Losing a key person is basically losing time, which translates into money and the future success of the business. If a key person unexpectedly dies, suffers a serious illness or is permanently disabled, it will, to some extent, cause economic losses for the company. It is good management practice to have keyperson insurance in place to alleviate the economic upheaval caused by a permanent or temporary loss of a key person.
Consider what happened with Peter Clare, the CEO of Westpac and John Bongard, the CEO of Fisher & Paykel.
Peter Clare suffered a serious heart condition and in May 2014 had to take an extended break to give himself time to recover. He tried to go back to work but because of the pressure and quite probably returning to work too early, he had to resign completely in August of that year. It took until February 2015 to appoint a new CEO.
John Bongard was diagnosed with prostate cancer, with the restructuring going at the company he felt he needed to carry on, against medical advice, whilst at the same time complete his medical treatment in NZ and Australia. The treatment was completed but after nine months there were signs that the cancer could be returning, the stress of the job meant that he was not recovering as he should. He had to resign and walk away from the company and his career – within weeks he showed improvement.
** If there had been comprehensive keyperson cover in place there would have been a sufficient cash injection to give these companies the breathing space to deal with the problems that arose when their top executives were sick for a prolonged length of time. The funds could have been used to bring in an experienced person on a temporary basis or train someone up internally, minimising the disruption caused by their sudden absence and assuring key stakeholders such as shareholders and investors (and to a certain extent competitors) that the business was continuing on a sound basis. The pressure would have been taken off the CEOs so that they would not have felt forced to return to work before they were completely recovered. Instead they could have been able to return to their position fully fit and the businesses would not have lost the valuable business skills and expertise that they brought to the company.
More recently, David Goldberg, CEO of Survey Monkeys in California, fell while exercising on the treadmill. He hit his head causing a severe head trauma and died at age 47. Two years prior the company raised US$800 million through a combination of debt and equity ($444m from the investors, the rest was debt). Then only in December 2014 they raised a further US$250 million in venture capital funding. The funding was intended to help the company pursue acquisitions and allow the employees and existing shareholders sell some of their stock. Mr Goldberg’s sudden death has, quite understandably, thrown his company into complete turmoil.
There has been a history of keyperson cover being instrumental in stabilising and calming the market down and, conversely, the absence of it causing a large drop in company value and a huge down turn in profits.
These types of policies have become more popular since the 1997 murder of international fashion figure Gianni Versace. When he was murdered three days before his fashion company was to hold an initial public offering, everyone thought his fashion empire would collapse. However, the company was quick to announce they had substantial keyperson cover in place. With a payment of US$21 million, they could cover the cost of business continuation, including hiring designers to replace him and temporarily his sister, Donatella Versace, for up to a year. During this transitional period, Donatella was fully occupied with time-consuming administrative and legal procedures involved in succeeding her brother’s businesses, as well as assuring all her important clients, creditors and employees that the business could continue on a sound basis.
In contrast, the owner of Hong Kong GOLD Group, Mr Lam Sai Wing, had no keyperson cover. When he died suddenly in 2008, his company’s share value plunged by more than 60% in one day. Additionally his duties had to be temporarily shared amongst the board of directors until a suitable candidate could be found.
Similarly, the death of Phillip Carter in 2007, CEO of UK company Carter and Carter, had a devastating effect on the company. The training and services company floated on the UK stock exchange in 2005 and was named new company of the year. It quickly grew to become worth more than £500 million pounds and had over 500 employees. Backed by the British Government it provided apprenticeship schemes in the UK, Australia and the US. But in May 2007 Phillip Carter was tragically killed in a helicopter crash at age 44. The impact on the business was immediate, as news of his death became public, Carter and Carter shares dropped by 11%. After his death the company entered a period of uncertainty. Over the next five months the group failed to secure contracts it expected to and other contracts with manufacturers and contractors were ended. The first of three profit warnings was issued at the end of June 2007 resulting in shares dropping 41% in a single day. The second profit warning was issued in July and the shares dropped another 80%. The third profit warning in October saw trading suspended and shares priced at 85p (a fraction of the £12.75 the previous year). The company failed to negotiate a bailout with the banks for large parts of the debts to be cancelled in return for a significant volume of shares, with the banks deciding the amount of money needed was too great. There was no alternative and in March 2008, a mere 10 months after Phillip Carter’s death, the company went into receivership.
In 1999, when Albert Garcia, of Hawaii based shrimp company, Ceatech USA, died, the fledgling company was thrown into turmoil barely after opening for business. Garcia was chairman, CEO and the shrimp sales and marketing expert. Because of his death Ceatech’s sales in its first two quarters lagged about $1 million behind expectations. The company’s plans for mainland distribution and processing never got off the ground. Meanwhile, the four remaining directors tried to manage by consensus – an experiment that ended in apparent failure with the firing in October of that year of Ronald Ilsley, Ceatech’s chairman and chief financial officer. The same day, Ilsley issued a press release accusing the company of improper business practices. Despite the disarray, Ceatech did learn a lesson from Garcia’s untimely death – that the company needs to protect itself and its shareholders from the loss of key people. The company announced it had bought keyperson cover for two other top executives, citing the “negative impact” Garcia’s death had on operations.
