Today: Friday, 10 July 2020 18:14

financial security through sustainable planning

The Importance of Key Person Cover


By Caroline Banks, MORT Executive Committee Member, United Kingdom

(This is an excerpt from Caroline's Main Platform presentation at the 2010 MDRT Annual Meeting).

Millionaire businessman Phillip Carter was the CEO of Carter and Carter in the UK. He was killed on 2nd May 2007, aged just 44. His company, which he started from his home in 1992, had become the darling of the City of London. It was floated on the stock market in 2005 and was named "New Company of the Year". Following several takeovers it grew into a firm with more than 2000 employees. It was a Government- backed training and services empire which was worth more than half a billion pounds at its peak in April 2007, providing apprenticeship schemes for thousands of mechanics each year for the automotive industry. Clients included Ford and BMW, and Carter and Carter held contracts in the USA, Australia and the UK.

Phillip was returning home that fateful day after watching his revered soccer team Chelsea, playing at Anfield against Liverpool. He and his son, along with a friend and the pilot, were in a helicopter that had taken off from Liverpool's John Lennon Airport. They never made it home.

In the immediate wake of Phillip Carter's death, Carter and Carter shares dropped by 11%, Carter and Carter announced that it was looking for a successor for Phillip, and in the interim the Chairman, Rodney Westhead, would assume the day-to-day running of the group. Westhead stated that the group would continue to pursue "large and exciting market opportunities" and with tendering and bidding activity at exceptional levels, prospects for the group remained bright. Shares had been worth just over 12 pounds in April 2007, the month before Phillip's death.

Three profit warnings were issued in quick succession during the summer as the group failed to secure the contracts it thought it would and by October, shares in the company were suspended. In December 2007 "The Times" wrote that Carter and Carter was in discussion with its bankers because it was not making enough money to service its 131 million pound debt.

The death of Phillip Carter had marked a sharp decline in the company's fortunes and on 11th March 2008, ten months after he died, the company went into receivership. The company had failed to negotiate a bailout with its banks despite months of talks. The decision by the banks to walk away came out of the blue.

The receivers announced on 21st March 2008 that investors' shares would be cancelled when stock markets opened the following day. A major loser was the British Steel Pension Fund, one of Carter and Carter's major investors with a stake that had been worth 15.6 million pounds just a year before. Fidelity International, the UK arm ofthe global investment fund with thousands of retail investors, was the second largest investor after Phillip Carter. It had a 12% stake which fell from 63 million pounds to zero in under a year. Even though we may not have known him, Carter's death may have affected us or our clients' investments. Does due diligence on an investor's part stretch as far as checking what business protection exists ifthe main man dies? Based on the sad case of Phillip Carter, it certainly should.

Carter was a wealthy man after the flotation ofhis business. His wife was left with his estate but was left with shares that were worthless 10 months later. She and her remaining daughter would also have lost Carter's salary, use ofhis car and no doubt his health care. What a turnaround of events.

This sad scenario demonstrates what a key person Phillip Carter was to his company. The loss ofconfidence so quickly expressed after his death could perhaps have been stalled with a rapid injection ofcash. It illustrates why a successor should be identified and waiting in the wings to help restore confidence when disaster strikes. It highlights why corporate debt must be insured to allow a company to run its own affairs and not operate at the whim of its bankers, and why major shareholders need to be insured.

If a failure as swift as this can happen with a 500 million pound company, think of the consequences for so many small ones, many ofwhom we advise now.

Caroline's message is clear - we need to urgently speak with all our business owner clients about Key Person cover .