The Outsiders by William Thorndike, Jr.
The Outsiders by William Thorndike, Jr.
Starting with Henry Singleton (the guy who built Teledyne), Thorndike profiles several CEOs who created large returns to shareholders, instead of management. Tom Murphy, Bill Anders, John Malone, Katharine Graham, Bill Stiritz, Dick Smith, and Warren Buffett complete the inventory of CEOs who ran legendarily lean operations.
TCI (John Malone's company) was the largest company in the cable industry, with the lowest programming costs, least maintained facilities, most complex structure, and, oh yes, far and away the highest returns.
His management of TCI had a quality of asceticism about it. Every element of the company's strategy -- from the pursuit of scale to tax minimization to the active use of financial leverage -- was designed to optimize shareholder returns.
Another key source of capital at the company (TCI) was taxes not paid...
he applied his engineering mind-set to the problem of minimizing the "leakage" from taxes as he might have minimized signal leakage on an electrical engineering exam. As the company grew its cash flow by twentyfold over Malone's tenure, it never paid significant taxes.
In fact, Malone's one extravagance in terms of corporate staff was in-house tax experts. The internal tax team met monthly to determine optimal tax strategies, with meetings chaired by Malone himself. When he sold assets, he almost always sold for stock or sheltered gains through accumulated NOLs (net operating losses), and he made constant use of the latest tax strategies.
The second pattern is timing investments to coincide with significant management or strategy changes. Buffett uses the analogy of a pro-am golf event to describe these investment opportunities, which arise when a company with an excellent "franchise-type" business invests in other businesses with lower returns: "Even if all of the amateurs are hopeless duffers, the team's best-ball score will be respectable because of the domineering skills of the professional." When, however, Buffett sees that a new management team is removing the amateurs from the foursome and returning focus to the company's core businesses, he pays close attention, as the preceding table demonstrates.