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They enjoy empire building, growing revenue and headcount without concern for profit or long-term outcomes. Typical CEOs let their egos get involved in strategic decisions. This relentless focus on cash flow also allowed them to avoid counterproductive distractions, such as costly acquisitions for the sake of growth that would later prove unprofitable. This affected their operations deeply, from how they financed acquisitions to their compensation schemes for employees. Instead, they focused on cash flow and then-innovative metrics like EBITDA (earnings before interest, taxes, depreciation, and amortization). Outsider CEOs resisted focusing on reported earnings, which present a muddled reflection of company performance because of capital expenditures, acquisitions, and other accounting artifacts.
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When they acquired companies, they instilled this lean culture into the new company. They avoided typical corporate perks like private cars and airline seats and kept headcount lean and efficient. Therefore, outsider CEOs cut operating expenses to a minimum. To outsider CEOs, cash was vital to the business, since it could be redeployed in their capital allocation strategies. Instead of being buried within a large conglomerate, spin-offs gave individual business units more autonomy and better-aligned incentives with management. Not only does this increase overhead, but it also encourages office politics.ĭecentralization also came in the form of spin-offs and tracking stocks. In contrast, typical companies tend to bulk up headquarters, featuring layers of vice presidents and MBAs. Warren Buffett of Berkshire Hathaway rarely expects managers of his portfolio companies to contact him unless they have questions.