Chapter 151 - Limping on Water: My 40-year adventure with one of America's outstanding communications companies
What I learned from Tom Murphy and Dan Burke
Today’s Chapter is based on the book “Limping on Water: My 40-year adventure with one of America’s outstanding communications companies” by Phil Beuth. The book is an excellent biography that goes over Phil Beuth’s experience at Capital Cities working along the legendary Tom Murphy and Dan Burke.
“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
In this Chapter, I will also refer to the book “The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success” by William Thorndike, which has a specific chapter on Tom Murphy and Capital Cities.
Here’s what I learned:
Decentralization
“It doesn’t make sense to hire smart people and then tell them what to do, we hire smart people so they can tell us what to do.”
— Steve Jobs
Tom Murphy’s tenure at Capital Cities exemplifies how granting extreme autonomy to managers can foster a corporate culture of responsibility, innovation and efficiency. Unlike traditional large companies that often stifles innovation with layers of bureaucracy, Tom Murphy believed in hiring capable individuals and then stepping back, allowing them to own their decisions fully. This decentralized approach motivated employees by instilling a sense of ownership that made them reluctant to leave. As Murphy once said, “Hire as few of the best people available, pay them well, give them equity and autonomy in an ethical company and leave them alone.”
This decentralized approach was inspired by the founder of Capital Cities, Frank Smith who once said, “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.”
As such, it is not surprising to see that extreme autonomy for its operating managers is a core philosophy at Capital Cities. In fact, it is mentioned so on the inside cover of every Capital Cities annual report:
“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.”
— Tom Murphy
A great example of the success of full autonomy can be seen in Dan Burke’s early experiences, where he learned that silence from headquarters signaled trust, allowing him to prioritize operations over reporting. In fact, Burke famously said, “Murphy delegates to the point of anarchy.”
As William Thorndike explained, “The guinea pig in the development of this philosophy was Dan Burke himself. In 1961, after he took over as general manager at WTEN, Burke began sending weekly memos to Murphy as he had been trained to do at General Foods. After several months of receiving no response, he stopped sending them, realizing his time was better spent on local operations than on reporting to headquarters. “
This was similar to Phil Beuth’s experience working with Murphy. Beuth echoes Murphy’s hands-off style, where often a brief conversation sufficed for assigning new responsibilities, trusting employees to deliver without micromanagement. As Don Polec, a manager from a competing company once said, “My parent company in Cincinnati, tells me, the manager, what I am going to do. The difference, is you tell New York what you are going to do.” That is just pure Capital Cities at its best.
By consequence, by providing so much autonomy to its employees, there was an extremely low turnover among employees. As Robert Price, a rival broadcaster once said, “We always see lots of résumés but we never see any from Capital Cities.” Similarly, Frank Smith once said, “The system in place corrupts you with so much autonomy and authority that you can’t imagine leaving.”
This concept of extreme autonomy reminds me of how Ken Iverson structured Nucor around decentralization, granting divisions near-complete autonomy to make decisions locally, which fostered innovation and responsiveness. This model contrasted with centralized bureaucracies, allowing Nucor to adapt quickly to market changes while holding managers accountable for results. By keeping divisions small and pushing authority downward, Iverson ensured that those closest to the work drove the business, rather than distant executives.
As a matter of fact, Iverson mentions that “Each division operates its one or two plants as an independent enterprise. They procure their own raw materials; craft their own marketing strategies; find their own customers; set their own production quotas; hire, train, and manage their own work force; create and administer their own safety programs…. In short, all the important decisions are made right there at the division. And the general manager of the division is accountable for those decisions. That’s where the buck stops at Nucor.“
For Iverson, this autonomy was non-negotiable and managers at Nucor enjoyed this decision-making responsibility and accountability. However, to maintain this autonomy, managers were expected to deliver a 25% return on assets and follow the ethical standards of the company.
“At Nucor, we chose long ago to build our company on a decentralized model in which each operating division enjoys true autonomy. We have told our managers to “trust your instincts”—and we have meant what we said. We’ve urged them to confer the same kind of decision-making autonomy to their people—to make their own decisions based on what they think is best for the business—and we have never backed off our commitment.“
— Ken Iverson
The main reason why Iverson believed in decentralization was because he believed that the frontline employees were the one that were closest to the problems and by consequence, have the best innovative ideas. He once said, “That is, by the people closest to where the work actually gets done. Those businesses must tell people on the front lines to “trust your instincts.” And businesses that tell their people to “trust your instincts” generally should be decentralized. A decentralized structure pushes the power to set strategy, spend money, make decisions, and create policies out toward the marketplace. It promotes local autonomy.“
As such, he believed it was primordial for managers to be maintain close contact with their employees. As he explained, “Managers are supposed to do what’s best for the business. And what’s best is to remember we’re all just people. Managers don’t need or deserve special treatment. We’re not more important than other employees. And we aren’t better than anyone else. We just have a different job to do. Mainly, that job is to help the people you manage to accomplish extraordinary things.”
“That’s the main reason we’ve tried to keep our divisions small. When a business grows beyond 400 or 500 people, it’s hard for management and employees to stay connected. I don’t order our managers to keep in close contact with their employees. But I do nag them. I say, “Andrew Carnegie was a financier. He could afford to treat people like peasants. We’re managers. We can’t.” They may not appreciate my nagging, but I do it with their interests in mind.“
— Ken Iverson
Frugality
“When we cut expenses we have a direct, equal and positive impact on our bottom line. If we forget this fact we will be a member of the “Losers Club” and stupid. That is one club that we are not joining.”
— Alan Greenberg
If autonomy was the engine of Capital Cities, then a relentless focus on costs was the fuel. Murphy and Burke understood a fundamental truth: while revenues in an advertising-based business could be unpredictable, costs were almost entirely within their control. They instilled a culture where every dollar spent was scrutinized, not for the sake of being cheap, but to build a resilient and highly profitable enterprise. This frugality was a defensive moat against economic downturns and a competitive weapon. As Thorndike explains, “Frugality was also central to the ethos. Murphy and Burke realized early on that while you couldn’t control your revenues at a TV station, you could control your costs. They believed that the best defense against the revenue lumpiness inherent in advertising-supported businesses was a constant vigilance on costs, which became deeply embedded in the company’s culture.”
“The best defense against revenue uncertainties are constant, tight cost controls.”
— Tom Murphy
In fact, the most legendary story about Tom Murphy was how he scrutinizes every expenses, even for paint. Thorndike writes, “Shortly after Murphy arrived in Albany, Smith asked him to paint the dilapidated former convent that housed the studio to project a more professional image to advertisers. Murphy’s immediate response was to paint the two sides facing the road leaving the other sides untouched (“forever cost conscious”). ”
More importantly, this cost control culture was passed down from the executives to the operating managers. As Phil Beuth mentions, “Now, 30 years later, the company is no longer small, and if you wonder how it happened, well, there is no mystery; we just did it day to day. The bankrupt stations lost $ 360,000 the first year, and we did not turn the corner until our third year, after going back to our stockholders twice for $ 150,000 each time. There were 39 employees running radio and TV, and 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.”
“The goal is not to have the longest train, but to arrive at the station first using the least fuel.”
— Tom Murphy
Furthermore, Murphy and Burke’s success in building Capital Cities was often by acquiring companies and incorporating Capital Cities’ culture of being cost efficient. Often, this would allow the newly acquired subsidiary to run leaner and to boost margins significantly.
A great example of this was how they transformed ABC’s culture from extravagance to efficiency. Thorndike mentions that “Burke and Murphy wasted little time in implementing Capital Cities’ lean, decentralized approach—immediately cutting unnecessary perks, such as the executive elevator and the private dining room, and moving quickly to eliminate redundant positions, laying off fifteen hundred employees in the first several months after the transaction closed. They also consolidated offices and sold off unnecessary real estate, collecting $175 million for the headquarters building in midtown Manhattan.”
“ABC, in fact the whole broadcasting industry, was a limousine culture—one of the most cherished perks for an industry executive was the ability to take a limo for even a few blocks to lunch. Murphy, however, was a cab man and from very early on showed up to all ABC meetings in cabs. Before long, this practice rippled through the ABC executive ranks, and the broader Capital Cities ethos slowly began to permeate the ABC culture. When asked whether this was a case of leading by example, Murphy responded, “Is there any other way?””
— William Thorndike
Tom Murphy’s fanatical approach to cutting costs reminds me of Alan Greenberg at Bear Sterns, who believed that a company’s success should be evaluated on its Return on Equity (”ROE”). And the secret to improve its ROE is simple: to increase revenues while cutting expenses. However, considering that sales are quite dependent on various external factors, Greenberg prefers to focus on what he can control: cutting expenses. As he once said, “The only statistic I care about is return on equity. After many sessions with some of our business school graduates (yes, we do have some), I think they have helped me understand the secret to improving our R.O.E. It seems that if we increase revenues and cut expenses, return on equity goes up and that is what makes me happy. Please make me happy! I can be very unpleasant when I’m not.
As such, Alan Greenberg was an expert at cutting cost and he made sure to remind his employees to do so in his various memos. One way he did this was by asking his staff to save up on office supplies such as paperclips, rubber bands and scotch tapes. While these may seems excessive, there is no need remind you that even a small expenses can compound into a big ones at a large scale.
“I have just informed the purchasing department that they should no longer purchase paper clips. All of us receive documents every day with paper clips on them. If we save these paper clips, not only will we have enough for our own use, but we will also, in a short time, be awash in the little critters. Periodically, we will collect excess paper clips and sell them (since the cost to us is zero, the Arbitrage Department tells me the return on capital will be above average). This action may seem a little petty, but anything we can do to make our people conscious of expenses is worthwhile.”
(…)
“Because of your cooperation, I would like to extend our cost-cutting efforts to a larger matter. Bear Stearns will no longer purchase rubber bands. If we can save paper clips from incoming mail, we can save rubber bands, and my hope is that we can become awash in those little stretchies also.”
(…)
“All of us use blue envelopes for sending written material around the office. Our team has done a great job of saving these envelopes and reusing them, but our scotch tape expense has gone up. From this day on, instruct your secretary to lick only the left side of the flap when sending the envelope. The reason for this will amaze you, and make you wonder why you did not think of this yourself. If the envelope is gently opened by the recipient, it can be used again and sealed, without using scotch tape, by your secretary licking the right side of the flap and then sealing it. After all of us have become accustomed to accurate and precise licking, a further extension of this will be to lick only the left third, and then the middle for the next trip, and the right side for the penultimate voyage. If one has a small tongue and good coordination, an envelope could be opened and resealed ten times.”
— Alan Greenberg
Integrity
“Our goal still remains—a high return on equity with integrity.”
— Alan Greenberg
The final, and perhaps most important, lesson we can learn from Tom Murphy’s career at Capital Cities is that high performance and high integrity are not mutually exclusive. In fact, Murphy would argue that they are interdependent as he built Capital Cities on a foundation of absolute honesty.
This wasn’t merely a morale stance but a practical business requirement. Decentralization relies entirely on trust. If you are going to give a manager total autonomy, you must be able to trust their word implicitly. If that trust is broken, the system collapses. Therefore, Murphy had zero tolerance for dishonesty. Mistakes were acceptable, but a lack of integrity was not. As Murphy once said, “I can accept mistakes, but do not ever lie to me or anyone else in the company. There is no second chance here.”
This concept of integrity was important in every interaction, from how the company treated vendors, partners and the public. As such, it was primordial for Murphy to recruit employees who shared this ethical framework. It suggests that character assessment was a big part of their due diligence when hiring. As Warren Buffett once said, “You’re looking for three things, generally in a person: intelligence, energy, and integrity. And if they don’t have the last one, don’t even bother with the first two.”
“Over the decades, as someone who had an intimate working relationship with Tom Murphy, I have often been asked to explain what made Tom 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.”
— Phil Beuth
Furthermore, this ethical code forbade employees to receive gifts, which was a common practice in the entertainment industry. He understood that small compromises lead to larger ones. As Beuth explains, “Almost overnight, I was bombarded with interview requests from agents and actors. That was fine, but on a half-dozen occasions, those requests were accompanied by lavish gifts and personal, handwritten notes, as though they’d come from old friends. I was sent a Rolex watch by a producer I hardly knew, and a fine leather wallet and briefcase from others. We did not accept such generosity at Capcities. With thankful explanations, the gifts were returned.”
Based on this story, it is clear to me that Tom Murphy understood the power of reciprocation. Reciprocation bias refers to the strong human tendency to feel obligated to return favors, gifts, or actions received from others, whether they are positive or negative. This bias fosters cooperation and social harmony but can also lead people to make decisions against their best interests due to a sense of social debt or obligation. This is the reason why Sam Walton wouldn’t let Walmart’s purchasing agents accept even a hot dog from a vendor.
Furthermore, Murphy and Burke’s hiring preferences were often in odd compared to other companies. In fact, at Capital Cities, leaders were chosen for intelligence and drive over rote industry credentials. As Beuth once said, “The company’s hiring practices were equally unconventional. With no prior broadcasting experience themselves before joining Capital Cities, Murphy and Burke shared a clear preference for intelligence, ability, and drive over direct industry experience. They were looking for talented, younger foxes with fresh perspectives. When the company made an acquisition or entered a new industry, it inevitably designated a top Capital Cities executive, often from an unrelated division, to oversee the new property.”
This reminds me of Edwin Land, the founder of Polaroid who had this motto of “an education without a degree”. Land hired his employees but did not require them to have any technical experience. Since his company’s office was located nearby, he frequently hired fresh graduates or students from Harvard or MIT. Furthermore, Land preferred to hire bright young liberal students over applicants with technical experience. As a matter of fact, he believed that they could learn the routines of the laboratory and the structure of scientific discipline as rapidly and, more importantly, they had little to unlearn.
While Land did not expect his new hires to have technical knowledge, he expected his employees to continue their education as an integral part of their working career. He fully believed that individuals in the industry would be better qualified to increase their technical competence and at the same time make their job fully satisfying through continuous learning.
Beyond the Book
Listen to "#328 Tom Murphy (Buffett's favorite manager)" by Founders Podcast
Read "Interview with Tom Murphy" by Harvard Business School
Read "Warren Buffett: The Three Things I Look For in a Person" by Farnam Street
Read "Reciprocation Bias" by Farnam Street
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