The 4 Ps of Key Person Risk

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Topics: AFSL Responsible Manager CPD | Responsible Manager Fundamentals

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What Are Key Person Risks?

There is more to key person risk than simply dealing with the staffing issues that arise when a senior member of your team leaves the business suddenly. In this blog, we examine the ‘risks’ in key person risk.

As we discussed in our last article, a ‘key person’ is anyone directly associated with your business whose loss can cause financial strain to the business. But financial strain does not just come from direct resourcing costs. There are a number of other ways in which a person’s departure could impact your business and, for this reason, demand that a risk mitigation plan to be put in place for that person.

1. Personnel

When any employee leaves a business there are personnel impacts: recruitment costs, onboarding, reduced capacity while the new employee gets up to speed, training expenses, etc. However, when the employee is a ‘key person’, the impact on your business can be even greater.

For senior oversight roles (such as the CEO or Chief Compliance Manager), it is likely you will need to appoint someone to an ‘acting’ position. Do you have the appropriate resources to call on from within? How long can your business continue to operate with ‘acting’ management?

It is also important to consider how a person’s departure may affect staff morale. Are your employees loyal to the business or to specific individuals? Will your team see the departure as a personal opportunity or a threat?

A key person succession plan will not only ensure there is someone with the appropriate skills and/or training to step up into the vacant role, but it can also reassure your staff that the company culture will remain consistent under new leadership.

2. Productivity

Linked closely to personnel is productivity. If the role of the departing key person is filled from within your existing employee pool this can have a downstream effect on productivity. It’s important to fill gaps but this needs to be done in such a way as to avoid putting additional pressure on the remaining employees, particularly over a prolonged period.

You may also experience a productivity risk due to the departure of people responsible for revenue generation. For example, if you have a financial advice business and one of your two financial planners is unable to work, how many of your existing clients could your remaining team realistically continue to service? Would new business acquisition suffer as a result?

When conducting your key person risk assessment, don’t forget the ‘person’. No-one wants to feel like a resource that can be stretched or pulled for an indeterminate amount of time. Make sure all your staff understand how the departure will be handled and how long the transition period is likely to take.

3. (Intellectual) Property

An often-neglected element of key person risk planning is identifying those individuals who possess specialist knowledge about the business (for example, it’s history, operations or legacy systems). Think of it a bit like losing your email password. Sure, there are ways you can work around the issue, and alternative means of communication, but what messages will slip through the cracks in the intervening period? What if you were never able to recover your emails?

Documenting processes and cross-training your team are ways of mitigating this type of risk. But it’s also important to consider what information belongs to the company versus the individual. It may be necessary to make contractual arrangements (such as ‘gardening leave’ or non-compete clauses) for certain employees to avoid information falling into the hands of your competitors.

4. Perception

Like it or not, consumer confidence plays a massive role in the value of a business. For larger businesses, or those with high-profile leaders, the departure of a key person could lead to reduced consumer confidence, which can then flow on to share price or even the long-term viability of the business.

There are numerous examples of companies who have suffered at the hands of media speculation due to a high-profile departure. Does their decision to leave point to bigger problems within? Was the key person’s departure voluntary or were they ‘pushed’?

Key person planning should always include a communication strategy; messages must be carefully crafted to mitigate negative press, reassure shareholders that their interests will be protected and, most importantly, help customers understand how the departure will (or will not) impact them.

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With the right planning, and attention to the different types of risk (especially non-financial risks) that your company might face, you can ensure that your business will continue to operate effectively and efficiently through any departure.