The fall of Carlos Ghosn from luminary to pariah illustrates what can go wrong when too much executive power puts a firm at key-person risk.
One of the automotive industry’s most powerful figures, the former Chairman and CEO of Renault-Nissan-Mitsubishi and CEO of Renault is credited with forging the three-way alliance, saving Nissan, and revitalising Renault. On November 19 he was arrested for financial violations and taken into custody. The news sent the car companies’ combined market value down by $5 billion, or 7%, and to date the question of who else could manage the complex alliance remains unanswered.
Carlos Ghosn is only the latest example of the over-reliance on a key person culminating in crisis. What defines key-person risk is the power of an individual’s presence, absence or behaviour to disproportionately impact the firm’s value. There have been several other instances this year; for example Sir Martin Sorrell’s departure from WPP, and Elon Musk’s misleading tweets. The shares of these companies have dropped by 27% and 14%, respectively.
The Economist opines that among the world’s 20 most valuable firms, eight, including Amazon, Berkshire Hathaway and JPMorgan Chase, have key-person risk. In America’s S&P 500, some 66% of firms “would be materially harmed if their chief executive, or in some cases other key executives, were hit by a bus”, based on statements of risk filed with U.S. regulators.
Key-person risk has not always been so prevalent. In decades past, executives were more utilitarian, and generally did not have a public persona. Then in the 1980s came a flood of individualism. By the 2000s, the larger-than-life chief à la Jack Welch emerged. Multiple scandals and ultimately the global financial crisis brought stark reminders of the dangers of the indispensable boss. Corporate governance experts advocated limiting executive power, and key-person risk abated for a time.
But more recently, the wave of big founder-led tech firms has set up more key people. Vigilance in corporate governance has diminished, while robust profits and share prices have made CEOs more entrenched. The average CEO tenure at S&P 500 firms rose from seven years in 2009 to 11 in 2017.
In some cases, a CEO holds too much power due to their control of voting rights. Facebook is facing trouble, with Mark Zuckerberg apparently unwilling to appoint a credible, truly independent board. Its share price has gone down by 37% since July. In November, shareholders requested an as-yet pending request to replace Zuckerberg with an independent board chairman.
The case of Carlos Ghosn represents a risk scenario in which an organization is considered so complex that it can only be directed by one impresario. Lastly, there is the key person who is simply too good at their job. Chief executives such as Apple’s Tim Cook and JPMorgan Chase’s Jamie Dimon fall into this category. Even in such instances, overdependence spells danger.
The risk can be avoided by avoiding its principal causes: firms having unequal voting rights, overly complex financial structures, and chief executives with no term limits. Some are taking the right steps. Alibaba co-founder Jack Ma announced that he will step down as Chairman in 2019. Three of the largest listed private-equity firms, Blackstone, KKR and Carlyle, have made plans for their founders to loosen the reins, suggesting a realization that no single individual should hold the key to a firm’s future.