William N. Thorndike and Michael White generously shared their wisdom in the “Outsiders” issue of The Manual of Ideas.  Below are a few of my favorite insights from exclusive interviews with these two legendary thought-leaders.


 

Michael White is a retired former CEO of DirecTV, the world’s largest pay television service. He served at DirecTV from 2010-2015. Previously, he spent two decades at PepsiCo International, where he served in various roles, including as CEO. He was also CFO of Frito Lay from 1990-1994. Mike started his career at Bain & Co. in 1980.

Selected Excerpts

From where you sit, how much of successful strategy is “figuring it all out in advance” and how much is, to quote Jim Collins, “trying a lot of stuff and keeping what works?”

I think it’s a very interesting question. Both are important and I think you’re missing one additional element: I think every good CEO has an intuitive sense of what matters. Sometimes there are so many metrics and so many things to look at that, and the best CEOs are the ones who can simplify the complexity. Where are the key opportunities and where are the key threats? What are the key strengths to leverage and what are the key weaknesses to watch out for? What are the best markets to fish in for growth? Where do you place your bets, if you will, since you’re usually going to have more than one bet to place on the future?

At DirecTV I had a pretty clear sense that we needed to focus on three key areas: one, improving our digital presence, particularly TV Everywhere; two, significantly enhancing our customer experience; and three, driving growth aggressively in Latin America. These were intuitively three bets that we wanted to make and I wanted to drive the organization to focus on them.

In a world of uncertainty and rapid change I do believe that trying a lot of stuff and keeping what works – or doubling-down on what works – is really important, and I think in many ways my role was to give the organization a broad sense of direction, and then you’ve got to count on the right people to figure it out. When you see something working, I’m a big believer in pushing harder on that. I think in today’s world, where things are changing so fast, you’re going to go down some rat holes that don’t pay out, and you’ve got to know when to hold and when to fold.

Once you’ve got that intuitive sense of where to point the organization then you should give them a lot of room to try a lot of stuff and keep what works. With all that being said, there is a time and a place for figuring it out in advance. But it tends to be when you have the one “bet your company” transformational move, let’s say. In our case, it was when I came to the conclusion that our strategy was running out of gas and then we really needed a transformational move and the merger with AT&T was the way to go. We did a lot of analysis around that, but with a very small team. These moves tend to be those where there’s no turning back once you make that transformational move and you don’t have the chance to try a lot of stuff and see if it works. Once you go down that path the die is cast and that’s the way you’ve got to go.

I think that there’s a time and a place for each of the three different approaches. You better have a good sense of what matters and lead the strategic focus on those areas. You’re going to do a lot more trying stuff, empowering people, seeing what works and encouraging people to try things, but every now and then there are those few times when you’ve got to figure it all out in the advance; again, that tends to be the big transformational moment.

In what nuanced ways did you grow cumulatively wiser from your experiences at Bain, then Avon, followed by PepsiCo, and finally DirecTV?

I think great leaders are learning machines. Wayne Calloway, who was the Chairman at PepsiCo, used to say, “God gave you two ears and one mouth; use them in proportion, because you can learn a lot by listening.” I’ve always been a good student, but I’ve come to appreciate that you learn in different ways and that there are different kinds of intelligence, if you will, if you think about the growth of the EQ phenomenon.

For me, the learning really started at Bain & Company. I would say that was my free Harvard MBA. I had a great time working for Mitt Romney. He was a terrific boss and it really taught me about data-based analysis. It taught me how to think strategically. It taught me about being linear logical in my thinking and how to convey your point of view with a clear fact-driven presentation. I would say for the strategic thought leadership component, probably I got the most out of Bain.

Avon was a completely different experience, working for Jim Preston – who is one of the most inspirational leaders I ever worked for. I learned about connecting with people. Jim was great at that. I also learned, though, that sometimes what they tell you in the book doesn’t work. I hired a general manager for our small UK perfume business from Estee Lauder thinking she was the best of the best and it turned out she almost bankrupted the business because she was used to big budgets and not being entrepreneurial. I also learned at Avon that you can’t grow your career if you can’t grow the business and some things just aren’t fixable. In the end, after we sold off the perfume businesses, I just felt the door-to-door distribution system was fundamentally broken in developed markets and wasn’t fixable, and it was time for me to move on because some strategy issues are so structural that they are just not fixable.

I’d say I learned the most at PepsiCo. I had some fabulous leaders all along the way at PepsiCo. Roger Enrico was great about focusing on the front line with great clarity. I learned a lot about having a passion for growth and performance. We were taught to aggressively innovate and seek new growth opportunities. I also learned a lot about leading change at PepsiCo. I think PepsiCo is such a rich company in terms of talent, you also learned a lot by watching other people. I learned a lot about strategy working for Mike Jordan, who has since passed away. I learned a lot about leading people, simplifying complexity, and leading change from Roger Enrico, who recently passed away. I learned a lot from Craig Weatherup, who is the most well rounded leader I ever worked for. I learned a lot about global, local, and international business ultimately running everything outside the U.S. and Canada. I came to realize not all the world works the same way as America necessarily. And, even in terms of strategy your competitors don’t always play by the same rules.

I suppose by the time I got to DirecTV I’d done a lot of learning because I was in my late 50s, but I also learned a lot there. Negotiating content deals is like nothing else I’d ever experienced and while I knew a bit about negotiating I had to take it to another level. I’ve always been a voracious reader, but that’s just one element of learning. Connecting to the front line when you are the guy at the top was something I learned a bit about, as well.

Elaborating on the comment that you’re a voracious reader – are there any books that you find yourself revisiting on a regular basis or books that you find yourself frequently gifting to others?

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As you reflect on successful business leaders – what, in your observation, differentiates the best CEOs you have met versus the merely ordinary CEOs?

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You mention John Malone as someone who has particularly impacted you. Could you share some of your experiences and his wisdom?

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How do you perceive risk, and more importantly, how did you try to de-risk the choices you made as you ran your businesses?

In the case of DirecTV, most of the risks were strategic or technology change driven and highly disruptive. so the question of risk tended to be technology change and strategic disruption. Issues such as, somebody’s going to go over the top or someone’s going to be able to take video-over-the-top wireless.

You’ve got to create some different scenarios because I don’t think anybody knows what the world’s going to look like in 2025. You need to look around the corner, Shai, but looking around the corner doesn’t mean having a crystal ball. What it means is understanding what are these demographic and attitudinal mega-trends with Millennials and what they’re watching, how internet capacity was changing, and how will video over the internet evolve, and how do I think about that, and how do I place a bet there and be smart about it? In our case, we did a Hispanic over-the-top play called Yaveo. I don’t think it’s been all that successful, but the point was to learn what it was like to operate similar to a Netflix type advertising-free model.

I just think in most businesses when you look at risk it tends to be related to your competitive strengths and weaknesses, opportunities and threats. You worry much more about technology change or competitive risks from a competitor from China or Korea that doesn’t play by your rules. In any case, you’re back to the basics in terms of your business strategy – how do you become the low-cost competitor, how do you deliver the best customer service or best customer experience more broadly, and how do you innovate around the product consistently year-in and year-out to provide added functionality that consumers will value? That’s where you’re going to find your risks, outside the financial services industry.

Now, with the financial services industry, you’re looking at the stress test on what happens if everything goes to hell and how prepared am I to withstand the 100-year storm? Risk at financial services is very different, as I know from being on the Bank of America board where you’ve got a heavy, heavy dose of regulatory oversight.

Please share your observations about successful investors over the years. How have they spotted change before others, both good changes and bad changes?

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On buying back half the shares that traded – do you have any thoughts why others have not adopted a similar strategy? It was simple but not easy, but maybe also obvious in hindsight?

I’ve come to realize that you get the investors you attract. In other words, in our case because we never paid a dividend, I could look at the theory that says buying back shares is more efficient than the double-taxation on dividends, and therefore not pay a dividend. Over time, because investors knew that’s what I was doing, I tended to get shareholders who didn’t want a dividend. But, there are other companies, like AT&T, that pay a consistent dividend year in and year out and that dividend is sacrosanct for them. You have to look at your circumstances and determine what is best from a capital allocation standpoint.

Additionally, I think in some companies, only because their market caps are so high, it’s a challenge to try and buyback enough shares to make a meaningful difference.

In the case of DirecTV, I always said I would have preferred a big acquisition that was highly strategic. I just couldn’t come up with one that made any sense. Absent that it was, “Let’s keep buying back shares because the valuations were compelling.” I think our average share price bought back over the five years I was at DirecTV was probably $55 and we sold the company at $95, but it was a unique circumstance.

I think there are a lot of ways to look at capital allocation, but too many CEOs focus too much attention only on the Income Statement and not enough on the Balance Sheet and the Income Statement.

I’d love to get a sense of what, if anything, The Manual of Ideas could be doing that’s helpful to you. How can our member-community add value to you and your endeavors?

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If you’re willing to share with us, could you summarize what you’re doing these days?

I’m on three public company Boards – Whirlpool, Kimberly-Clark, and Bank of America. That takes a fair amount of time. I’m also an advisor to Nelson Peltz and Trian Partners. I’m also on the Board of Trustees of Boston College, and I chair a non-profit called the Partnership for Drug-Free Kids, which is doing all it can to fight the disease of addiction and opioid abuse and address the challenge of kids abusing drugs. And then, I have seven wonderful grandchildren to give back to. Between that and a little piano playing and some golf, that’s my average day.

The full interview is 4 pages of unique first-hand perspective.

(members of The Manual of Ideas, download the full interview.)


 

Will Thorndike is founder and a managing director of Housatonic Partners, a private equity firm. He is a graduate of Harvard College and the Stanford Graduate School of Business and has been a guest lecturer at the Harvard and Stanford business schools. He is a director of eight companies and two not-for-profit organizations and lives in the Boston area with his wife and two children.

Selected Excerpts

The Outsiders is described by Forbes as “one of the most important business books in America,” and Warren Buffett is on record stating this title is “an outstanding book about CEOs who excel at capital allocation.” With that backdrop, The Outsiders is a landmark book and we are truly grateful that Will Thorndike is sharing his direct insights with fellow members of The Members of Ideas. As we begin our conversation, let’s please together explore how the book came about.

I work at Housatonic Partners and every other year we host a conference for the CEOs of our portfolio companies. The conference format usually includes a keynote speaker, someone like Jim Collins or Michael Lewis. We’ve had Nick Howley, Tom Might, Andy Grove come and other CEOs who would be familiar to The Manual of Ideas community.

We also include a series of practical talks, and about ten years ago, I raised my hand and said I’d lead one of these sessions. I then needed to figure out what I was going to talk about. I had read about Henry Singleton and his long-term shareholder returns at Teledyne. We had an HBS student working for us that summer, between years at business school, who was terrific. I asked if he wanted to do an independent study in his second year to assist with the research on Singleton and the comparable group of 1960s era conglomerates. The student had just committed to another independent study, but connected me with his tennis doubles partner Aleem Choudhry, who had been a Phi Beta Kappa in Physics from Stanford.

Aleem and I worked on the Singleton project together over the following year, preparing for this talk. The first semester we did very detailed analytical work on Teledyne and the comparable companies and in the second semester we spoke to everyone alive who had anything to do with the Teledyne. Unfortunately, Singleton was deceased, but we spoke to members of the management team, prominent investors, Board members, competitors, employees, investment bankers, and consultants – a broad mix of people. I just found the project to be substantially more intellectually interesting than I had expected.

As I was in the process of writing up our findings, Aleem introduced me to a very talented student in the class behind him, who was also looking for independent study for his second year of studies, John Gilligan. John was a Phi Beta Kappa in Chemistry from Harvard and we together ended up researching Capital Cities.

So it started out as a presentation at our CEO conference, and then, just by happenstance, I got into a very talented vein of Harvard Business School second year students. I did about one case study per year after, so the book took a very long time, but grew organically from that first project.

I think the audience would appreciate learning more about Housatonic Partners.

I am a private equity investor, working with CEOs and management teams to build companies over longer periods of time. Our strategy specifically emphasizes longer holding periods and backing very talented younger CEOs who have a prior history of success and prior P&L experience, getting their first opportunity to earn real equity. We also focus on a very specific type of business model. We like high return on tangible capital businesses, typically businesses with strong cash generation and recurring, subscription-like revenues in growing markets. We have an office in Boston and an office in San Francisco.

In what ways has your book helped improve your own investment endeavors?

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As you explain the concept of Outsiders, I sense a deliberate word choice of “traits” and “approach.” Can you please elaborate?

I think that’s a good framework because I think they’re two different things.

In terms of traits, you would use a different set of adjectives to describe this guy than people typically use to describe CEOs. You would likely not use the typical description of strategic, visionary, and charismatic. Instead, you would use words like pragmatic, cool, logical, agnostic, analytical, and opportunistic – words along those lines. You would also find that if there was a spectrum from extrovert to introvert, the group would tend maybe slightly to the introverted side of things. They did not relish the public outward facing part of the CEOs role: they actively made a conscious decision to avoid the standard investor relations type activities – they did not speak at industry conferences, they did not partake in sell-side gatherings, and they weren’t Chamber of Commerce types. The example that I think is vivid: that they would not have chosen to attend Davos, had they been invited, that was just not a part of the CEO package for them. While they came from a wide variety of prior backgrounds – one of them had actually been an Apollo astronaut, one was a widow, two were high-level mathematicians, one was an investor – they shared a common set of personal characteristics, and they tended to be very quantitative, very analytically oriented, and very intellectually independent.

These traits drive a type of approach: they are very comfortable doing their own analytical work. They did not delegate that to finance teams, outside accounting or consulting firms, McKinsey or Bain types. They were comfortable doing that work themselves and that was actually central to their ability to pursue a differentiated course in capital allocation.

Half of the Outsiders had engineering degrees, only two had MBAs.

Have any of these traits become more important in the years since the book was published?

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I’d love to please delve further what you mean by “this approach” when defining Outsiders.

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Have you started to look for Outsiders beyond the United States?

That’s a great question. The short answer is yes.

I am beginning to assemble a list of CEOs who have these characteristics and traits, and exemplify this approach, outside the United States. I am doing so with the idea that I may add one or two chapters, and do an expanded edition of the book. I will not do an entirely new version of the book as I think that the core ideas are in the existing book. (Plus I’m a very slow writer.) The book has gained some nice traction outside the U.S. and I’d like to try to find some great examples overseas.

With such a well-defined framework of Outsider “traits” and “approaches,” what could be done address the risk of getting a false positive?

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For someone who is investing in Outsiders deliberately and is keeping close eyes on 10-Ks, 10-Qs, conference calls – what would you characterize as signposts of change, what would be key data-points for the incremental better or worse?

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Identifying Outsiders is the definition of case-specific, fundamental research. At the same time, we are living through interesting times – we have record low interest rates and stock markets hitting new highs. To what degree does backdrop, if at all, factor into how you think about the search for Outsiders and your analysis of Outsiders?

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Is it equally likely to see an Outsider CEO in an airline business as it is in a chocolate company? Are certain types of industries more versus less conducive to Outsider CEO behavior?

That’s a really interesting question. The short answer is no.

I think this sort of approach can be found in any industry and I think you could actually make the case that it can be most impactful in commodity type businesses.

However, the combination of a shareholder value oriented CEO in a true high return on invested capital, recurring revenue type business – that’s very, very powerful, full stop.

This general approach in a commodity business, a truly commoditized business, can represent a powerful competitive barrier in-and-of-itself. Property and casualty insurance at Berkshire Hathaway over the last 50 years, since the acquisition of National Indemnity, is an example. Their competitive advantage, they have been able to instill, is a cultural one that stems from the very top – from the CEO and Chairman – of two things: focusing on float generation while being willing to not write insurance when it’s not profitable, when the combined ratio is over 100. That sounds very simple, but it turns out it’s very hard to implement in an industry where you have a competitive peer group that is trying to manage its quarterly earnings and that can’t have the lumpiness of profitability inherent in this approach across the P&C cycle. The same mindset would give similar advantages in oil and gas companies, E&P companies, mining businesses, etc. It’s this willingness and ability to be extremely disciplined, in terms of when to allocate capital to growth. On a very large scale, over a long period of time, you can see this capital discipline in ExxonMobil, and it’s produced highly differentiated returns relative to the peer group.

The Manual of Ideas membership community is wonderfully diverse and intelligent. In what ways can our collective base of experience and wisdom be additive to your endeavors? What type of feedback would you most welcome, and how can we create value for you?

Read answer in The Manual of Ideas Members Area.

The full interview is 6 pages of unique first-hand perspective.

(members of The Manual of Ideas, download the full interview.)


Learn Even More:  The Outsiders: Who Are They?