Corporate Activism at HSBC - Case Study Example

Activism at HSBC Ans According to Geoff Lindley, strategic advisor on corporate governance to the UK’s national Association of Pension funds, “activism only really has a part to play when the accountability breaks down and the management aren’t doing their job properly….” (Brass, 2004). In the wake of corporate scandals that have rocked the world such as Enron, World Com and more recently, the case of the trading Company REFCO and Parmalat where corporate executives have been guilty of fraud resulting in huge losses for shareholders, the Government in the UK has made the disclosure of compensation paid to executives a mandatory requirement.

The Directors Remuneration Regulations 2002 and the Companies (Summary Financial Statements) Amendment Regulations 2002 requires financial statements and annual reports of all corporations to disclose the remuneration that is being paid to Directors.(Practical law Company, 2002). The Returns must also include performance graphs which show the total shareholder returns for the past five years. Moreover, according to Section 241A of the Companies Act, the remuneration report must also be put to a shareholder vote.

As Brass (2004) points out, with these changes in the law, shareholders have become vocal in voicing their concerns and demanding good corporate governance, especially since the corporate scandals that have occurred recently have highlighted the deficiencies in corporate governance. While major shareholders voiced their concerns quietly during earlier days, there is now a greater willingness on their part to go public if necessary, to ensure that any action on the part of CEO’s and top executives that may be suspect is dealt with.

Shareholder activism has now become more vocal and rampant and executives at companies cannot afford to ignore the sentiment of their major shareholders. In the case of HSBC, the issue is one where shareholders are accusing the corporate executives of environmental money laundering. HSBC is arranging for bond issues to Chinese banks which include environmental protections but is unable to guarantee what exactly the funds will be used for. HSBC views this as an opportunity to work with institutions in emerging markets, however shareholders are concerned about the failure of these institutions to apply due diligence standards and the potential misuse of funds.

Similarly, HSBC bank also set aside $3.5 billion for losses resulting out of subprime mortgages, which caused active shareholder discontent because it has generated the first profit warning and generating complaints from shareholders that they are not receiving expected results from the bank. (Werdigier, 2007) The new regulations for UK companies as required by the Turnbull report mandate the inclusion of risk assessment as a part of corporate governance. The Turnbull Report seeks to introduce a system of internal controls and risk assessment within an organization in order to bring about sound business practices and prevent financial mismanagement, such as that which occurred in the cases of Enron, etc cited above.

The Turnbull also introduces a conceptual framework for corporate risk disclosure, to protect the interests of shareholders. For instance, the Company must have clear objectives, which should include measurable targets. Furthermore, internal and external, operational and financial risks should periodically be assessed and identified in the Operating and Financial review. Clear strategies are to be identified by the Company for the benefit of the management in dealing with significant risks that must be identified.(www.frc.org.uk at p.13). The question of HSBC’s bond issues and the attention this is garnering from shareholders such as Eric Knight who are demanding improved corporate governance illustrates the new power shareholders possess under the legal regulations which have been introduced.

As also pointed out by Brass (2004), during the merger of Carlton and Granada, the major shareholders took corporate activism to a new level by publicly humiliating the Chairman Green and scuttling his plans to be the new Chairman. Therefore, in order to avoid such activism from its shareholders, HSBC must take pains to ensure that the Chinese banks are made to adhere to due diligence standards and that shareholders are satisfied about the manner in which funds are being utilized. Unless the bank is able to satisfy its shareholders that risks have been properly assessed and steps have been taken to educate Chinese institutions in training their executives on the standards and policies applied by HSBC and other western banks, they may be fuelling shareholder activism.

Ans 2: Any strategy that HSBC implements needs to target the concerns of shareholders about the profit warning that emerged in early 2007 as well as the failure to generate the expected returns. While the bank so far appears to have contained its losses in the US and has reported higher earnings than those which were expected (Werdieger, 2007), yet a failure to address shareholder concerns is likely to escalate into a crisis situation in the same manner as that which occurred at Carlton where shareholder concerns were ignored.

One of the strategies the bank needs to follow is to benchmark its performance continuously in order to ensure that it continually improves its performance by incorporating the best practices which have brought success for other companies. Shareholders have voiced their discontent over the appointment of Green as executive chairman, which they claim is against corporate governance. HSBC’s strategy should therefore be geared towards providing evidence of its good corporate governance practices.

There are also concerns about the fact that HSBC misrepresented the extent of bonuses being paid to executives.(The Times, 2007). In view of the fact that disclosure of remuneration of the directors is required under the new regulations, the Company needs to focus upon addressing the anomalies that have occurred and clearly identifying the steps that have been taken to address the situation in its annual report. One of these could be by withholding the executive bonuses which are being paid despite the losses the Company suffered.

The adjustments need to be made in the annual reports, in order to reinstate shareholder confidence in HSBC’s corporate governance and commitment to ensuring that bonuses are paid to executives only when growth and profits can be justified and sustained. The shareholders have called for the bank to sell off its business in developing countries and concentrate on development in the faster growing markets. Therefore, it appears vital for HSBC to scale back its activities on bond issues with Chinese banks where there is a greater element of risk, in order to focus its operations on stronger markets where the risk of losses is higher.

A failure to make a note of the shareholder concerns and address them before its next report which has been voiced could result in serious implications for the bank in terms of its share position in the market. References: * Brass, Richard, 2004. “Corporate activism: why more shareholders are showing executives the red card”, Retrieved December 15, 2007 from: http://www.accaglobal.com/members/publications/accounting_business/archive_by_topic/business/2004/1124390 * Investor claims HSBC misled shareholders over share plan”, Retrieved December 15, 2007 from: http://business.

timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2926396.ece * Practical law Company, 2002. “Executive Compensation Disclosure requirements: the German, UK and US Approaches” Retrieved December 15, 2007 from: http://crossborder.practicallaw.com/4-101-7960 * Shareholder activism meeting with HSBC regarding controversial bond issue”, Retrieved December 15, 2007 from: http://www.portfolio21.com/in_depth_shar_comp_dial_2005.php * Turnbull report [online] available at: http://www.frc.org.

uk/corporate/internalcontrol.cfm * Wachman, Richard, 2007. “Fears over surge in corporate activism” retrieved December 15, 2007 from: http://www.guardian.co.uk/business/2007/oct/14/money10 * Werdigier, Julia, 2007. “An activist investment firm asks for a review of HSBC strategy”, Retrieved December 15, 2007 from: http://www.iht.com/articles/2007/09/07/business/hsbc.php