It’s widely accepted in the sports world that to pin all hope of winning on one player is not a good team strategy. If they can no longer represent that team for any myriad of reasons, it stands to reason that there should be a chain of replacements (or at least a plan to get these as soon as possible).
If we think back to the 2011 Rugby World Cup, we’ve seen this kind of replacement plan in action. We lost three first-five members in a row and went from Dan Carter all the way to Stephen Donald, who had to be called up from whitebaiting in the Waikato. We went on to win the Cup and all’s well that ends well – but had we not had that chain of replacement, we could have been in serious trouble.
The same rule applies in business. It’s called key person risk, and it’s something that must be planned for and mitigated if (and when) it becomes an issue.
You may have seen the recent headlines about Magellan Financial Group’s troubles, which seemed to really come to the fore at the end of 2021 when a busy few months saw the CEO Brett Cairns resign, chairman and CIO Hamish Douglass confirm his marital separation (and then his exit for health reasons), and their biggest institutional mandate walking.
Douglass has been a well-known figure in business for over a decade now. He was one of the co-founders of Magellan in 2007 and was widely touted to be the powerhouse behind the company’s pre-2021 success. After a tumultuous personal and professional period, an undetermined leave of absence is understandable… but not altogether reassuring for those who had seen him as a steady pair of hands in the past.
Of course, a company is more than one man. However, if that one man is the person shareholders are placing all their faith in, it can be difficult to assure your clients that their departure will not be significant. Especially when that one man left suddenly, following a year of significant underperformance.[i]
Another infamous example of key person risk is the $33 million man, Chris Cuffe. Back in 2003 he was given a controversial $32.75 millon pay-out when he left Colonial First State. If you’re thinking this sounds like a lot for any executive to be paid out, you wouldn’t be alone.
This kind of pay-out isn’t uncommon, even if the amount is usually less – It’s known as a golden handshake, a stipulation in an employment agreement where the employer will provide a significant severance package if the employee loses their job. It’s usually provided to top executives in the event that they lose employment because of retirement, layoffs, health or for negligence.[ii]
In Cuffe’s case, this made him Australia’s biggest ever recipient of such an exit package – and he got it after he’d spent 6 months on sabbatical.
Cuffe is credited with having built CFS into a dominant wealth management brand. Newer bosses from the Commonwealth Bank (ASB’s parent company), who acquired it in mid-2000 for $10 billion, ended up with egg on their face when they had to honour the agreement, which predated the acquisition, and announced it on the same day as news that their profits had a big slide.[iii]
And who could forget Ron Brierley’s fall from grace? Brierley was known and even knighted in 1988 for being a trailblazer in New Zealand business – ironically followed by stumbles from the early 90s onwards, including being removed as CEO from his own company when it faltered after the market crash of the late 80s. Googling any businesses once connected to Brierley now will bring up his charges for possessing child abuse material, which cemented a more grim reputation for him in 2021.
If the success of a venture depends on one person, there is going to be consequences when they inevitably falter.
The market is not emotional. But stakeholders might be. They’re only human after all, and if they lose confidence, it can be fatal. It’s a risk, like any other, that needs to be managed – and if the time comes to put a backup plan into motion, it needs to be communicated effectively.
With investment, evidence shows time and again that diversification is the best way to mitigate a number of risks. This is how you can avoid being stung by volatility.
The same thought should be applied to the underlying management team for your wealth. Does their strategy hinge on the thoughts and ideals of one person? Or do they hold a more robust, evidence-based approach?
A good litmus test is to simply ask for a copy of the firm’s investment philosophy. They should be able to produce evidence for their approach. If the reply is that it is proprietary, or can’t be evidenced – it might pay to look elsewhere.
If you’re looking to grow or protect your wealth, you are much better off following philosophies which subscribe to scientific, evidence-based practices than those who depend on the golden touch or guidance of individuals. If you’re questioning your current approach or wanting a second opinion, get in touch with a trusted fiduciary to discuss your options.
Nick Stewart is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
[i] https://www.moneymanagement.com.au/news/funds-management/magellan-doubles-down-prevent-outflows-following-douglass-exit
[ii] https://www.investopedia.com/terms/g/golden-handshake.asp#:~:text=A%20golden%20handshake%20is%20a,%2C%20layoffs%2C%20or%20for%20negligence.
[iii] https://www.smh.com.au/national/the-peoples-bank-finds-33-million-for-one-man-you-know-whats-his-name-20030213-gdg9j1.html
