When Sergei Polunin recently announced he was quitting the Royal Ballet, the celebrated young dancer stunned the dance community. Monica Mason, the Royal Ballet’s director, described the 22-year-old Ukrainian’s departure as a “deep shock”. One ballet expert described it as a “box office loss”.
While the Royal Ballet was keen to minimise the impact of Mr Polunin’s resignation, losing such a key individual is a serious risk for organisations and businesses that are over reliant on a small group – a problem known as “key-man risk”.
The creative industries are particularly exposed as top executives often do not wield as much power as the star talent that they, in theory, oversee.
When designer Tom Ford quit Gucci in 2004 after falling out over artistic control with parent company Pinault-Printemps-Redoute, there were serious concerns over the brand’s future.
Together with Domenico De Sole, Gucci’s then chief executive who also quit, Mr Ford had transformed the Italian fashion group from an under-respected leather house on the brink of bankruptcy into an internationally-celebrated business. “There was a concern that the Gucci brand would be less innovative and less visionary when they left,” says Melanie Flouquet, luxury goods analyst at JPMorgan.
During a period of subsequent bad press that accused Gucci’s creative team of being rudderless, “Tom Ford Syndrome” became the fashion world’s byword for key-man risk – although the brand, now steered by creative director Frida Gianni, has since rebounded.
Ballet companies have developed sophisticated understudy systems because of the high levels of injury in the industry. These often involve multiple replacements for different parts across different productions. It is difficult to replicate this understudy model in other industries, partly because lower rates of injury don’t justify the expense.
Sports teams tend to mitigate against key-man risk through insurance. After all, a career-ending injury for a Premier League footballer will mean his club not only loses a top player, an unquantifiable loss, but also has to writedown the traded value of the player which could run into the tens of millions.
Nick Faux at insurer Marsh, says most clubs only purchase insurance for their very top players because team policies can be expensive. “Football clubs do purchase team policies but they look to cover their key players such as the strikers, the people they rely on week in week out for their results,” he says.
Beyond the creative industries and sports, key-man risk has also been a feature of the fund management business. Gartmore blew up after its star trader, Roger Guy, who managed 16 per cent its £20.9bn of client assets, announced his retirement in 2010. Earlier that year, another key trader, Guillaume Rambourg, who ran the firm’s £5.5bn hedge fund business, was suspended amid an FSA investigation into his trading activities. He stepped down in July, to clear his name, by which time the shares had almost halved.
No wrongdoing was ever uncovered but the company was so badly hit by fund withdrawals and plummeting shares that it was swallowed up by Henderson Global Investors last year in a £366m acquisition.
“This is one reason why very concentrated asset management firms trade at a discount multiple to ones that are broader base,” says Bruce Hamilton, an analyst at Morgan Stanley. “Nobody can mitigate this risk but there are firms that have a more team-based approach and good succession planning as opposed to a star culture approach which is very risky.”
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