'...the most crucial ingredient in a team that achieves and sustains historic greatness is the character of the player who leads it.' Sam Walker
Highly successful CEOs share certain characteristics
We have previously written about The Outsiders, a book by William Thorndike. He details the results of a comprehensive analysis of companies that provided shareholders with truly exceptional total returns over extended periods. After identifying these companies based on quantitative metrics, Thorndike performed a qualitative analysis to find any commonalities between the individuals who ran them. Since ‘Management’ represents one of the 3 Ms on which we base our investment decisions – which means we spend a significant amount of time analysing management teams – we found plenty of food for thought in Thorndike’s book. He emphasises, for example, the importance of allocating capital to the highest potential returns instead of the largest possible deal, and observes that it is often more effective to empower managers of subsidiary companies than to micromanage them (however, manager selection and incentivisation are key).
In sports, it all comes down to the captain
Sam Walker performed a similar exercise to Thorndike, but focused on sports teams. Over an 11-year period, he reviewed the achievements of more than 1 200 teams across the world, in 37 major sports categories. His data set went as far back as the 1880s as he looked for standout teams that achieved exceptionally long or concentrated bursts of success. Walker’s test of success was not a simple win rate. It also considered several additional factors, such as the strength of the competition on a per-match basis and a team’s aggregate performance relative to the runners-up (which had to be vastly better to qualify for consideration). Every data point was also weighted for the significance of the event. A mere 16 teams crossed all his demanding hurdles.
After extensive analysis, Walker found a common thread running through these 16 teams: their success could all be attributed to their captains. This came as a surprise. After all, most people would expect coaches or exceptionally talented individual players to be the secret sauce.
Successful captains of sport and industry have much in common
There were several traits the captains from Walker’s study had in common, and a number of parallels we can draw with the exceptional CEOs identified by Thorndike:
1. Aggressive play that tests the limits
Outsider CEOs did deals that held significant financial benefit for themselves and their shareholders – but were by definition very detrimental to the parties on the other side of the transaction. Generally, they also structured operations so that they could share the bare minimum in profits with tax authorities. The captains identified by Walker tended to test the referee’s boundaries and were comfortable to transgress from time to time, placing pressure on opponents and showing commitment to their team members.
2. Low key and very little interest in the limelight
Outsider CEOs were not charismatic. They tended to ignore investor relations, earnings guidance and the spotlight. They focused on return on capital, rather than on building empires. In fact, they often shrunk their empires through share buybacks. The same can be said of Walker’s captains, who often maintained a relatively low public profile and didn’t appropriate their team’s success for themselves. Their focus was on leading from within.
3. Emotional discipline, with an occasional show of intense emotion
The Outsiders showed tremendous restraint to wait patiently for the right deal, but then moved quickly and boldly. Similarly, successful captains had controlled temperaments on the field but occasionally displayed strong emotional reactions. This was always by design rather than default, to show commitment to team members.
4. Supportive rather than instructive leadership (a pat on the back rather than a rap over the knuckles)
Outsider CEOs empowered their underlying managers by giving them autonomy and scope for significant financial reward. They tended to provide capital from a holding company level and gave advice rather than instructions. They also showered underlying managers with praise when they performed well. (Warren Buffett’s letters to shareholders are a good example.) The captains in Walker’s study used similar tactics by being supportive rather than instructive.
5. Strong conviction and the courage to stand apart
An Outsider’s conviction was always evident by the significant amount of ‘skin they had in the game’ – in many cases, almost their entire net worth. These CEOs had the ability to be buyers where or when others were too afraid, and in doing so often picked up bargains. Successful captains showed similar commitment and were prepared to put themselves on the line for the cause.
Corporate managers who push for promotion are often those less suited to it
Recognising that successful leaders in both sport and business share many of the same qualities, Walker points to a paradox in the selection of corporate managers. Individuals who get the most out of teams work behind the scenes. They demonstrate their commitment, and support team members rather than reprimand them. The irony is that these are not the kind of individuals who push for corporate promotions. Individuals who do are often motivated by prestige rather than by the desire to promote the goals and values of the organisation.
Purpose is an important driver
For us, one of the most interesting lessons from Walker’s book is that purpose drives sports teams. We have also found this to be an almost universal recipe for success in corporates. Individuals can inject purpose in many ways, but personal fame is not one of them. Interestingly, we have on several occasions come across CEOs who talk about ‘me’ and ‘them’ when referring to underlying managers. More than once, this led to a disastrous destruction of value.
We apply these principles in our investment process
Walker’s book has again highlighted that it is critical to assess the leadership of an organisation before making an investment. As CEOs are often charismatic, they can be masters at focusing your attention on areas that reflect well on themselves. Our continuous learning and reading helps us to focus on the areas that really matter.
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