term focus. Though difficult to measure directly, there are clear indicators when studying a company.
One good starting point is a CEO’s shareholder letter or earnings calls. Consider the following images (click to expand):
This is extremely important. High-quality companies don’t face the problem of generating profit but rather the challenge of continuously finding reinvestment opportunities.
Other signs that a CEO is well-versed in capital allocation include:
Strategic Share Repurchases
In the 21st century, strategic share buybacks are a breath of fresh air amid the trend of companies repurchasing stock indiscriminately. Many buy shares during good times, when valuations are high, and avoid repurchasing during downturns. CEOs who act contrary to this pattern demonstrate boldness and skill.
For example, Evolution shows a clear pattern of repurchasing shares when their stock price is low. Even better, the company issued shares right around the stock’s all-time high:
Long-Term Over Short-Term
Some CEOs willingly suffer short-term losses to achieve long-term gains. For instance, Amazon often operated on the verge of profitability due to high R&D expenses. More recently, Adyen, the Dutch payment processor, significantly increased operating expenses by hiring aggressively while competitors were laying off employees. Profitability suffered, investors responded very negatively, but Adyen’s management stayed focused on long-term growth.
High Returns on Invested Capital (ROIC)
High ROIC is a reliable indicator of prudent capital allocation. For more on this, see my earlier post discussing ROIC in detail.
2. Decentralization
A decentralized organization is a key aspect of Thorndike’s CEOs. Decentralization empowers entrepreneurship and autonomy by delegating responsibilities to lower-level managers, granting them complete freedom as long as they meet their targets. This minimizes overhead costs, fosters accountability, and enhances agility and efficiency. Meanwhile, the CEO can focus on their most important task: capital allocation.
Warren Buffett’s Berkshire Hathaway exemplifies a highly decentralized organization.
3. Ignoring Wall Street
When companies go public, much time and effort often shifts toward investor relations (IR). Outsider CEOs, however, prioritize the business itself over appeasing Wall Street.
Costco is a great example. The company’s approach to IR is unique in its simplicity:
Presentations are basic and short, avoiding flashiness.
The IR page is straightforward, providing the essentials without unnecessary features.
Costco doesn’t provide guidance.
Leadership is reserved and prefers to stay behind the scenes.
The company lets its results speak for itself.
4. Significant CEO Ownership
High ownership stakes indicate that the CEO is aligned with shareholders. Leaders who are heavily invested in their company are more likely to make decisions that prioritize long-term success. This is one of the most quantifiable indicators of alignment with investor interests.
These four pillars—an investor mindset, decentralization, an unconventional approach to investor relations, and significant insider ownership—form the foundation of an outsider approach to leadership. A combination of these traits is a strong indicator of excellent leadership, which is what makes or breaks a company.
If you want to dive deeper into this topic and explore real-world examples, I highly recommend Thorndike’s book:
The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success
In case you missed it:
Disclaimer: the information provided is for informational purposes only and should not be considered as financial advice. I am not a financial advisor, and nothing on this platform should be construed as personalized financial advice. All investment decisions should be made based on your own research.
Great post, the Outsiders is one of my top investing books I have read. Let me know if any CEOs you have come across fit this mold. Of course Mark Leonard is the obvious example that comes to my mind.