Jul 13, 2018

In Bob Collymore’s absence, Safaricom has set an excellent example of how corporates can manage ‘keyman risks’

Insurance and its main concept-that 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 has 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 commoditizing the same bets). And if you thought you’ve had enough, wait for it.

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 a compensatory protection that a company takes out against possible damages to the brand arising out of its CEO leaving. Upon crystallization, 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. Uncobbling 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 organization; and/or (ii) when the company’s decision-making has been centralized around the CEO. The presence of those two sets of premises not only elevate ‘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. One such company is Safaricom, Kenya’s telco giant. In October 2017, the Safaricom’s Board announced that its CEO Bob Colllymore would be taking a long medical leave to seek treatment for an illness which, on privacy grounds, the Board did not disclose. The leave came just when the company was a month into the second half of its 2017/18 fiscal calendar. To fill the void, the Board tasked Chief Financial Officer (CFO), Mr. Sateesh Kamath with the primary Executive role(s) supported by Director of Strategy and Innovation, Mr. Joseph Ogutu. In the second half of its fiscal year, Safaricom posted strong numbers: (i) it added 70,000 in additional subscribers; (ii) total revenues rose 4% half-on-half to Kenya Shillings (Kshs.) 119.3 billion; (iii) Earnings before Interest, Tax, Depreciation and Amortization (EBITDA) rose 8% half-on-half to Kshs.58.6 billion; and (iv) the company generated Kshs.54 billion in gross cash.

For cash-intensive businesses like Telcos, and Safaricom by extension, EBITDA is a vital key measure of the underlying health of a company’s operating performance and allows watchers of the company (sell-side analysts, individual and institutional investors) to smoothen out the noise(s) around potential impacts of non-operating factors such as tax environments, accounting and financing decisions. During the company’s full year investor briefing, nearly six months later, Bob Collymore announced return from his sick leave. And from these second half numbers, it is fiscally evident that Bob Collymore’s six-month leave absence did not affect the company’s operating performance. This then offers two critical lessons on 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 CEO turnovers. Second, companies should place emphasis on building well-functioning internal systems that have the rigor of fiscal conveyor belts, to the extent that a temporary absence of a CEO doesn’t ground its operations.

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