Business Ethics of HSBC Holdings - Essay Example

? BUSINESS ETHICS Table of Contents Table of Contents 2 Introduction 4 Product & Service Mix 4 Brief SWOT Analysis 4 Business Ethics 5 Theoretical Perspective of Business Ethics 7 Code of Conduct for HSBC 8 Corporate Governance 8 Conduct for Suppliers of Goods and Services 10 Economic 10 Environmental 11 Social 11 Employment Conditions 11 Community 11 Telemarketing 12 Regulatory Reform 15 Volcker Rule 15 Security 16 Conclusion 16 Introduction HSBC Holdings Plc is a well known multinational financial and banking service provider located in United Kingdom. The organization is headquartered at Canary Wharf, London, United Kingdom. HSBC Holdings Plc was founded by Sir Thomas Sutherland in the year 1865. Officially HSBC Holdings Plc was established during the year 1991. Forbes magazine has announced HSBC as 6th largest publicly traded organization. Intraday market capitalization of the company is $122.65 billion (Yahoo Finance, 2012). Product & Service Mix HSBC focuses on delivering various services like investment banking services, retail banking services, global private banking and wealth management. The company has emerged as one of the leading banking service provider internationally. Company products comprises of long term and short term loans, current and savings account, insurance schemes, credit cards, fixed deposits and advisory services. Brief SWOT Analysis Strength Weakness The bank has established global scale operation and prolonged international network. The company has created strong cash reserve ratio which helps them to diversify business operation HSBC has reduced volatility of cash flow by using diversified revenue mix. Strong financial muscles of HSBC have helped them to create sustainable corporate strategy. The bank has experienced not only asset quality deterioration but profit margin shrinkage also. Market capitalization of HSBC has declined due to poor performance of SBUs. HSBC has low control over unlawful activities like money laundering in the currency trading process Opportunities Threat HSBC has the opportunity to increase enterprise value by controlling existing portfolio. HSBC can expand business in emerging market such as Asia and Latin America. They can increase market share by focusing on low interest mortgage business. Entering emerging market will not be easy for HSBC due to strict regulatory framework of countries like India (Reserve bank of India) and China. Retail deposit might increase funding cost for HSBC in near future (Source: HSBC, 2011) Business Ethics Business ethics has evolved as a significant management concern for organizations in present time. Many organizations in USA have understood the importance of business ethics and have therefore designed ethical assistance lines for employees to report business and ethical concern to top level management. Following diagram can be used to understand importance of ethical assistance lines for organizations. (Source: Ferrell, Fraedrich, and Ferrell, 2012, p.222) Academic scholars have dissected business ethics into two parts like Descriptive Business Ethics (morality of a business is justified by ethical rules for fair trade policy in this model) and Normative Business Ethics (this is a supportive model which specifies after work required decreasing or discouraging unfair trade practices). Business ethics covers variety of issues like political situation, legal framework of the system, economic responsibility and moral values of business organization (Brenkert, 2004, p. 188). Research scholars have pointed out that business ethics can work in multidimensional manner in order to fulfil various organizational issues. Hooker has underpinned following guidelines for business ethics. Organizations need to establish a transparent and fair incentive and remuneration structure for top level executives. Organizations need to follow government rule in order to discourage stakeholders from doing illegal activities Leading companies should encourage healthy competition by allowing small firms to enter in business environment. Organizations should not create illegal trade barrier in order to establish monopoly in the market Organizations need to help the society to achieve sustainable development. They need to focus on creating value for unprivileged segment of the society (Hooker, 2003) Theoretical Perspective of Business Ethics In 1994, Collins had described business ethics has oxymoron which juxtaposes two managerial aspects such as “deafening silence’ and ‘cheerful pessimist’. Andrew Crane and Dirk Matten have pointed out that business ethics covers study of business situation and decision making perspectives (Crane and Matten, 2007, pp. 4-5). Chryssides and Kaler have argued that business ethics should cover large scale of issues like equal opportunities legislation, corporate responsibility, environmental issues, advertisement ethics and many other factors instead of focussing on contemporary business issues (Chryssides and Kaler, 2000). Fisher and Lovell have focused their study on generating ethical awareness instead of specifying non practical norms. According to them business ethics should guide organizations to show socially responsible behaviour in corporate and business level. Business helps organizations not only to achieve sustainability but perform corporate social responsibilities also (Fisher and Lovell, 2006). Campbell and Martin have identified two problem areas for business ethics. According to them first problem associated with business ethics is the philosophy of business ethicists while second problem is associated with individualism of social actions (Jones, Parker and Bos, 2005). In 2005, Richard had pointed out that business ethics rely on subjectivity instead of objectivity. Richard also argued that ethical norms applicable for particular business are also applicable to regular human life (De George, 2005, pp. 3-9). Many companies follow Kantian model of ethics in order to develop a sustainable business operation. Kantian model emphasizes on personal duty employees or the company (Fernando, 2009, pp. 34-35). According to Kantian model employees should do the work without involving any self interest. The obligation to perform business ethics entirely depends on mission and vision of the firm to work for betterment of society. Code of Conduct for HSBC Corporate Governance HSBC focuses on creating high level of corporate governance in order to achieve sustainability of the organization. HSBC Holdings has created combined code for corporate governance and changed business objectives in accordance with the code. Corporate governance of the company can be viewed as an important part of their business ethics program. Corporate Code of Conduct of HSBC can be analyzed in the following manner. Board Committees Internal Control Reputational and Operational Risks Health & Safety The Board of HSBC has created numerous committees complemented with Group Managing Directors and Directors in order to realize importance of corporate responsibility. Separate responsibilities were assigned to each committee member and each of them needed to follow predetermined code of conduct. Directors of the review policies of internal control. They have created procedures to safeguard valuable assets from unauthorised disposition. For example, directors of the bank give importance on maintain transparent accounting records and reliability published financial information. HSBC reviews financial policies periodically in order to maintain operation and business reputation. The company has synchronized leading best practices and international high standards accompanied by rigorous code of conduct and principles to decrease operational risk. HSBC managers focus on maintaining cogent health and safety standards for their employees. HSBC works on identifying health and safety objectives such as identify, reduce and control potential risks of accidents, injuries and fires to stakeholders and employees. Communication with Shareholders Corporate Governance Obligations of Senior Financial Officers Patriot Act HSBC gives high importance on creating transparent communication with shareholders. The company provides detailed information regarding their activities with the help of Annual Report, Annual Review and Interim Report. Shareholders can access those reports from www.hsbc.com. HSBC follows corporate governance rule for listed companies specified by stock exchange of particular country. HSBC Holdings uses code of ethics guided by Sarbanes-Oxley Act. Code of ethics cover corporate responsibility of group chairman, principal executive officers, finance director, group chief executive and group chief accounting officer. Patriot Act of any country focuses on providing direction to financial institutions to share information regarding correspondent accounts with security exchange board. HSBC group has already achieved Patriot Act Certification from various countries. The company tries to do business in accordance to legal norm of particular country. (Source: HSBC, 2012a) Conduct for Suppliers of Goods and Services Economic HSBC emphasizes on maintaining transparent commercial transactions backed by honesty and integrity. Commercial transaction of the company provides benefits to all partners involved in the deal. The company has guided suppliers to understand local laws and discouraged them to commit bribery and corruption in operation. HSBC has provided guideline to suppliers in order to make them responsible for reasonable payment policies. Environmental HSBC has created environment norm for their suppliers to follow environment goal of the bank. Suppliers must create an environment policy addressing issues like CO2 emissions in value chain, wood & paper management and waste disposal. HSBC expects that suppliers should create environmental management programme complemented by trained staff in order to decrease environment concerns of the bank. Social The bank expects its suppliers should respect human rights of their staff. Employment Conditions Suppliers should create a healthy employment condition for workers by vanquishing the concept of forced labour from human resource policy. Suppliers should not encourage use of child labour and minors in the workplace. Wage structure should comply with industry standard and legally mandated minimums. Suppliers should create standard working hours for staff members in order to give them opportunity to enjoy social life. Community HSBC has directed suppliers to respect human rights practiced in the communities in order to improve quality of life of people belong to the community (HSBC, 2012b). Conduct for Marketing Department Marketing executive should not discuss prospect’s privacy to any other persons and they should not disturb prospects after office time by calling them. Marketing department should not give false and misleading statements to clients. Telemarketing Marketing executives should not call the clients prior to 0930 hrs and after 1900 hrs DSEs should take permission from clients before offering them product portfolio of the company They should apologize to customers for any kind of inconvenience and should clearly specify reasons for the call Sales persons need to specify “Important Terms and Conditions” to customers before advising them to buy financial scheme offered by the bank Marketing department should not call for next three months to person who have showed lack of interest on purchasing product from HSBC DSEs should ask feedback from customers who have been flagged as “Do Not Disturb” (HSBC, n.d.) Values of HSBC HSBC relies on three drivers to generate value for their business. Three key components of value driver for HSBC are environment protection, relationship with stakeholders and sustainable finance. Three components can be explained in the following manner. Working with Stakeholders Sustainable Finance Environment Protection HSBC recruits best employees regardless of gender, age or ethnicity. They recruit employees who are committed to serve customers with delight. The company provides competitive reward package to employees in order to motivate them to perform well. HSBC has designed two way models to maintain growth in terms of wealth creation, capital flow and international trade in future. Currently HSBC is eying on retail banking as profit making segment and also a way to fulfil target of 13-14 % return on equity to investors. They have achieved cost efficiency ratio of 40% in 2011 which is way above than industry expectation. HSBC uses detailed review process to ensure effective capital deployment. HSBC has created GEEP or Global Environmental Efficiency Programme to reduce pollution level in the environment. GEEP aims on raising awareness among employees about bank’s activities for reducing carbon emission from operation. HSBC closely works with NGOs or non-governmental organisations in order to provide better social life to unprivileged section of society. They engage with non-governmental organisations to manage risk associated with business process. The company has taken initiatives like RSPO or Roundtable on Sustainable Palm Oil to ensure legal proceeding for critical issues related to supply chain management. HSBC uses five filter frameworks for calculating profitability earned by product portfolio in each country with an intention of deploying capital effectively. HSBC tests profitability of service portfolio in terms of five filters like connectivity, economic benefit, cost efficiency, profit margin and liquidity. The company did nineteen strategic disposals in last three years in order to sharpen existing portfolio. HSBC has ceased retail banking operation in countries like Russia, China, Poland and Thailand to reduce risk associated with poor profitability. Disposal strategy helped HSBC to trim down US$50 billion risk weighted assets. In 2004, HSBC has created lending standards for freshwater mining, forestry, chemicals and defence equipments in order to decrease sustainability risk. For example, The bank has prohibited illegal login, operation in World Heritage Sites (mentioned by UNESCO), and loan to companies manufacturing chemical weapons and financing companies manufacturing radioactive weapons without following IAEA standards. HSBC's senior executives and Group Chairman have created strategic engagement with global politicians to promote rules which ensures stability of global economies. The company is emphasizing on recuperating cost efficiency with an intention of increasing sustainable savings up to US$0.87 billion. HSBC has incorporated global business models for corporate restructuring and decreasing layers of management. (Source: HSBC, 2012c) Business Ethics of HSBC HSBC follows Sarbanes-Oxley Act (SOX) in order to maintain transparency in the auditing process. They work closely with PCAOB or Public Company Accounting Oversight Board in order to calculate three key issues like examining the audit process, creating a standard audit report and investigating registration of accounting firms. HSBC has adopted SOX guideline in order to maintain business ethics in accounting process (Webb, 2008, pp. 5-23). Regulatory Reform HSBC deals with financial services hence business ethics of the company deals with regulatory framework. Reform agenda of the company revolves around issues like liquidity, central counterparty infrastructure and capital deployment. The company has created resolution plan for different countries in order to achieve ethical objectives. The company follows local legislation in order to maintain business sustainability in different countries. In UK, traditional FSA has been replaced by Financial Conduct Authority and Prudential Regulatory Authority hence HDFC has changed existing financial policy with new on for UK. Volcker Rule HSBC follows Volcker Rule (proposed under section 619 of ‘Dodd-Frank Act’) to maintain its retail business in North American countries. Volcker rule restricts illegal and unethical trade practices in the field of sponsoring hedge fund and investing in hedge fund. The company discourages activities like bill and hold or market speculation. Federal Reserve Board (FRB) has extended the period for conforming investment activities for HSBC. HSBC has restructured retail banking operation in UK in order to fulfil leverage requirement. Security The company has created an official platform for clients and stakeholders to contact them in case of privacy concern. A separate monitoring system has been implemented by the company to monitor fraudulent accounting transactions and internet hacking. The company has provided training to employees to handle privacy related issues of retail banking. In 2011, HSBC has achieved pre tax profit of US$1.4 billion from their business operation in emerging market. The company operates retail banking services guided by GAAP and IFRS rule. Pin code of the ATM service changes frequently with an intention of providing security to customers. HSBC is planning to implement online security code in order prevent customer account from unethical transactions. Conclusion HSBC gives significant importance on implementing high degree of ethics in every level of its business operation. It can be concluded that business ethics plays significant role in sustainability and growth of any organization. Other companies should follow the corporate governance model of HSBC in order to synchronize business ethics and functional activities to achieve sustainable growth in future. Reference Brenkert, G.G., 2004. Corporate Integrity and Accountability. 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