Insurance and its main concept of distributing risk(s) has been around since Edward Lloyd first opened the doors of his London coffee.
Over time, the world of insurance has evolved, and so have its offerings, from the plausible to the most ludicrous.
The Showbiz world has demonstrated this, with Hollywood celebrities insuring body parts. But the corporate world has nearly touched its elasticity limits.
From investment banks betting against their own clients to hedge funds (and other savvy individuals) betting on sovereign defaults (and commoditising the same bets).
And if you thought you’ve had enough, you ain’t seen nothing yet.
There has been an increasing trend for blue chip companies to take out a keyman policy against their chief executive officers (CEOs).
What’s that? Basically, it’s compensatory protection that a company takes out against possible damages to the brand arising out of its CEO leaving.
Upon crystallisation, the company gets paid (and not the CEO). The whole premise is simple.
A CEO, being a brand custodian, on behalf of shareholders (of course), is the face of brand success and often gets cobbled together.
Unbundling that tie-up, whether prematurely or not, is perceived or presumed to be injurious to the brand and would require some form of monetary compensation.
But that premise only holds true under two sets of circumstances: (i) when the CEO has cultivated a cult-like personality in the organisation (like Elon Musk's kind of cult); and/or (ii) when the company’s decision-making has been centralised around the CEO.
The presence of those two sets of premises not only elevates ‘keyman’ risks but also makes it difficult to run the company in the absence of the CEO.
Fully aware of the risk elevations, some companies have mastered the art of de-risking by having distributed keymen.
Some of the stand-out companies when it comes to distributed power include Absa, where an internal interim team took charge in October 2022 after the announcement of Jeremy Awori’s exit.
The Board even went further to appoint the interim in an acting capacity (and there is a high chance that the Board might just confirm the team).
An almost similar script played out in Britam which had an internal interim team run the company for a couple of months in lieu of a substantive CEO (after Tavaziva Madzinga’s resignation in the fourth quarter of 2021).
Eventually, a substantive CEO was appointed, and the interim team de-escalated. But perhaps Safaricom still provides the best example.
In October 2017, Safaricom’s Board announced that its then-CEO the late Bob Collymore would be taking a long medical leave, which came just when the company was a month into the second half of its 2017/18 fiscal calendar.
The Board tasked the then Chief Financial Officer (CFO), Sateesh Kamath with the primary executive role(s) supported by another senior director.
Nonetheless, the company still delivered a strong second-half performance, reflecting the fact that distributing keymen can provide continuity.
This then offers critical lessons on the management of keyman risks. First, companies should focus on anchoring their brands on core corporate principles (and tenets).
The role of effective enforcement and management of corporate principles is then vested in the CEO. This then insulates the brand from the adverse effects of CEO turnovers (and personality cults).
Second, companies should place emphasis on building well-functioning internal systems that have the rigour of fiscal conveyor belts, to the extent that a temporary absence of a CEO doesn’t ground its operations.
Finally, companies should endeavour to have a robust succession plan that can provide corporate stability and provide assurance to key stakeholders, especially in times of tumult.
For instance, what would happen to Tesla or SpaceX if Elon Musk was to become incapacitated (given that he is such a towering figure over the two companies)?
Ultimately, succession straight-line provides certainty to customers, investors and other key stakeholders.
The writer is an investment analyst.