Indispensable Employees

There is an old aphorism in business that may appear perplexing when first encountered:

If you have an employee that is absolutely critical to the company or project - someone you absolutely cannot do without - fire him/her!

If you are an employee, you most likely would enjoy being in this position since it is not only fulfilling (we all like to be needed) but also gives leverage in negotiating salary and benefits. Besides, why would the company want to get rid of you if you are so valuable? When looked at from the perspective of the employer, the situation is more nuanced.

The issue is one of risk. A critical dependency on one individual - a person that could leave, become ill or simply lose motivation - is a sign of poor management; having a single point of failure in an organization is unduly risky. That is the point of the aphorism above: to make the employer realize the risk with which they are dealing and to start planning, now, to eliminate the source of the risk. The solution is not (despite the superficial message of the aphorism) to fire the individual but to incorporate redundancy into the organization so that loss of any one individual cannot cause serious damage. This may not be possible in a small company or technology start-up, but plan for it anyway.

A good example (for Ottawans) is the pending loss of Heatley from the Senators line-up. It isn't critical since the team has sufficient talent that loss of an unhappy star is entirely managable. But what happens in a business, a prominent business, with a publicly-acknowledged star player, when there is a real risk that the player will be lost. Consider this quote from the famed Warren Buffet of Berkshire Hathaway:

"I think if I have any serious illness, or something coming up of an important nature, an operation or anything like that, I think the thing to do is just tell the American, the Berkshire shareholders about it. I work for 'em. Some people might think I'm important to the company. Certainly Steve Jobs is important to Apple. So it's a material fact."

Here we have a situation where Apple has a CEO, Steve Jobs, who is widely believed to be indispensable to the company. As he alludes, the same can be said for Buffet himself.

Notice that he doesn't say that he and Jobs are indispensable, only that the investing public might think that they are. Are they? Perhaps not. In Apple's case, while Jobs' leadership clearly had a major impact on the company's recent successes, the talent pool goes deep into the organization, in engineering, design and management. In Berkshire Hathaway's case, it is also true, though less deep since the company has a smaller number of employees and key managers.

If Jobs and Buffet were truly critical employees, investors should be very wary. If something unfortunate happens to one of them (Jobs is ill and Buffet is getting old), what will happen to the stock prices of their companies? I expect there will be an initial hit, followed by a rebound. I expect this since neither person is currently critical to their companies; they both were at one time, but not now. They have done their jobs well to ensure there is not only a succession plan but also a culture infused with their style of leadership.

If there is a company with a truly critical employee, an especially visible employee, you should limit your investment, both in time and quantity. Ensure that you are not overly exposed when the inevitable occurs. That is prudent investing.