Does This Metric Tell Investors All They Need to Know About Gilead Sciences?
In his book The Outsiders, author Will Thorndike highlights eight skilled capital allocators who succeeded by being unconventional in how they spent money. The decision to launch only projects that will have a favorable return, Thorndike explains, may seem like common sense, but it’s not the approach CEOs typically take, or the one Wall Street expects.
This is largely explained by the owner-versus-manager mindset. Owners are driven by accountability — and a desire to spend the company’s money as if it were their own. After all, when you own a business, expenses and investments are essentially coming out of your pocket.
Conversely, the manager mindset is one of hierarchy and bureaucracy, where building larger teams — and, by extension, a larger organization — is the goal. Managers won’t hesitate to acquire a business that doubles the size of the company, because it means they’ll be managing twice the enterprise. Many executives (most, even) are actually incentivized to make these deals; managing a larger company means getting paid more money. But an owner balks at such deals and asks, “Where will the money generate the greatest return?”