The Secrets of the Best CEOs

The best CEOs of the last 50 years tend to be people you’ve never heard of.

“That isn’t a coincidence,” says William Thorndike, author of The Outsiders, a 2014 book that has garnered a lot of attention in the investment world.

The CEOs with the highest shareholder returns since the 1960s are people like Henry Singleton and Tom Murphy. Warren Buffett makes the list as well, though he serves as an exception to this general rule of anonymity.

Extraordinary bankers fit the same profile. The top performers are often the most understated and media shy of their peers. Although they are not mentioned in the book, this includes Richard Davis of U.S. Bancorp and Robert Wilmers of M&T Bank, who lead two of the most profitable banks in the United States.

These executives are iconoclasts. They go against the conventions that most people associate with effective leaders. In many cases, they’re the polar opposite of Jack Welch, the former CEO of General Electric, who was known widely for his managerial acumen.

These men and women place less emphasis on being charismatic, inspirational, or motivational, and more on being “independent, pragmatic, logical, and analytical,” explains Thorndike. The tie that binds their operations together is a disciplined and hyper-rational approach to capital allocation. Singleton repurchased 90 percent of his company Teledyne’s shares from 1972 to 1984. He did so at an average multiple to earnings of less than 8. The compound annual return from the purchases equated to an incredible 42 percent.

Murphy ran an especially lean media conglomerate, Capital Cities. This allowed him to rationalize acquisitions, knowing that he could expand the acquired companies’ margins and thereby boost Capital Cities’ purchase price without sacrificing its return. And Buffett produced Berkshire Hathaway’s stellar returns by combining insurance float with a countercyclical approach to investing. He piled into Wells Fargo in the early 1990s when analysts and commentators were forecasting its demise. And he put $5 billion into Bank of America as it seemed to teeter on the brink of failure in 2011.

The results from the CEOs covered in Thorndike’s book speak for themselves. A single dollar invested in Teledyne in 1963 was worth $181 when Singleton retired during the 1990 bear market. The same dollar invested in Capital Cities at the beginning of Murphy’s tenure was worth $204 by the time it sold to Disney 28 years later. And $1 invested in Berkshire Hathaway when Buffett took over in 1965 was worth $18,262 at the time of his 2014 shareholder letter.

“There are no structural reasons that banks can’t follow in these same footsteps and be excellent capital allocators,” says Thorndike. “It’s all about optimizing around a given set of constraints; playing the hand you’re dealt.” Few banks prove this better than U.S. Bancorp, a $422 billion bank based in Minneapolis, Minnesota. Its capital allocation strategy dates to 2000, the year Firstar purchased the namesake institution and adopted its name.

Davis and his team committed to distributing 30 to 40 percent of the bank’s earnings via dividends, 30 to 40 percent for stock buybacks, and 20 to 40 percent for internal growth and acquisitions. It hasn’t veered from these benchmarks since. “We wanted to telegraph to shareholders that they were important and that we wouldn’t be distracted by the accumulation of too much capital,” says Chairman and CEO Richard Davis.

These benchmarks have survived the scrutiny of bank capital plans since the 2008 crisis. This is in part because the 30 percent constraint on dividend payouts intimated in the Federal Reserve’s 2011 comprehensive capital analysis and review process has eased up, with multiple banks already exceeding it. Their survival stems also from U.S. Bancorp’s long record of prudent and profitable operations, which distinguishes it from its peers who have struggled to satisfy the Fed’s otherwise stringent capital standards.

U.S. Bancorp’s consistency is one of many reasons that its stock trades for the highest multiple of book value among the nation’s biggest banks. This arms it with a valuable currency that can be used to make highly accretive stock-based acquisitions. U.S. Bancorp also prides itself on its ultra-efficient operations. Its efficiency ratio last year was 53.8 percent. To put that in perspective, if U.S. Bancorp’s efficiency ratio rose to its peer-group average, its return on equity would drop from 14 percent to below 9 percent, says Davis.

This matters because it weighs on the hurdle rate that a bank like U.S. Bancorp applies to capital investments-that is, beyond the portion of earnings already allocated to dividends. The higher the return on equity, the higher the hurdle rate. And the higher the hurdle rate, the more selective a bank must be when making acquisitions-which, research has shown, destroy shareholder value roughly two-thirds of the time.

This discipline coupled with the temperament of its leaders allowed U.S. Bancorp to avoid the worst excesses that washed over the industry in the years before the financial crisis. These traits also explain why its shares have outperformed all of its peers since Firstar and U.S. Bancorp came together on October 4, 2000.

A second bank that fits the profile in Thorndike’s book is M&T Bank, a Buffalo, New York-based bank with $124 billion in assets following its recently approved acquisition of New Jersey’s Hudson City Bancorp. “Our approach to capital allocation comes from a strong sense of purpose,” says Rene Jones, M&T’s vice chairman and chief financial officer. “It’s our job to extend loans and provide opportunities in the communities we serve, regardless of where we’re at in the cycle.”

The spillover effects from this are substantial when it comes to protecting and creating shareholder value. Most importantly, it helps M&T’s executives stay prudent at times when their counterparts have become complacent from low loan losses at a cycle’s peak.

This countercyclical discipline also informs M&T’s philosophy toward returning capital to shareholders. M&T has earned $13.6 billion in net operating income since Chairman and CEO Robert Wilmers took over in 1983. However, only 43 percent of this was used to make new loans or expand its franchise through organic growth or acquisitions. It returned the rest to shareholders. “Returning capital is essential to our model,” explains Jones.

This purpose-driven approach to banking has positioned M&T throughout the years to make acquisitions when high loan losses caused its competitors to sell out at discounts to better-capitalized suitors. It purchased a bank in the wake of Black Monday in 1987, two thrifts in the savings and loan crisis, a Syracuse-based bank in the midst of crises in Asia and Russia in the late-1990s. Most recently, it picked Wilmington Trust and Hudson City Bancorp from the smoldering remains of the financial crisis.

M&T’s returns prove the validity of this approach. After adjusting for dividends and buybacks, $1 invested in M&T stock when Wilmers took over in May 1983 is equal to $132 today.

It’s tempting to relegate capital allocation to an afterthought, unworthy of the attention paid to operations. But this is a mistake. Davis and Wilmers’ records, as well as Thorndike’s book, demonstrate convincingly that the best returns throughout time have tended to stem from CEOs who do the opposite.