Company risk is often one person risk

One of the competing theories of history is the conflict between the Great Man theory and Tolstoy's concept as explained in his novel WAR AND PEACE. The Great Man Theory, more popular here in the individualistic West, is that history, or at least much of it, is the result of the actions of individuals, whether for evil such as Hitler or for good such as Lincoln. Tolstoy maintained the opposite, that such leaders were simply the people who saw a parade and jumped in front of it. According to Tolstoy, tens of thousands of French men just decided to all of a sudden invade Russia, and Napoleon just called himself their commanding general.

However, large scale businesses seem to prove that the Great Man theory is the more correct. Did a whole bunch of computer programmers just all of a sudden decide to move to Redmond Washington, and Bill Gates just jumped in front of them and called himself the CEO of Microsoft? Or did Bill Gates first found Microsoft and then hire those programmers?

Obviously, the second explanation is more reasonable. And there's a clear implication that the fate (and therefore the stock price) of businesses are highly dependent upon one or a few individuals.

This is most obviously true of start up businesses which are usually the result of the vision of one person. Sam Walton and Bill Gates are two prominent examples, but almost every small company depends upon the vision and/or research and/or ideas of a founder or chief scientist.

This is probably more true even of large companies than we recognize. Where would General Electric be now if Jack Welch had never become CEO?

Yes, of course the work of a company is done by thousands or more of its employees, and the contributions of some other few individuals are very important. But it's also true that for maximum effectiveness their efforts must be directed and shaped toward a corporate goal.

McDonald's has good cashiers and bad cashiers, and always has, but its fate does not depend upon any one cashier, and never did. But certainly McDonalds would no longer be in business today if Ray Kroc had died a year after taking the business over. I wonder how many great businesses never got off the ground because their founders died prematurely.

So my point is that much of what is technically termed "company risk" is actually "important person" risk.

This seems to me a serious issue for people who think that they've found a company that's going to make them rich in a few years, whether the stock tip came from their broker, a buddy at work or an investment newsletter or the Internet.

Do you want your financial future to be just one fatal car crash, one heart attack, one untreatable case of pancreatic cancer, one bitter divorce, or mental breakdown away from disaster?

That's why it's important to diversify your investments. It'd be great to get in early on the next Wal-Mart, but none of those investors had a guarantee that Sam Walton would live as long as he did.




important person company risk
important person company risk