I just re-read “The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success” by Willam Thorndike. It’s an analysis of eight relatively unknown Jack Welch-record-beating CEOs and how they trounced the market and industry peers over 20+ years. Their primary source of value as CEOs was how they allocated capital, or how they invested the excess cash their businesses made. The companies were decentralized organizations, never paid big dividends, learned when to exit businesses, knew what metrics mattered, and were independent and frugal. Over time they delivered 5-10x the dollar gains of the market. One key was they avoided the “institutional imperative,” a term coined by Warren Buffett to describe corporate peer pressure. In Berkshire Hathaway’s 1990 shareholders letter, he described it as “the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so.” Companies that follow the institutional imperative tend to:
- Follow the buzzwords and the strategy du jour, often for the only reason that others are doing it.
- resist change in direction when industries and information changes.
- benchmark everything.
- participate in auctions and frequently buy hot companies dependent on “synergies” and investment banker recommendations.
- like being in the spotlight.
The Outsiders understand when to use simple math and how to intuitively validate numbers. Complex models were shunned in favor or yellow legal pads and basic calculations. Henry Singleton of Teladyne was a pioneer in share repurchases. He didn’t buy by the drop. He bought sporadically and by the bucket. Shares bought at the right price can often be the greatest investment. Katharine Graham, the CEO of Washington Post, was leery to invest in new equipment until it was used by competitors first. She was untested but had great instincts and mentors, including a man named Warren Buffett, who was not famous in the early 1970s. She also had the discipline of establishing a simple long-term hurdle rate for any acquisition, which assumed no synergies or debt.
In employer healthcare, the idea of capital allocation can be applied to how healthcare dollars are spent. For employers, this can often be more than $10,000 per employee, or $100,000,000 for a company with 10,000 enrolled employees. That becomes big money. Several questions can help frame healthcare dollar allocation decisions and avoid corporate peer pressure:
- Are you doing everything everyone else is? Are you enticed with a new program just because big fancy surveys say 80%+ of companies will be doing it in 3 years?
- Which dollars will make the biggest difference? Which the least?
- Does a program reduce units of care (e.g., do companies see the expected reduction in emergency room visits after implementing telemedicine, a program 90% of companies will soon be offering)?
- Are you offering screenings and programs according to guidelines and research, or the vendor and broker suggestions that generate fees and commissions?
- Are you aware of the risk of adding a 15th vendor to your suite of programs (communication risk for that and other programs and low use risk)?
- Do you recognize risks, including hidden risks, risks of inertia, the creative risks that require a little more in-depth thinking?
The healthcare decision-makers with The Outsiders mindset won’t achieve the fame or financial rewards of the eight CEOs from the book, but they can impact a big expense category. They just need to be independent and bold. As John Templeton said: “It is impossible to produce superior performance unless you do something different.”