Lessons in management — ‘Doing well and doing good’: The Capital Cities doctrine
A recollection of my notes on leadership, management, capital allocation and life lessons from the examples set forth by Tom Murphy and Dan Burke at Capital Cities.
“Tom Murphy and Dan Burke were probably the greatest two-person combination in management that the world has ever seen or maybe ever will see.” — Warren Buffett
Note: This article represents my notes compiled on these two remarkable individuals. Tom Murphy and Dan Burke did not write much and kept low profiles. Most of what I have compiled is through the writings and speeches of Warren Buffett and Charlie Munger, ‘The Outsiders’ by William N. Thorndike, former Disney CEO Bob Iger’s fantastic autobiography ‘Ride of a Lifetime’ and former Capital Cities executive Phil Beuth’s autobiography ‘Limping on Water’.
Results speak for themselves
$1.00 invested with Tom Murphy when he became CEO in 1966, would have been worth $204 by the time he sold the company to Disney. That’s a remarkable 19.9% internal rate of return over twenty-nine years, significantly outpacing the 10.1% return for the S&P 500 and 13.2% return for an index of leading media companies over the same period.
From a bankrupt television company in Albany, New York to a giant broadcasting empire that was ultimately acquired by Disney in 1995 for $19 Billion. The story and management philosophy of Tom Murphy and his lieutenant, Dan Burke, is an awe-inspiring lesson for anyone interested in the highest quality of management decision making and capital allocation.
“Most of what I learned about management, I learned from Murph. I kick myself, because I should have applied it much earlier.” — Warren Buffett, Berkshire beyond Buffett
Tom Murphy and Dan Burke built this empire from the ground up with a set of principles and values. Their story of leadership, management and business success is a truly remarkable story that is worth further study. Here are some of those principles and values.
1. “Hire as few of the best people available, pay them well, give them equity and autonomy in an ethical company and leave them alone.”
“Decentralization is the cornerstone of our philosophy. Our goal is to hire the best people we can and give them the responsibility and authority they need to perform their jobs. All decisions are made at the local level. . . . We expect our managers . . . to be forever cost-conscious and to recognize and exploit sales potential.”
At Capital Cities, you were responsible for your own decisions, and once you were used to complete autonomy and a compensation system based on profits, it was difficult to work any other way. Here’s how Cap Cities Chairman Frank Smith put it:
“Some of you fellows may think I tie you to Capital Cities by corrupting you with compensation and stock options. But I’ve decided the reason you are afraid to leave this company is more because our system naturally corrupts you with autonomy and authority. And I suspect that after living that way for a time, you’re fearful that someplace else might not operate in the same manner.” — Frank Smith
The cornerstone of the company’s philosophy was built by this statement first espoused by Capital Cities Chairman, Frank Smith. Unprecedented autonomy and authority were granted to employees, many of whom were hired because they showed more energy and enthusiasm for solving problems than previous work experience in the same field.
A blizzard of memos from corporate headquarters is a gross waste of paper
All types of broadcast markets are different, Tom Murphy and Dan Burke did not send instructions from HQ to highly talented and motivated individuals on how to do their job. Capital Cities leadership may have had high expectations, but the company’s focus on autonomy also meant that you won’t be blaming headquarters for your problems. You make your own decisions, and you have to live with them.
An example of the autonomy enjoyed by Cap Cities managers
Phil Beuth describes the experience of hiring the local manager of a Burger King, who ended up becoming the hottest feature reporter in that market. After hearing about an enthusiastic Burger King manager, Phil invited him over to their office. After gauging his enthusiasm for the job, Phil asked him to imagine he was a reporter and prepare 5 stories for TV show segments the next day. Blown away by his ‘55’ ideas the next day, he was hired on the spot and walked directly into the newsroom where he was put into work.
Here is how a friend and competitor at NBC congratulated Phil on the hiring of this reporter. “Taft, my parent company in Cincinnati (NBC), tells me, the manager, what I am going to do. The difference,” he said, “is you tell New York what you are going to do.” And that is pure Capital Cities.
“Don’t hire a dog and do the barking!” — Tom Murphy
2. “The best defense against revenue uncertainties are constant, tight cost controls.”
At the core of the company was a belief in tight control of costs and prevention of unnecessary expenses and waste. It was always expected that employees continued to do excellent work, despite the constant — perhaps ad nauseam — harping on costs, urging thrift, not at the expense of quality, but to avoid the waste of stockholders’ money.
The philosophy behind this management style is simple, with autonomy and control you were to treat the company like your own. A waste of money meant it was almost like you were wasting your own money. Everybody prospers when the company’s earnings grow and profit is shared and the best way to maintain profitability in a business with uncertain revenues or ‘lumpy’ earnings is to manage what you can control — your costs!
Some personnel immediately recognized the attractive monetary rewards linked to cost controls, while others who were less attentive, considered them a nuisance. That is, until new information about earnings increased the price of their stock and the value of their profit sharing. That snapped them to attention.
“… we learned one important thing — we needed only a few people to keep things going. That experience was worth a great deal to Capital Cities over the years. It helped us avoid building up huge staffs. We believed we should hire the best people, pay them well, and never have more people than necessary. Even to this day, we have no corporate counsel, no vice president of personnel, no public relations department. When my boss said the building needed a paint job, I had them paint only the sides the public could see … not the sides facing the woods and the Hudson River.” — Tom Murphy, Harvard Business School, Graduating Class of 1985
3. “In your business career, don’t do anything that is ethically questionable. You will lose more than you can ever gain”
Phil Beuth describes what made Tom Murphy tick. “If one simply measured the man by his intelligence, person-to-person skills and business smarts, he would already rank among the best. But those who know Tom recognize that his brilliant operational acumen and business philosophy were always rooted in the highest degree of integrity. Tom built a company based upon certain honorable principles and only recruited partners who shared those principles and considered them gospel.”
Tom Murphy and Dan Burke made it clear that employees could make honest mistakes or miss budgets, but if they put the company, or themselves, in disrepute, there was no second chance at Capital Cities. Those words were the bible. Do the right thing was their personal road map. Employees were taught to avoid the quick-fix solution and when faced with a tough decision, favor the best long-term interest of the station, person or community.
Like Warren Buffett at Berkshire Hathaway, at Capital Cities, if you lost a shred of reputation for the company you were gone.
“As my father used to say, do not do anything that would cost you a good night’s sleep!” — Tom Murphy
4. “Let your employees know you believed they could succeed beyond even their own expectations”
Phil Beuth described himself as a turtle on a fencepost, claiming, “Do not ask me how I got here, the recipient of all this credit, because the truth is my staff put me up to it!”
Tom Murphy and Dan Burke believed in sharing credit obtained during a successful endeavor and constantly took an effort to praise others rather than themselves. Especially giving subordinates credit and praise.
Phil elaborates on this point by saying “I was blessed and lucky to work with good people, about whom I cared deeply. I had been taught years earlier by Dan Burke that it was smart management to let your employees know you believed they could succeed beyond even their own expectations. He had employed that tactic with me on many occasions”.
Keeping your emotions in check
Tom Murphy and Dan Burke were gentlemen and careful to not act on anger and emotion, employing rationality instead.
“Be careful what you say to subordinates. You will forget in 24 hours, but they will remember it word for word forever.” — Dan Burke
Managers believed in openly sharing information with staff as a way to bond them to Capital Cities/ABC. Keeping them current regarding ratings, rates, sales, profit sharing, and all company activities, reminding them over and over that they were part of a great company.
“You can always tell the guy to ‘go to hell’ tomorrow” — Tom Murphy
5. “The goal is not to have the longest train, but to arrive at the station first using the least fuel.”
Bill Paley, who ran the legendary media business CBS in 1966 when Tom Murphy became the CEO of Capital Cities had a company with a market capitalization of 16x the size of Capital Cities. 30 years later Capital Cities was three times as valuable as CBS. Following conventional wisdom of “diversification” and “synergy”, CBS diversified to an array of unrelated businesses from manufacturing guitars to baseball teams, making the company larger and even more bureaucratic.
Tom Murphy instead focused on things he really understood that deliver real value to all stakeholders. He and Dan Burke rejected bureaucracy and diversification and focused on creating a streamlined conglomerate that focused singlehandedly on the media businesses it knew well.
“The business of business is a lot of little decisions every day mixed up with a few big decisions.” — Tom Murphy
Tom Murphy’s capital allocation principles
Tom Murphy did not delegate acquisition and capital allocation decisions, never used investment bankers. He was a highly disciplined buyer who had strict return requirements and did not stretch for acquisitions.
“I get paid not just to make deals, but to make good deals.” — Tom Murphy
Here are some of the principles he deployed
- It had to be in his ‘circle of competence’
- After reviewing profit and operating histories he was confident they produced a double-digit after-tax return over ten years without leverage
- He was confident that the philosophy and business savvy of Capital Cities could be infused by his team to further improve margins and efficiency
- He was patient, nurtured relationships over years with potential buyers and choose targets carefully. He worked hard to become a preferred buyer by treating employees fairly and running properties that were consistent leaders in their markets
- Almost across the board, the response from the newly acquired entity’s employees was positive, gentlemanly, collegial and enthusiastic. Tom believed in “leaving something on the table” for the seller and said that in the best transactions, everyone came away happy
- He eschewed diversification, paid almost no dividends, rarely issued stock, made active use of leverage, regularly repurchased shares (when the company’s multiple was low relative to private market comparables, Tom Murphy bought back stock)
Once a deal fit his requirements, Murphy was prepared to act aggressively and make very large bets with deals sometimes representing 25% or more of the company’s market capitalization at the time. Tom Murphy kept his discipline, and if the deals did not fit the bill he would walk away saving time and acrimony.
6. “Do yourself a favor, get yourself involved in your community. Put something back. When you do well, do some good also!”
Phil Beuth describes many community programs and non-profit organizations that were aided by the exposure received on Capital Cities media network and noted that Dan Burke insisted all profits from community programs and after school specials go directly back to the organizations featured in those shows.
Corporate Initiatives were part of the philosophy that made Capital Cities an extraordinary company. Tom Murph and Dan Burke did not do these things for show or out of obligation to serve CSR industry quotas. They did them out of a sophisticated conscience that they obeyed regardless of how successful and powerful the company became. The company demonstrated that a business can succeed while operating at the highest standards.
Over the years I have given a fair amount of reflection to form a set of principles that will dictate what kind of manager I want to be and the kind of company I want to operate. I was immediately drawn to the way these gentlemen conducted themselves and this article represents my collection of notes made on what they did and why they did it.
Their awe-inspiring maxims and teachings are full of wonderful life lessons and wisdom to anyone paying attention, here’s one of my favorite passages from former Disney CEO Bob Iger in ‘The Ride of a Lifetime’ regarding these two men.
They were two of the most authentic people I’ve ever met, genuinely themselves at all times. No airs, no big egos that needed to be managed, no false sincerity. They comported themselves with the same honesty and forthrightness no matter who they were talking to. They were shrewd businesspeople, but it was more than that.
I learned from them that genuine decency and professional competitiveness weren’t mutually exclusive. In fact, true integrity — a sense of knowing who you are and being guided by your own clear sense of right and wrong — is a kind of secret weapon. They trusted in their own instincts, they treated people with respect, and over time the company came to represent the values they lived by.
— Bob Iger, Ride of a Lifetime
Here are some classic Dan Burke maxims from Phil Beuth’s book
“You just have to let your managers know someone is watching.”
“Always be careful who does the hiring. Mediocre people tend to hire mediocre people.”
“Avoid the echo effect. Line managers besieged by MBA-laden corporate staffs hire their own MBA’s, so they can talk to one another.”
“Never tweak the nose of a bear …”
— Dan Burke
and my personal favorite from Tom Murphy, that sums up their entire philosophy
“Be sure to pick a business you enjoy. Do not go for the biggest buck, but go where you will be happiest, because if you are happy, you are successful And do yourself a favor, get yourself involved in your community. Put something back. When you do well, do some good also. You will feel better about yourself. As my father used to say, do not do anything that would cost you a good night’s sleep!
And finally, in your business career, don’t do anything that is ethically questionable. You will loose more than you can ever gain.”
— Tom Murphy, Harvard Business School, Graduating Class of 1985
If you enjoyed what you read here, be sure to check out my article on keeping human misjudgment in check the ‘Charlie Munger way’ here or if you are interested in business and investing you can check out my review of Ben Graham’s ‘The Intelligent Investor’ here or my review of Adam Smith’s ‘Wealth of Nations’ here.
This article was derived in large part by the material and inspiration listed below
- ‘The Outsiders’ by William N. Thorndike
- ‘Ride of a Lifetime’ by Robert Iger
- ‘Limping on Water’ by Phil Beuth
- QZ: The man who taught Warren Buffett how to manage a company
- LA Times: Cap Cities’ Style Is Lean, Profitable: Combines Decentralization With Rigid Profit Standards
- Tom Murphy on the Charlie Rose show
- 25iq.com: A Dozen Things I’ve Learned from Tom Murphy About Capital Allocation and Management