Warren Buffett once told a joke about Katharine Graham, the CEO of The Washington Post Company: apparently, he had found a sheet of paper prominently displayed on her desk that read “Assets on the left, liabilities on the right.” Buffett said that Graham feared the art of business, once commenting to her that she “had a kind of ‘priesthood approach’ to business and seemed to feel that if ‘she hadn’t studied Latin and all that, she couldn’t make it into the priesthood.’”
In her autobiography, Graham concurred.
If one were to talk about the greatest executives of American business, Katharine Graham would probably list as one of its unlikeliest members. Graham took over The Washington Post Company in 1963, a month after its prior President, her husband Phillip Graham, committed suicide.
At that point in time, she was a 46-year old mother and housewife, and had not been regularly employed for nearly twenty years. She had no business experience to speak of. In her own memoirs she says that this was just the nature of the times, writing that in 1946, when her father entrusted Phil with the running of the Post — “Far from troubling me that my father thought of my husband and not me, it pleased me. In fact, it never crossed my mind that he might have viewed me as someone to take on an important job at the paper.”
In taking over The Post, Graham found herself the only female CEO of what would soon become a Fortune 500 company. She was, understandably, frightened. She had carried the insecurity of being unprepared all throughout her long career. For instance, over a decade later, long after she had already proved her mettle as head of the company, Graham burst into tears when told that several famous investors had decided to sell their holdings in The Post (after making a tidy profit, mind you!).
In her Pulitzer-winning autobiography Personal History, she writes:
I have to admit that my immediate response was to burst into tears. Here were these terribly clever investors, reputed to have such great judgement, who no longer believed in us; others would be leaving in droves. I considered their move a referendum on my management of the company and it was clear that I was found wanting. (emphasis added)
This insecurity, whilst haunting her throughout her entire business career, was ill-placed. When Graham stepped down in 1991, she had led the Post through some extremely trying times. She stood firm against the government with the Pentagon Papers; she earned Nixon’s wrath as publisher of the paper that pursued the Watergate scandal, and she personally helped with company operations during the shockingly violent 1975-1976 Washington Post pressmen’s strike.
To top it all, Graham also generated incredible value for the company’s shareholders. In her time as chairwoman, The Post Company’s compound annual return to shareholders was 22.3% — outperforming the S&P by eighteen-fold and her peers by six-fold.
At the end of the day, she had generated 1.9 times value for every dollar retained within the company. So, how did Graham go from a widow with no business experience to one of the best executives in the country?
Graham was born into a wealthy, well-read family in New York City. Her father, a respected financier, bought The Washington Post at a bankruptcy auction in 1933. The journalism bug bit Graham too. After graduating from Vassar and the University of Chicago, she worked as a journalist for a San Francisco newspaper, before finally taking up a job at The Post in 1938. Little did Graham know that less than three (short but eventful!) decades later, she would find herself in the top seat as CEO.
Graham’s father handed over majority ownership of The Post to her husband, Phillip, in 1946. Phillip owned two-third of the shares and Graham held the rest. Her father also entrusted Phillip with the responsibility of running the company.
When Phillip committed suicide in August of 1963, Graham found herself taking on the most “important job at the paper” — president and de facto publisher.
Graham inherited a company that had grown significantly under her husband’s leadership. Among its key assets were: a portfolio of newspapers, a magazine, and three television stations. In 1971, Graham took the company public under the advice of her board. Phil had been overly generous with options when building the paper, and the Post was strapped for cash. She was formally named CEO the following year (relinquishing the title of ‘President’), and was also pronounced chairwoman of the board in 1973, a position she would hold until her retirement in 1991.
For the first few years on the job, Graham didn't ruffle any feathers. She devoted her time to quietly understanding the company’s business. In 1967 Graham made her first bold move — and in the sphere she probably felt most comfortable in: the newspaper’s editorial policy. She replaced longtime editor-in-chief, Russ Wiggins, with Benjamin Bradlee, a relatively inexperienced assistant editor at Newsweek, a magazine affiliated to the paper.
Graham’s decision paid huge dividends. Bradlee was a fantastic choice, leading The Post through the publication of the Pentagon Papers in 1971 and the Watergate investigation, eventually leading to Nixon’s resignation in 1974. He also introduced the country’s first style section. Bradlee attracted great journalistic talent to The Post. His leadership on the editorial side of things kept the wheels turning, playing a key role in ensuring the company’s profitable growth.
Graham’s uncanny knack for spotting great talent went beyond her hiring duties. A great example of this was when a random investor from Omaha started buying up The Post Company’s stock in 1973. As you might have already guessed, this was Warren Buffett. However, at the time he was a small investor, practically unknown in Wall Street circles. His actions raised the board’s hackles; they suspected a hostile takeover. Once Buffett had bought more than 5% of the company, SEC regulations required him to notify Graham of the acquisition. He sent the required legal forms along with a warm letter which ended with the line:
You can see that the Post has a rather fervent fan out in Omaha. I have hopes that, as funds become available, we will add to our holdings, at which time I will send along amended 13-D filings.
Despite the positive letter, Graham was warned by her board members, well-wishers, and senior management that this new investor did not spell good news. To her credit, Graham didn’t take their words at face value. She recalls being influenced by her husband’s infectious curiosity. Phil had always urged her not to assume things about people without getting to know them first. He often reached out to different kinds of people before forming an opinion. Graham went on a mission to find out everything she could about Buffett. She wrote, later:
I tried to find out whatever I could about this man…And when I called everyone I knew who might know Warren directly or indirectly, no one I spoke to had anything but positive reactions: he had never done anything hostile, he was straight, brilliant, fine.
Graham decided to meet Buffett. Buffett told her that he thought The Post Company’s stock was undervalued, by both the market and the management itself. He was confident that the value would rise. Graham liked and trusted him from the very start. She wrote to one of the many people who had been warning her against him:
I have met the threat…and was conquered unfortunately. You’ve got to keep warning me about how they always charm you at first. He has…But if he isn’t OK, I’ll eat and digest my hat—or your hat since I don’t wear them anymore.
Graham immediately recognized what a valuable asset Buffett could be. She chose him as her mentor, confidant, and business advisor, even inviting him onto the company’s board. It was the beginning of a long, fruitful relationship between the pair. To reiterate how unusual this decision was, Buffett was far from the investing paragon he is today. Nobody knew of him. Graham’s inclination to invite him into her inner circle speaks to her discerning people skills. Needless to say, her bet paid off. Buffet played a monumental role in Graham’s success. Graham’s son, Donald, later credited her decision:
Figuring out this relatively unknown guy was a genius was one of the less celebrated, best moves she ever made.
In the early days of their association itself, Buffett noticed that Graham was unfamiliar with finance jargon. She often felt unsure of herself as she took business decisions. Buffett took her under his wing, giving Graham the business education she had longed for ever since she was put in charge. Buffett’s ingenious teaching methods included taking her through the annual reports of various interesting, if historically obscure companies. In her autobiography, she records this instance:
He told me that, whereas Otis Chandler collected antique cars, he himself collected ‘antique financial statements…[because] just as with geography or humans, it is interesting to take a snapshot of a business at widely different points in time—and reflect on what factors produced change as well as what differentiates the specific pattern of development from others also observed.’
One thing Graham never needed any help with, however, was her sense of humour. She once wrote to Charlie Munger:
...but I am sitting down in Virginia with Ben Graham’s beginner’s book and ‘How to Read a Financial Report’ by someone called Merrill, Lynch, Pierce, Fenner and Smith. I am told I have to finish Ben Graham very soon because Warren is unwilling to pay the small fine involved in having the book out of the Omaha public library too long.
Buffett guided Graham on most important decisions henceforth, including capital allocation. He did this gently and with utmost respect. In the words of a longtime board member, George Gillespie:
“He would never say, ‘Don’t do that,’ but something more subtle, along the lines of, ‘I probably wouldn’t do that for these reasons, but I’ll support whatever you decide.’”
Another notable instance of Graham’s knack for recognizing great talent was her choice of COO. However, it wasn’t until two decades into her leadership of The Post that she found the right person. Graham’s first fifteen years as CEO were fraught with existential episodes like the Watergate scandal, the Pentagon Papers, and the labour strikes; a time she called “the defining period” of her working life. Without a solid COO to lean on, Graham was occupied with operational matters. She later wrote: “My management troubles may have derived mainly from my lack of business experience, but they were multiplied by not having a real partner to help me run the company.”
Between 1977 and 1981, Graham fired a string of COOs (ten in total!) who didn’t quite match up to the role for one reason or another. Of the search, she said:
The search went on for so long that I began referring to it as “the search for Mr. Wonderful.” But over the course of the process, I came to realize that I did have an idea of the goals of the company, and the search process helped me crystallize that idea while at the same time helping me define the qualities I was looking for in a president.
Finally, in July of 1981, Graham met with Dick Simmons, then President of Dun & Bradstreet. Graham recognised in Simmons everything she needed from the company’s operational head. Two weeks later, she offered Simmons the job.
Once Simmons was on board, he acted quickly and with a quiet confidence. He was instrumental in dramatically increasing the company’s margins, across both the newspaper and broadcasting divisions. Simmons drove down running costs and transformed the company’s various subsidiaries into lean, efficient machines. An example of his strategic decision making was the sale of weak assets like a Trenton newspaper and a sports magazine. Even though the sales reduced the company earnings temporarily, it made the core business more profitable in the long-term.
Simmons also cultivated a culture of frugality. Alan Spoon (who would later become president of the company) said of this philosophy:
The system was totally federalized with all excess cash sent to corporate. Managers had to make the case for all capital projects. The key question was, ‘Where’s the next dollar best applied?’ And the company was rigorous and skeptical in answering that question.
In The Outsiders, author William Thorndike compares Simmons to the likes of Tom Murphy and Dan Burke at Capital Cities — like them, his management style was lean and decentralised. Key managers were empowered with real responsibility and incentivized to work harder because their compensation was tied to their performance relative to their peers. The play seemed to be finding the best people (a large number of them young executives) and then leaving them be.
After Simmons came in, Graham was finally free from day-to-day operations, such that she could wholly focus on capital allocation. She had been CEO of The Post Company for eighteen years by that point. In her autobiography, she wrote:
Dick Simmons’s arrival helped make the decade of the 1980s the best years from a business point of view both for the company and for me. The Washington Post Company began achieving its goals of sustaining earnings growth, developing new businesses, and building for the future.
First up in Graham’s capital allocation approach was the company’s acquisition policy. Thorndike characterises Graham’s attitude toward acquisitions as guided by the “twin themes of patience and diversification.” The Post Company had ridiculously high standards for potential deals. In the words of manager Tom Might:
Acquisitions needed to earn a minimum 11% cash return without leverage over a ten-year holding period. Very few deals passed through this screen. The company’s whole acquisition was to wait for just the right deal.
Graham didn’t get caught up in the buying and selling frenzies that swept the market every once in a while. In the 1980s, when media houses were tripping over themselves to acquire the shiniest toy on the block, Graham stood aside. Buffett would cite, approvingly, her policy of abstinence in his 1991 letter to Berkshire shareholders. The only acquisition the company made that decade was a minority interest in Cowles Media (publisher of the Minneapolis Star Tribune and other small dailies). The deal was finalised at an attractive price based on a long relationship between the Graham and Cowles families.
Similarly, when all her competitors installed new, expensive printing and prepress facilities, Graham was the only major newspaper CEO who held back. She waited until costs had dropped and the benefits of the technology were proven before investing in it herself.
During the recession of the 1990s, Graham took advantage of reduced prices and purchased a series of cable systems, underperforming TV stations, and several education businesses. The company’s exceptionally strong balance sheet allowed them to be active at a time when other, overleveraged newspaper companies were forced to step aside. Evidently, a number of these acquisitions led The Post Company into new industries.
One of Graham’s biggest acquisitions as CEO pioneered the company’s entry into cable. After the merger between broadcasting giants Capital Cities and ABC, Capital Cities was forced to divest its cable television systems to comply with government regulations. Buffett spotted the opportunity, arranging for The Post Company to have an exclusive chance to buy the assets. Graham saw it as a compelling opportunity and finalised the deal over a busy weekend (and without a single investment banker!).
The company entered the electronic age in 1982, building out some of the first cellular systems in the United States. In an uncharacteristic move they divested themselves of this a few years later, because the business was too capital intensive for their liking. Graham, influenced by Buffett, preferred long term direct ownership over spinning out and selling parts of the business. However, this exit proved to be hugely valuable for shareholders because prices of cellular companies were highly elevated when they sold. The Post Company also diversified into education with the acquisition of the tutoring and test preparation business of Stanley Kaplan. In The Outsiders, Thorndike suggests this diversification helped the company in the trying times after the newspaper industry’s ‘moat’ shrunk in the face of digital competition.
The next skill in Graham’s capital allocation repertoire was buybacks. Once Buffett had explained the wonderful maths behind stock repurchases to Graham, she took it upon herself to aggressively snap up the company’s shares, especially given how undervalued it was. She herself was initially suspicious of the idea, but Buffett made a compelling case. In Graham’s own words:
Warren went through the numbers with me, showing me what this action could do for the company in the long run, or even in the short run. He re-emphasized how low the stock was compared with its real value and how this was a better business move than many we were contemplating. He gradually made his point: if we bought 1 percent of the stock in the Post Company, everyone owned a larger share of our stock at a bargain price. I decided we should do it.
After overcoming initial resistance from top executives and board members, Graham eventually bought back nearly 45% of the company. This created enormous value for shareholders. Reputed investor Ross Glotzbach of Southeastern Asset Management praised Graham, remarking that “all buybacks are not created equal—she purchased in big chunks and at the right time.”
Amusingly enough, an expensive McKinsey report advised the company to stop repurchasing its stock in the 1980s. Graham followed the advice for a bit. In her autobiography, she remarked, rather dryly:
I actually took this advice for a while, although, as Warren has repeatedly said, anyone would have told me the company was probably worth more than $400 million on the market and the stock market value was about a quarter of that amount. Perhaps no one at McKinsey stopped to do that math. Afterwards, Don referred to the page in McKinsey’s report on which the suggestion had been made as the “half-billion-dollar page,” given that’s what it probably cost us in lost value to the company.
Stock repurchases was one of the biggest similarities between Graham at The Post Company and Murphy at Capital Cities. This overlap is significant because of just how rare buybacks were at the time. However, it is also worth noting that a big point of difference between these two executives was their approach to diversification. Graham was clearly for it, while Murphy preferred to stay within the same core industry.
Throughout her tenure, Graham prudently maintained low levels of debt. One of the few times the Post Company took on significant debt was to finance the acquisition of cable systems from Capital Cities. The company’s strong cash flow ensured that most of this was paid down in less than three years. She also consistently distributed minimal dividends, a policy especially unusual for a family run company. In the long term, this move was beneficial for shareholders.
In 1991, after a terrific three decade run, Graham stepped down as CEO. Her son Donald wrote a heartfelt tribute to her in the company’s annual report that year. One anecdote he shared was:
At a Christmas lunch one of her guests asked everyone around the table what they wished they had done earlier in life. Most said they wished they’d been centerfielders or movie stars. Kay said she wished she’d gone to Harvard Business School. (emphasis added)
Well, in 1998, Graham not only gave a talk at HBS, she was introduced by Dean Kim B Clarke as a business leader who "exemplifies the character and values that we hold dear at Harvard Business School.” A happy coincidence if there ever was one!
Sources:
Personal History: A Memoir by Katharine Graham. Published in 2002.
The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success by William N. Thorndike, Jr. Published in 2012.
https://www.alumni.hbs.edu/stories/Pages/story-bulletin.aspx?num=5522