As on 2nd October 2022, world markets are anticipating and pricing in the imminent collapse of Credit Suisse. Credit Suisse is a top Global Bank headquartered in Switzerland, with a storied history of 150+ years in investment banking and private wealth management. The markets have been in turmoil of late due to a multitude of crises over the past few years, but such is the nature of the beast. Credit Suisse, however, can blame atrocious business decisions and incompetence in risk management for its predicament. Archegos and Greensill are interesting case studies, but I digress.
History is littered with corpses of corporations universally believed to be “too big to fail”. The Credit Suisse collapse, if it happens, would just be the latest in an endless line: Barings Bank, LTCM, Enron, Arthur Andersen, Worldcom, Lehman Brothers, AIG, Wirecard, Theranos…. The media has a field day reporting on these collapses with lurid visuals of now-former employees disoriented and in shock, walking out of their now-defunct offices as they suddenly find their lives upturned.
This got me thinking about consequences for employees caught up in a whirlwind beyond their control. Over the past few decades, corporations have encouraged employees to participate in programs to buy their (listed or unlisted) stock, thus aligning the salaryman with the owners of the company and mitigating moral hazard. These programs can take many forms, Restricted Stock Units, ESOPs, ESPPs, all of them aimed at reducing the cash wages, while inculcating ownership in the employees. This is also a way to ensure the employees have skin in the game as their net worth rises significantly when their company’s stock rises. These programs may also have a vesting schedule, where payout hinges on long-term stock performance rather than short-term quarterly results cycles.
While these programs achieve the corporate objectives very well, they are also a sweet deal for the employee. With the passage of time, staff accumulate a substantial chunk of their net worth in their employer’s stock and drawing this down could be a key component of their retirement plans. While this works if you are employed in Google from 2010 to 2020, employees of Enron learned a bitter lesson in 2000 with a triple whammy: They were freshly unemployed, their industry did not have suitable roles to absorb this surplus and their net worth eroded to zero if all they had was Enron stock. Rather than a moving scene of a captain willingly going down with the ship, these were galley slaves tied in chains as water surged into their quarters.
Efficient markets tend to compensate investors for risk taken. For example, someone exposed to small-cap companies is taking on more risk than one investing in a broad-based total-market all-cap index, and could hope for a slightly elevated return over time compared against the total index. The same holds good across other factors (value, quality, momentum, size and volatility). This potential for extra returns is a compensation for taking on extra risk. This however, does not stretch to taking positions and concentrations in specific companies or industries. Uncompensated, or idiosyncratic risk, is your headache and the market is not obliged to heed your wishes. The stock does not know (and does not care) that you own it as it crashes and loses all its value.
If your reward is distributed across a thousand coin tosses, you can be sure of hitting heads around five hundred times. However, if an outsize reward awaited you based on the guess of a single coin toss, you better call it right. Planning for your future, however, should not rely on luck blessing the company you have bet on by circumstance of your employment. It is risky to have an outsize exposure to a single company (or even to a small group of companies). This is doubly applicable for those with a significant investment in their company stock – not only is your net worth tied up with the whims and fancies of your company, it is also the source of your future earnings. Figure out your comfort level threshold and retain company stock up to that level of your net worth. Target to sell vested stock beyond that threshold and immediately purchase diversified broad-market assets such as total world equity indices as soon as the sale amount is credited to your account. There could be tax implications of these trades, so you would need to plan accordingly.
Parting thought: Always remember that this could be you.