CHAPTER 27 Cultural dilution, cultural strength
‘HE WAS FOND OF REFERRING to the HSBC culture – an intangible that stood for care and attention and civility, for not being flash, for always putting clients’ needs first,’ noted the journalist Chris Blackhurst at the end of John Bond’s chairmanship in May 2006. ‘Its history, tradition and methods were steeped in his veins.’ Bond’s successor, Stephen Green, also told Blackhurst at the same time, ‘the culture of this bank is its most important asset’.1 Culture, in other words, mattered hugely to HSBC, and this chapter reflects on that culture’s strengths and weaknesses amongst the unprecedented challenges of the 2000s.
The challenge of size and complexity
‘HSBC’s network is unique and an awesome advantage that we have over our competition,’ Mike Geoghegan observed to senior colleagues shortly before his first global roadshow in 2006.2 Without doubt, the numbers in this period were striking. Total head count (FTE, i.e. full-time equivalent) grew rapidly from 171,000 at the end of 20013 to 330,000 by the end of 2007,4 before slipping back to 307,000 by the end of 2010.5 Over the same nine years the number of countries and territories in which the bank operated rose from eighty-one to eighty-seven,6 while the total of subsidiary companies in the Group mushroomed from 417 in 1999 to 2,277 by 2009.7 Undeniably, especially after the rash of acquisitions in the late 1990s and early 2000s, complexity increased – as did the danger of cultural dilution. ‘At the end of 2010,’ Stuart Gulliver candidly told a Parliamentary Commission some two years later, ‘HSBC was doing auto insurance in Argentina, subprime credit cards in the United States and corporate banking in Hong Kong. There is nothing in those activities that is remotely similar. There are no economies of scale from the systems that you can achieve, and there is no common risk platform that you can achieve.’8
How was this collection of businesses to be managed? Traditionally it was the man on the spot, usually an International Officer (recently renamed International Manager), who had the primacy; but a debate had been rumbling since at least the mid-1990s, and in 2003 it apparently took a significant new turn. ‘As you know,’ Bill Dalton wrote that December to Personal Financial Services (PFS) colleagues, ‘the Group’s recently published strategic plan “Managing for Growth” acknowledged the reality of matrix management in a Group of our complexity, and also envisaged a more pronounced role for Customer Groups in taking the strategy forward, whilst retaining the many clear benefits of a geographic management structure.’9 A few months later, one planner explained the thinking to another. ‘When we were developing the Group Strategy, we were consciously moving the Group away from the traditional emphasis on geographical management towards a Customer Group-led matrix,’ Tim O’Brien in London emailed K. B. Chandrasekar in Hong Kong in March 2004. ‘We were however always aware of the continuing importance of local management as an essential component of being “The World’s Local Bank”. It was recognised that having empowered local CEOs has been one of the critical success factors in the past and that, while change was needed to get maximum value from membership of the Group, we didn’t want to throw the baby out with the bathwater.’ In practice, he went on, ‘the reality’ was that ‘some parts of the Group’s businesses are more centralised than others’. Thus, ‘within CIBM [Corporate, Investment Banking and Markets], control of Treasury has for a long time tended to lie more with the centre than in the country’, and in addition ‘we have to manage clients who operate globally on a global basis’; whereas ‘the opposite is true of PFS, which is much more local in nature and where it was clearly envisaged that local management would have a greater degree of control’, while ‘CMB [Commercial Banking] perhaps comes somewhere in between’.10
Overall, then, Managing for Growth allowed for a variable approach, but nevertheless, through the greater emphasis on customer groups (which also at this stage included Consumer Finance and Private Banking), did imply something of a shift towards line-of-business management. ‘Even in the case of PFS and CMB,’ noted a paper for the Holdings board in April 2004 about how ‘collective management’ could hold the two approaches together, ‘we need to ensure that a global perspective is brought to bear on business development targets, resource planning, marketing initiatives and the sharing of best practice’.11
It did not quite work out like that. In October 2005 – nine months after a recently retired senior figure at Citibank had told him that at Citi ‘country heads have lost their influence with disastrous results’12 – John Bond spelled it out unambiguously in a speech about how to build a global company: ‘Because local knowledge is so important, the responsibility for running our businesses around the world lies with our local CEOs – all seventy-seven of them. They “own” the business locally, they can tailor their products and services to suit their customers, but they can also access the centre for product advice, information technology and know-how.’13 Nor, crucially, did this prioritisation change when Bond addressed an internal audience. ‘We are,’ he told a Group Management Board (GMB) offsite in January 2006, ‘blurring customer group/geography interface: outside CIBM, geography should hold the final decision.’ He added: ‘We will get the best out of our people this way.’14
Mike Geoghegan, Group CEO from May 2006, agreed. ‘The role of CM [country manager],’ it was reiterated in a paper soon afterwards for the GMB on ‘Joining Up the Company’, very much Geoghegan’s initiative, had to be ‘maintained and recognised as the person responsible for the Group’s business in each country’.15 Three years later, he was still adamant. ‘Locally based country managers are all-powerful – they’re more powerful in their country than the person running the product line from London,’ he stressed to Management Today in September 2009. ‘If I’m asked to rule between a product manager in London and the country manager, I will always support the country manager, because they know their market best.’16 The country head, in short, remained king. And given the physical and functional shape of the Group’s business, and given also how those country heads were usually drawn from the cadre of elite International Managers (IMs), trusted to embody HSBC’s core values, it was an understandable reluctance to tear up the history books.
The person who would succeed Geoghegan saw things differently. ‘Functional management will help us to grow the pie – the absence of functional management will lead us to develop a hundred new ways to divide it up,’ Stuart Gulliver wrote to Geoghegan in May 2007. ‘Functional management should be seen as a critical part of the process by which we demonstrate that this Group is worth more than the sum of its legal entity parts. Defaulting to geographic management is the easy option but it is not the right option. Functional management is very hard to do well – particularly in this Group – but to choose not to do it is a cop out.’ Gulliver emphasised that he was ‘not positioning this as a discrete choice between functional or geographic management’, adding that ‘the reality will always be more complex than that and I am very much aware of the local CEO’s responsibilities with respect to the integrity of their local accounts and local regulatory compliance’.17 Even so, the thrust was wholly clear – and three years later, during a GMB discussion in May 2010 about Group Private Banking, there was a further indication of Gulliver’s centralising instincts when he ‘commented on the need for management and system changes to address the boutique approach and cultural diversity that has developed in some GPB offices’, noting how ‘the merger and integration of Guyerzeller Bank in Switzerland has shown the potential benefits to be obtained’.18
By the start of the following year, Gulliver was in charge. ‘So in January 2011,’ he later told the UK Parliamentary Commission on Banking Standards, ‘I changed the organisational structure of the firm from being run by eighty-eight separate country heads who reported to the Group CEO.’ Instead, it was now the global business heads who would run the show, in conjunction with the global and more empowered functions of finance, legal, risk and compliance, so that ‘the information comes to the centre, because it is the person at the centre who is in control of everything’. ‘It is very easy from outside,’ added Gulliver, ‘to see this as a trivial change, but it is the biggest organisational change in this firm – I am not exaggerating – since 1865.’19
He was not understating the urgency or importance of these developments; for even as they were being implemented, HSBC found itself in the midst of an investigation into events that owed much to a traditional system of governance that had been painfully exposed as no longer fit for purpose. That largely decentralised system had worked well up to the mid-1990s, when the Group was much smaller and the International Officers were the authoritative, homogenous and highly mobile transmitters of HSBC’s distinctive DNA; but after the Group had tripled in size in a matter of five or six years, bringing into it not only hugely increased complexity but also unfamiliar territories, businesses and cultures, that federal model was found badly wanting – not least in the unforgiving light of rapidly changing and expanding regulatory and public policy expectations.
An institutional and cultural shortfall
The early twenty-first century would be a reputational disaster for the banking industry. Blamed by many for causing the financial crisis, banks were furthermore accused and found guilty of a wide variety of financial misdeeds. Even within the HSBC Group, traditionally priding itself on conduct of a high ethical standard, practices were found to have taken place that, as the Group’s CEO would graphically express it, ‘crushed’ the bank’s reputation after they were revealed publicly in 2012 in a report by the US Senate’s Permanent Subcommittee on Investigations (PSI).20 This report preceded a Deferred Prosecution Agreement (DPA) between the US Department of Justice and HSBC, as well as separate settlements with several regulatory and enforcement bodies and the district attorney’s office in New York City. It is not possible this close to events to make any detailed analysis of the findings and the subsequent actions taken to remedy the deficiencies. However, it is possible to summarise the charges against HSBC and its constructive reaction to the investigation, and to discuss how culture played a part in this story.21
The PSI investigation focused mainly on the activities between 2006 and 2010 of HSBC’s US and Mexican subsidiaries – specifically, highlighting failings over identifying and preventing money laundering through the US financial system. The report estimated that these deficiencies had resulted in hundreds of millions of dollars of Mexican drug-trafficking proceeds being laundered through HSBC.
The Statement of Facts (SOF), part of the DPA, identified four ‘significant failures’ on HSBC Bank USA’s part that had allowed this to happen. First, the failure ‘to obtain or maintain due diligence or KYC [Know Your Customer] information on HSBC Group Affiliates, including HSBC Mexico’; second, the failure ‘to adequately monitor wire transfers from customers located in countries that HSBC Bank USA classified as “standard” or “medium” risk, including over $670 billion in wire transfers from HSBC Mexico’; third, the failure ‘to adequately monitor billions of dollars in purchases of physical US dollars [i.e. banknotes] from HSBC affiliates, including over $9.4 billion from HSBC Mexico’; and finally, the failure ‘to provide adequate staffing and other resources to maintain an effective AML [anti-money laundering] program’.
Turning to HSBC Mexico, the SOF noted that its AML programme was ‘not fully up to HSBC Group’s required AML standards’ until at least 2010 − eight years after the acquisition of Bital. The SOF then identified three specific aspects in relation to HSBC Mexico: first, that it ‘did not maintain sufficient KYC information on many of its customers, including those with US dollar accounts’, with KYC ‘particularly poor’ with regard to HSBC Mexico’s Cayman Island US dollar accounts; second, that ‘when suspicious activity was identified’, it ‘repeatedly failed to take action to close the accounts’; and third, that between 2004 and 2008 it exported in the range of $3–4 billion per year to the USA through banknotes, a volume ‘significantly larger than its market share would suggest’, with that large-scale exporting continuing for a time even after it had been warned by the Mexican authorities that those dollars might represent drug-trafficking proceeds.
The investigation also examined the high-profile question of violation of US sanctions. ‘From at least 2000 through 2006’, the SOF noted, ‘HSBC Group knowingly and wilfully engaged in conduct and practices outside the United States that caused HSBC Bank USA and other financial institutions located in the United States to process payments in violation of US sanctions.’ The total value of these transactions was estimated at approximately $660 million; and the countries identified were Burma, Iran, Sudan, Cuba and Libya.
Obviously at one level it had been a major failure of compliance. Both the SOF and the PSI report made it abundantly clear, especially in relation to Mexico, that serious efforts were undertaken to improve standards; but it was equally clear from the evidence that, for a mixture of reasons, these efforts were neither implemented effectively enough nor went far enough. ‘HSBC Group executives and compliance personnel worked to build a compliance culture,’ noted the PSI, ‘but repeatedly faced a workforce in Mexico that disregarded the Group’s AML policies and procedures, delayed obtaining required KYC data, delayed closing suspect accounts, and delayed reporting suspicious activity to regulators.’22 Head of Group Compliance from 2002 was David Bagley. Right at the outset, shortly before the Mexican acquisition, he had observed that ‘there is no recognisable compliance or anti-money laundering function in Bital at present’23 – a particularly pertinent observation given that Mexico was predominantly a cash economy. Ten years later, in his written testimony to the Senate’s PSI, he explained the whole compliance shortfall largely in historical terms:
The bank’s Group Compliance function based in London mirrored HSBC’s overall global corporate structure – which is an international federation of affiliates around the globe. Many of these affiliates began as relatively small independent banks that HSBC acquired over the years with increasing frequency. As the bank’s footprint grew through these acquisitions, HSBC’s structure evolved into one with a small corporate centre, on the one hand, and numerous affiliates around the world operating with a significant degree of autonomy and varying levels of direct interaction among those affiliates, on the other …
The role of Group Compliance was an advisory one: we promulgated the baseline standards that all of the bank’s affiliates were expected to follow. As the Head of Group Compliance, my mandate was limited to advising, recommending, and reporting. My job was not – and I did not have the authority, resources, support, or infrastructure – to ensure that all of these global affiliates followed the Group’s compliance standards. Rather, final authority and decision-making rested with local line management in each of the bank’s affiliates.
‘This model,’ Bagley explained, ‘worked for many years.’ But he went on:
Over time, HSBC’s growth accelerated rapidly. Some of the new acquisitions had operations that at the time of acquisition fell far short of HSBC’s own compliance standards and expectations and were in relatively lightly regulated but often high-risk jurisdictions. At the same time, increased terrorism and narco-trafficking, and other financial sector developments, exposed the international banking system to new vulnerabilities and greater challenges. In addition, regulatory expectations both in the United States and abroad rightly continued to increase.
In short, ‘with its roots in a far smaller bank in a very different global banking environment, HSBC’s historic model, in retrospect, simply did not keep pace’.24
As an institutional justification – that of a centre lacking the resources or authority to impose its will on quasi-autonomous affiliates – Bagley’s explanation carries weight, though obviously begging the question of why there was a prolonged failure to adjust to changing circumstances. He might also have mentioned, as a complementary reason, the ‘silo’ problem. ‘HSBC Group failed to have a formal mechanism for sharing information horizontally among HSBC Group Affiliates,’ noted the SOF. ‘While informal communication between HSBC Group Affiliates did occur, information generally was reported up through the formal channels to HSBC Group. HSBC Group then decided what information needed to be distributed back down the reporting lines to HSBC Group Affiliates in other parts of the world.’25 Or as Paul Thurston (who in early 2007 succeeded Sandy Flockhart in charge of Mexico) put it in his written testimony, it would have been better if ‘the risks and challenges we faced in Mexico’ had been ‘fully appreciated by our counterparts in other parts of the Group’.26 Ultimately, however, narrowly institutional explorations only get one so far, and it is necessary to take into account the prevailing financial context and culture.
Mexico during much of the 2000s was one of HSBC’s great success stories, as evidenced by some of the headlines in analysts’ reports in May 2005 after a visit there: ‘HSBC at its best’; ‘Mexico – An oasis of growth’; and ‘If only it was all like Mexico’. ‘Taking a deposit-rich franchise with a retail focus,’ explained one analyst in glowing terms, ‘the Group cleans up the balance sheet, adds state-of-the-art systems and a much broader product range, while respecting local culture.’27 Mexico that year produced profits of almost a billion dollars, making it the fourth-largest geographical market, and in the words the following spring of the usually hyper-critical Citibank analysts, ‘the 2002 purchase of GF Bital and subsequent investments have created a business generating a return on investment of 30 per cent, which considering its size probably makes it HSBC’s best acquisition since the 1992 purchase of Midland Bank’.28 Given all of which, duly reported each month to the GMB, it was perhaps unsurprising that for so long the alarm bells failed to ring loudly enough.
Concerns were undoubtedly being raised. ‘It looks like the business is still retaining unacceptable risks and the AML committee [in Mexico] is going along after some initial hemming and hawing,’ an alarmed manager from head office Compliance emailed the Mexican head of Compliance in July 2007. ‘It needs to take a firmer stand, it needs some cojones.’29 Later that year, the Group Audit Committee ‘reiterated its concerns’ over Mexico ‘regarding the effect incentive schemes could have on employee behaviour’;30 while in February 2008 Leopoldo Barroso, stepping down as Mexico’s AML director, complained to Bagley about how ‘despite strong recommendations, business heads had failed or refused to close accounts’.31 It was a perspective shared also in head office Compliance by Warren Leaming, who in December that year noted in an email to the Mexico CEO that ‘the presumption’ still seemed to be ‘in favour of the businesses’ views’, which he urged ‘needs to change to a more compliance-orientated balance’.
Financial considerations also significantly influenced the resourcing of compliance which, during much of the second half of the decade, despite requests for additional AML staffing, had to manage with a flat head count. This was especially the case after 2007, when cost-cutting measures were implemented in many parts of the Group. In the US bank, the 1509 initiative, seeking to achieve an ROE (return on equity) of 15 per cent by 2009, had at its cost-cutting core the ‘$100 Million Dollar Cost Challenge’,32 while in Mexico, the compliance head count was probably some thirty-five short of requirements in 2008. Perhaps inevitably in retrospect, the unrelenting focus on cost efficiency, including on support functions – even one as vital as compliance – came at a high price.
Equally inevitably, the high prioritisation during these years of profit-generating activities sometimes led to choices having to be made between the competing claims of financial and reputational criteria. Almost certainly there was often a trade-off involved – neatly encapsulated in December 2004 when a senior Compliance officer asked a colleague for data on the potential commercial value of legally permitted Iranian–US dollar transactions. ‘It might be helpful,’ he explained, ‘if I was armed with the likely value to the Group if we are in effect making a reputational risk over possible reward type judgement.’33 Importantly, those reputational risks had grown by the mid-2000s, in the post-9/11 context of the global authorities increasingly linking financial vulnerabilities with terrorism. Arguably, HSBC should have appreciated earlier than it did how, in a world where the banking system was now placed squarely in the front line of the fight against financial crime, reputational considerations needed a greater weight in decision-making.
Undeniably, the whole investigation – in which HSBC cooperated fully − had profound implications. ‘HSBC Bank USA and HSBC Group have invested hundreds of millions of dollars to remediate the shortcomings in their AML programs,’ noted the SOF of HSBC’s response, while ‘management has made significant strides in improving “tone from the top” and ensuring that a culture of compliance permeates the institution’. A series of specific examples were given. These included HSBC Bank USA in 2011 spending $244 million on AML, nine times more than in 2009; and HSBC Group ‘simplifying its control structure’, applying since January 2011 ‘a more consistent global risk appetite’ and undertaking to implement single global standards shaped by ‘the highest or most effective’ anti-money laundering standards available in any location where the HSBC Group operates.
‘We are driving a change in culture so that our conduct matches our values,’ Stuart Gulliver explained in a letter to all staff shortly before the publication of the Senate’s report. ‘We have integrated our values into performance management, judging senior leaders on what they achieve and how they achieve it, because both matter to our reputation and share price.’ And he added, ‘while we cannot undo past mistakes, we will be judged on how we respond to this issue and demonstrate that we have learnt from it’.34
The bonus culture
Another important part of the reputational damage suffered by the banking industry during this period concerned the issue of remuneration. ‘I worked for the Group for over thirty-eight years,’ Geoghegan recalled in 2013. ‘For thirty-two years of that I had a thirteenth-month salary as a bonus. And it worked perfectly well.’ HSBC could not of course isolate itself from the bonus culture – essentially an American investment banking phenomenon that from the 1980s had spread rapidly across the banking industry – if it was to continue to operate in international markets and retain its best people; but Geoghegan was not alone in his generation, strongly imbued with traditional HSBC values, in regretting it. ‘The companies that we were acquiring seemed to have big bonus schemes,’ he added. ‘Household had a big bonus scheme; Mexico had a huge bonus scheme. And these bonus schemes were being rolled out as possible things to be having across the Group world-wide. Somewhere along the line we lost it.’35
The whole issue of pay, and above all bonuses, became undeniably toxic. But even as the reputation of the banking industry sank to an all-time nadir, the bonus culture remained stubbornly robust – with predictable consequences in terms of public attitudes.36 ‘The perception that some have taken pay and bonuses in vast multiples of the remuneration of ordinary hard-working and socially valuable people – for indulging in an alchemy which has blown up in their faces and required huge bail-outs at prodigious cost to the taxpayer – has ignited fury around the world,’ conceded Stephen Green in a June 2009 speech at the annual international conference of the British Bankers’ Association (of which he was chairman).37 ‘The backlash has become so extreme,’ observed a columnist the following February in Euromoney – very far from a banker-bashing publication – ‘that venting venom against financiers has become mandatory rather than merely acceptable.’38
HSBC during these years was not demonised as much as some of its peers, but as part of that general, understandably indiscriminate backlash it still received its share of deeply negative attention – not least because it was more transparent than some about its remuneration arrangements. ‘We used to think of HSBC as the most restrained of banks,’ commented one City editor, Alex Brummer, in May 2008 after a fractious AGM had seen almost one in five shareholders fail to approve a remuneration scheme with the potential to deliver up to £120 million over three years to the bank’s top six executives. Condemning the scheme as ‘distasteful’, he added that ‘HSBC should have shown the kind of rectitude expected in hard times’.39 The following year, bonuses were voluntarily waived by Green, Geoghegan, Flint and Gulliver (and there were no cash bonuses for other executive directors), while a year later Geoghegan donated a very substantial proportion of his £5.7 million remuneration to charity. Instead, the storm was now about ‘Bumper year for Britain’s £10m banker’, namely Gulliver, whose package for 2009 made him the highest-paid identifiable banker in London, a situation that he acknowledged left him feeling ‘uncomfortable’ with the resultant intrusive media attention.40 Simultaneously, three other unnamed HSBC bankers, presumably investment bankers, were to receive almost £24 million between them, after a strong performance from Global Banking and Markets.41 Even though these and other ‘code staff’ (receiving at least £1 million in bonuses but not identified by name) were being paid significantly less than their equivalents in competitor banks, the AGM in May 2010 was again contentious: 23 per cent of shareholders abstained or voted against the remuneration report, while Guy Jubb, head of corporate governance at Standard Life, accused the bank of not having been in ‘listening mode’ for several years.42 A few months later, the criticism was still not letting up. ‘As thousands of cash-starved businesses struggle to survive, one sector of the economy hits the jackpot yet again,’ declared the Daily Mail that August. ‘Yesterday, HSBC became the first of the big banks to announce its half-yearly profits – an astounding £7 billion. And that’s after setting aside a bumper £6 billion for staff pay and bonuses. For the bankers – if nobody else – it’s as if the credit crunch never happened.’43
The bank’s public defence of its image was largely conducted by Stephen Green. ‘At HSBC,’ he wrote in March 2009 in his statement for the annual report, ‘we are committed to the principle of sensible market-related pay, structured to align executive actions with long-term shareholder interests. A small number of individuals in a market system will inevitably receive compensation that is high in absolute terms, but this must be genuinely linked to long-term shareholder interests.’44 That summer he published a thoughtful book, Good Value: Reflections on Money, Morality and an Uncertain World, giving a series of interviews to promote it. To the Daily Mail he insisted that HSBC was an organisation that ‘does think carefully about its own values and culture, which we inherit from our predecessors over the decades’;45 and to the Church Times he described HSBC as ‘a bank that genuinely seeks to be an ethical bank’, though ‘it’s a business not a charity, to be sure’.46
The following year, in the wake of the difficult AGM in May 2010, the incoming chairman of the bank’s remuneration committee, John Thornton, was asked to undertake a consultation exercise with shareholders to discuss ways of achieving an appropriate mix of fixed pay, bonuses and longer-term incentives.47 The eventual outcome of these discussions was ratified at the AGM in May 2011,48 not long after the annual report had revealed a pay-out of more than £1 million each to 253 individuals, of whom eighty-nine were based in London.49 The new arrangements concerned the top management team: henceforth, their long-term bonuses would be paid solely in the form of shares; those shares would have to be held for at least five years, when some could be sold for the purpose of paying tax; and the rest could not be sold until retirement. ‘We believe these proposals will lead the way on better alignment of employee incentivisation with strategy and long-term sustainable value creation for shareholders,’ declared the bank ahead of the AGM, and undoubtedly it was a pioneering approach.50 The first shares under this plan were awarded in June, with the top fourteen managers receiving shares worth a total of some £8.5 million.51
No one imagined that the debate would die away, and already Douglas Flint, in his chairman’s statement at the end of February, had set out the new regime’s broad thinking. ‘In this globalised world,’ he asserted, ‘there is intense competition for the best people and, given our long history within and connections into the faster-growing developing markets, our best people are highly marketable.’ He went on:
It would be irresponsible to allow our competitive advantages to wither by ignoring the market forces that exist around compensation, even though we understand how sensitive this subject is. Reform in this area can only be achieved if there is concerted international agreement on limiting the quantum of pay as well as harmonising pay structures, but there appears to be no appetite to take the initiative on this. Our duty to shareholders is to build sustainable value in the economic and competitive environment in which we operate, and our principal resource for achieving this is human talent.52
A cultural balance sheet
In addition to questions of remuneration and incentivisation (including the spread of a sales culture, especially in the PFS business), there were perhaps, culturally speaking, three main problematic areas during the 2000s: bureaucracy, diversity and meritocracy.
‘If you’ve had all this “country head is king” stuff,’ Stuart Gulliver observed to the Sunday Telegraph in 2012, ‘you end up with multiple head offices and within those, multiple layers of bureaucracy, and so we haven’t been the nimblest firm, as bureaucracies are incredibly self-reinforcing.’53 Of course, he was not the first HSBC leader to identify the dangers of excessive bureaucracy. ‘Some barriers to success are internal,’ warned John Bond in January 2006 at a GMB offsite. ‘Our processes are becoming unwieldy, too much work being done which does not help clients or shareholders.’54
The problem was tackling these issues, and to judge by a diagnostic feedback exercise conducted in December 2010, not enough progress was made. A broad cross-section of senior management was asked to list the main factors impacting HSBC, and among the key negatives identified were overly complicated bureaucracy, and unnecessary duplication and management layers. Nor did it help that One HSBC – a hugely ambitious IT project going back to 2007 that was intended to standardise HSBC’s platforms and processes across the globe55 – was seen as cumbersome and not sufficiently driven by the business. ‘The organisation feels more and more like Midland Bank and less and less like Hongkong Bank,’ declared one historically attuned respondent, ‘as everyone spends too much time filling out forms, for no good reason sometimes. The Group lacks an off switch. It is very easy to impose new processes on people and well-nigh impossible to stop them.’56 ‘We are a car that has twelve cylinders but it is only firing on eight,’ Gulliver himself asserted two months later to the Financial Times, in his first press interview after becoming Group CEO. ‘There is a lot of upside. The point is to undo the bureaucracy without losing control.’57
‘HSBC is a diverse organisation,’ John Bond proudly told a conference in May 2004. ‘A quarter white European; 20 per cent Latin American; 15 per cent Chinese; 15 per cent white American; 7 per cent Indian; 4 per cent black; 2 per cent Arab; 2 per cent Hispanic; and 9 per cent none of the above.’58 About the same time, an internal paper on diversity agreed that ‘the ethnic mix of our Group is excellent at a total level’ – but added the crucial rider that ‘at a senior level things are different and this leads to us not maximising opportunities’. Thus, whites comprised some 60 per cent of senior management, whereas the comparable figure for Asians was 12 per cent.59 The diagnostic feedback from senior management in December 2010 suggested – despite steadily increasing diversity at board level – a continuing problem. ‘If the Bank is really serious about moving from west to east, there are just too few Asian talents in GMB and the top table,’ commented one respondent; another referred to the ‘sharp skewing to IMs and executives from the western world’; a third emphasised the need to ‘ensure senior local nationals in the top management structure, especially in the customer and regulatory facing positions’.60 ‘Anecdotal evidence suggests,’ noted a GMB paper soon afterwards, ‘that, in many cases, part of the limited local talent supply we face today is the lack of a historic focus in this area and because the default for many hiring managers was/is to seek an international assignee as they are easy to access, globally owned and culture-carriers for the Group.’ Accordingly, a three-year Emerging Market Talent Plan was formulated, aimed at ‘the increased use and progress of domestic talent in our domestic emerging markets’.61
HSBC diversity event in the USA, circa 2005.
It was a somewhat similar story in terms of gender. Across the Group in 2004 the clerical divide was 36 per cent male, 64 per cent female; by contrast, the senior managerial divide was 83 per cent male, 17 per cent female.62 A global survey conducted that year, focusing on the middle/senior manager strata, found only 49 per cent of women believing that they had equal opportunities to advance in HSBC regardless of gender, compared with 74 per cent of men; while reasons given for this perceived inequality of opportunity included ‘the lack of “risk taking” by the business on female appointments, lack of visible female role models, and male-oriented culture and networks’, all compounded by the apparent fact that ‘men are better salary negotiators’.63 Six years later, in 2010, the proportion of women in senior managerial positions was actually down, at less than 14 per cent (below market median for the financial services sector),64 and some of those more senior women explained for the benefit of the Group Diversity Committee (GDC) why there was still a day-to-day gender issue. ‘It’s partly a generational thing,’ noted one. ‘There are men in this organisation who honestly struggle to see women as their professional equivalents.’ Another highlighted the pressure to conform: ‘Men and women are different. Women typically like the opportunity to reflect and ask questions, whereas men like to make a decision and move on. And that is the prized behaviour in this organisation. But I don’t think that’s a natural behaviour for women.’ The GDC in March 2011 proposed various practical steps – including ‘GMB members to hold 1:1 conversations with senior direct report females on themes’ and ‘greater visibility in and use of senior female appointments within the Group’ – but almost certainly, few imagined that the gender imbalance was going to be transformed rapidly.65
The overarching principle remained explicitly meritocratic. The first Group Talent Pool (GTP) took shape at the end of 2002, comprising 162 people of whom 84 per cent were male and 66 per cent were British, though with over a dozen other nationalities represented.66 By the end of 2004 the GTP was up to 226 individuals – 44 per cent of them white Europeans67 – and increasingly membership of it was viewed as indispensable by youngish executives of talent and ambition. Where, in an era of increasing specialisation and to a degree localisation, did that leave the traditional, highly mobile International Manager (IM) cadre? ‘IMs are essential to the strategic management of the Group – unique in their flexibility and cross-cultural experience,’ the Managing for Growth plan had specified in October 2003,68 though by 2008 only about 25 per cent of the 350 IMs were in the GTP.69 Indeed, their very existence continued to divide opinion – ‘the IM system is totally out of date,’ commented one senior manager bluntly during the December 2010 diagnostic feedback70 – but in this respect anyway, Gulliver (on becoming Group CEO) favoured continuity. ‘The IMs need to be more modern and based more on merit,’ he told the FT. ‘But I won’t abolish the system. If there is an acquisition or a problem you want people with the DNA of the bank to parachute in.’71
What about meritocracy across the staff as a whole? In the Global People Survey (GPS) for 2007, the first of a thoroughgoing annual series, the proposition was put forward that ‘HSBC promotes the person best able to perform the job’. To this, however, only 44 per cent agreed, which was 6 per cent below the financial services norm;72 and even by 2009, when 51 per cent agreed, this was 2 per cent below the norm.73
More broadly, given the cultural dilution that was an inevitable consequence of the Group tripling in size between the mid-1990s and mid-2000s, there was an increasing emphasis during this period on identifying the core values that needed to be promoted. Unsurprisingly, the definition of those values tended to shift over the years. Managing for Growth in 2003 had laid down a fivefold cluster:
- Long-term, ethical client relationships
- High productivity through team work
- Confident and ambitious sense of excellence
- International character, prudent orientation
- Capable of creativity and strong marketing74
By the start of 2009, amidst a very different environment for banks, a major rethink was under way. ‘There is a strong commercial case for a values-based culture because of HSBC’s scale, employee diversity and employee turnover rate,’ Ann Almeida (head of Group Human Resources) and Alex Hungate (in charge of PFS and marketing) explained in January to the Holdings board. ‘Following internal and external research, Group Communications have distilled three plain English expressions of Group values which are being tested with focus groups. The three expressions that have emerged are “far sighted”, “dependable” and “in touch”. Most consensus has been shown for the value “dependable”, with least agreement on “far sighted”. The “in touch” value has had mixed views as it could have negative gender connotations.’75 Ten months later, after much further discussion and testing, the Holdings board endorsed the three agreed values statements, namely:
- Open to different ideas and cultures;
- Connected with our customers, community and each other; and
- Dependable and doing the right thing.76
Barely a year later, however, came a further twist. The overwhelming need, Gulliver told the GMB in January 2011, was for ‘urgent execution of initiatives to reduce complexity and bureaucracy and re-engineer businesses and processes alongside a clearly articulated Values and principles-based approach’.77 The new key theme of those values, he explained a few days later to the Holdings board, would be ‘Lead with courageous integrity’;78 and in March, after Gulliver had noted that ‘recent examples of poor behaviours in certain parts of the Group’ had ‘demonstrated an inconsistent adherence to Group values’, the GMB endorsed the statement that ‘the guiding principle that overlays the three specific values of being Dependable, Open and Connected with all stakeholders is that all employees should lead with Courageous Integrity, i.e. stand firm for what is right, even under pressure’.79 ‘This courageous integrity,’ Gulliver stressed at Investor Day in May, ‘is not some happy-clappy strapline. This will be the basis on which we evaluate people. As well as every one of my senior team’s scorecards having ROE goals, cost-efficiency goals, they will also have a rating in terms of their behaviour and the values, defined by courageous integrity.’80
Ultimately, however, these steers from the top were about adjustments to a culture that, certainly in the well-established geographies and businesses, had fundamentally strong and resilient characteristics. When analysts from the brokers Williams de Broe sought in June 2005 to identify HSBC’s crucial ‘enduring and competitive advantages’, head of their list was ‘a management culture and discipline that permeates the organisation’.81 They were largely right, and a handful of typical snapshots from the previous few years give something of the flavour.
‘As ever it depends on execution,’ John Bond told the CEO in Indonesia in September 2002 about the latest three-year strategic plan for that country, adding that ‘we should resist bringing third-party sales forces, etc, into the permanent establishment’, that ‘it is unacceptable to have an untested business recovery plan’, and that ‘I am always concerned when I see “salary increases in line with inflation” – salaries are paid out of revenue which is not always linked to inflation’.82 The following May saw Keith Whitson’s final chairing of the Group Executive Committee before retirement; and right at the end of the meeting, just before Bond paid tribute to his ‘superb innings’ as Group CEO, Whitson commented severely on growing signs at 8 Canada Square of ‘a lack of urgency and activity’, drawing particular attention to those ‘few liberty takers’ who ‘were not at their desks by 9.00 am or were seen to be entering the building with shopping during normal working hours’.83 Later that month, an email from the Group chairman’s office explained that the bank would not be attending the next IMF meeting in Washington because it already ‘has access to Finance Ministers and leaders of Financial Institutions around the world without needing the IMF meeting to achieve this, so we decided to save our shareholders money!’84 Almost a year later, in March 2004, Bond himself was on Chinese television, explaining some of HSBC’s core business principles: ‘Risk is the one factor that we always have to have consideration of, because it’s risk that destroys banks. It’s the strongest banks that survive the downturns in the economy. Every loan in HSBC is approved by an individual. We know who is personally accountable for every loan that goes wrong.’85 And finally, from November that year, take the crisp, unsentimental, goal-oriented message that Mike Smith (CEO for Asia-Pacific) sent with an attached paper to his country head in Australia. ‘It has been agreed with the Group chairman and Group CEO,’ wrote Smith, ‘that you pursue the game plan outlined and be given six months (end June 05) to produce a tangible difference. Failure to deliver will necessitate a change in business plan for Australia and new management.’86
This was the culture – a culture imbued for the most part with a deeply entrenched conservatism and prompting in 2004 one of the Group’s lead regulators to applaud the bank as the benchmark for all financial institutions – that during the second half of the decade, notwithstanding Household, triumphed through the financial crisis – a triumph that set HSBC apart from almost all its peers.87 Crucially, it was a culture informed by a strong sense of HSBC’s own very particular history. The upcoming offsite in June would be ‘an opportunity’, Geoghegan characteristically observed to the GMB in March 2009, ‘for those executives who experienced the 1990s Asia crisis to pass on the lessons learned and how they can be applied to the present situation’;88 while subsequently, in the wake of the crisis, John Flint would recall how he had learned the HSBC principles and methods of balance sheet management from Douglas Flint, who in turn had learned them from Willie Purves, who no doubt in turn had learned them from someone else.89 It was also a culture that never forgot that HSBC was different. ‘HSBC’s success is not the result of bringing in outsiders to chair the board,’ Whitson in retirement wrote to the Daily Telegraph in September 2010 at the time of the embarrassingly public succession episode. ‘It is because it has created a unique culture of commitment, loyalty and experience among its top executives and promoted from within.’ And later in his heartfelt letter, he called HSBC’s culture ‘truly amazing’ and ‘the envy of most of its global competitors’.90 Senior managers still in post concurred. ‘Our safe culture is a huge strength,’ commented one during the diagnostic feedback exercise later that year. Another observed that ‘we are cautious and methodical, which does serve us well’; and a third reflected that ‘where our complex organisation works well, it does so largely because of a healthy culture of teamwork and cooperation’.91 Nor were such feelings confined to senior management. In 2009, when the Global People Survey advanced the proposition, ‘I am proud to work for HSBC’, an overwhelming 83 per cent agreed.92
Loyalty, pragmatism, resilience, self-reliance – all these cross-generational cultural attributes have mattered hugely in the bank’s history, but arguably no quality has counted for more than the ability, perhaps owing something to the Chinese influence, to take the long view. It has been a quality much valued by customers – appropriately, one of Hongkong Bank’s very first customers back in March 1865, Abdoolally Ebrahim & Co., would remain a loyal customer almost a century and a half later – and in the modern era was most crucially to the fore on what turned out to be the eve of an almost unprecedentedly severe financial crisis. The pivotal decision by HSBC in early 2006 to ignore the pressure of the market, and not to follow the example of its peers by going down the highly leveraged route, was a courageous one that proved utterly justified and owed almost everything to deeplying cultural strengths. It may have been, by the end of this period, a culture that needed refreshing, as well as needing to be transmitted more effectively to all quarters of the Group, but it remained an astonishingly precious asset.
The years covered by this book involved a fascinating journey. The decision to embark on that journey was taken by Michael Sandberg in the late 1970s, when Hongkong Bank stood at seventy-fifth (by assets) in the world rankings of banks; three decades later, HSBC was the world’s number four.93 The journey, still in progress by 2011 but now entering a new phase, had encompassed many acquisitions, a huge amount of organic growth and the surmounting of several major crises. Would that journey have been attempted if there had been no looming transfer of Hong Kong’s sovereignty to China? It is impossible to know for certain. Perhaps a more interesting speculation is whether it would have been undertaken – essentially a global journey from out of the bank’s historic heartland – if it had been known that by the end of the period it was that heartland which seemed to offer HSBC’s best prospects. In retrospect, the fact and timing of the Asian financial crisis and ensuing downturn in the region appear particularly significant. Yet during the late 1990s and early 2000s themselves, those years of rapid expansion elsewhere in the world, it was the Group’s diversification that offered considerable comfort; while by the early 2010s, with HSBC’s renewed commitment to connectivity and becoming ‘the world’s international trade bank’, the case for a thoroughly international footprint was still compelling. Ultimately, although serious mistakes were made (especially in unfamiliar places and with unfamiliar businesses), mistakes that betrayed HSBC’s best self, it was a journey that amply vindicated the timeless principles of a long-departed chairman. ‘A bank wants three things,’ R. M. Gray told shareholders in Hong Kong in 1899, ‘viz., good character, good management and solid resources of its own. In the absence of any of these, pronounced success will be impossible.’94