HSBC – Board-Level People Risk

Both the Chairman and CEO of the banking behemoth HSBC have recently appeared before the Treasury Committee of the UK Parliament in connection with the Swiss Tax Scandal [1]. The bank’s Board had previously issued an apology for the scandal to its shareholders and the public in general [2].

The argument made by the HSBC Board is basically “We didn’t know, how could we? We are a huge organization. It would not happen today”.

Ignorance is bliss.

HSBC is a huge and successful organization. It employs over 266,000 employees supporting over 50 million customers in over 70 countries. Its recently released annual report shows profits after tax of some $18.7 billion and the firm is very well-capitalised, sailing through the Global Financial Crisis without too much damage.

The bank’s stated aim is to be “the world’s leading and most respected international bank” [3]. HSBC is certainly well on the way to achieving the former goal but has much work to do to achieve the latter.

The facts of the Swiss Tax case are pretty well-known. In 2008, an employee (disgruntled or hero depending on your perspective) ‘stole’ some highly confidential data about clients of the Swiss offices of the bank’s Global Private Banking (GPB) division and passed it to the French tax authorities. The facts about who knew what when are still being unearthed but undoubtedly other tax authorities were made aware of the tax evasion and money laundering being conducted through the Swiss offices. Some of the clients who were using the bank’s facilities were, to say the least, unsavoury characters but obviously very profitable to the firm.

Hubris
Despite admitting that the bank had suffered enormous damage to its reputation, the Chairman and CEO would take no personal responsibility for the tax scandal. Under questioning by MPs on the Treasury Committee, Chairman Dougal Flint, admitted ‘collective responsibility’ at the Board level, which included ‘personal responsibility’ , but then somewhat cryptically argued that one “can’t expect him to take personal responsibility for a large operation that he’s not personally running”. In short, it’s someone else’s fault!

Meanwhile, the CEO claimed the previous management was at fault and he was just cleaning up the mess. In their responses and demeanour, neither Flint (who had been CFO for some 15 years before becoming Chairman) nor Gulliver appeared to accept that they may have had anything to do with the problems in the Swiss office. And anyway most of those Swiss bankers had already left.

In fact, the only emotion that the leadership appears to show is against the ’thief’ who stole the records of illegal activity in the first place. Flint would not admit that whistleblowing had uncovered the scandal and was a loss to discuss why an internal whistleblowing compliance officer had apparently been fired for flagging problems at the Swiss bank. Everyone else was at fault, not the top brass.

This willingness to accept the benefits of success but to blame others for any failures betray hubris at the highest level of the bank.

Universal Bankers
The CEO, Stuart Gulliver, is a HSBC lifer, having worked in the bank for over 35 years, heading up the Investment banking arm before ascending to the CEO role in a pretty bloody boardroom coup in 2010 [4]. Just as HSBC is the archetypal Universal Bank, Gulliver is the archetype of the new breed of Universal Bankers, who live and work around the world. Gulliver certainly had a peripatetic career managing HSBC trading operations in London, Tokyo, Hong Kong and the Middle East before ascending to the top job in London, or is it Hong Kong? Although London is the headquarters of HSBC, Gulliver is a non-domicile for UK tax purposes, claiming Hong Kong as his home (which it is for all intents and purposes).

But as newspapers have discovered, Mr Gulliver has his salary paid into a Panamanian account but insists that is merely incidental, since he has paid all UK taxes due. This, of course, is not a good look for the CEO of a bank that is fending off a tax evasion scandal. Unfortunately, Mr Gulliver appears to be being set up to be the scapegoat for this scandal, as human nature requires that someone/anyone has to pay (for something). But that is in the future.

Bad Decisions
A number of really bad business decisions are apparent in the HSBC case. Obviously, the actions of the bankers in the HSBC Swiss private bank, who turned a blind eye to clients’ tax evasion and money laundering, were reprehensible. But everyone did it at the time so it had to be OK, wasn’t it? And when valid concerns were raise, they were ignored.  In other words, lots of people just didn’t do their jobs properly.

But were the Board also making bad decisions? The annual reports from 2010 onwards, when the Chairman and CEO were elevated to their roles, are pretty open about the profits and costs in their Global Private Banking business line, which included the Swiss private bank. Disclosures about private banking were ho-hum, up one year, down the next but making little real impact on HSBC headline numbers. The bank’s 2012 annual report gave no indication of problems ahead, stating that “GPB will adhere to the highest standards in the industry, and will continue to strengthen its compliance and risk framework, focusing on global standards and tax transparency”.

If one was to ask the man or woman in the street what jumps to mind when they hear the word Switzerland? After chocolate and mountains, the answer would probably be ‘tax evasion’. Likewise, asked the same question about Private Banking, ‘tax evasion’ would be up there. Put them together and the proverbial man in the street would undoubtedly answer ‘tax evasion’ at the top. So why did some of the best bankers in the world not flag this up as a ‘red’ area that needed maximum attention?

Probably no one will ever know, but the decision not to properly clean out the Swiss private bank when it was first acquired and then to strictly monitor it from then on was undoubtedly a very bad decision by the HSBC Board. But as the Chairman claimed, while collectively they were to blame, no single person could be blamed.

At this point, it is worth remembering the comments of the UK Parliamentary Commission on Banking Standards which in it 2013 report ‘Changing Banking for Good’ [5] “Too many bankers, especially at the most senior levels, have operated in an environment with insufficient personal responsibility. Top bankers dodged accountability for failings on their watch by claiming ignorance or hiding behind collective decision-making”.

Obviously, senior bankers at HSBC did not read that report or at least didn’t take it to heart?

The HSBC saga will roll on for many months and some heads will undoubtedly roll. But at its heart were bad decisions making by the Board of the largest bank in Europe and one of the largest in the world. It is (yet another) example of People Risk at the highest level of the financial industry.

People Risk Management
The risk that an employee or group make bad decisions is a People Risk as it can lead to significant losses even the bankruptcy of the firm. In this case a decision not to ensure that the firm’s policies as regards tax evasion was adhered to, resulted in considerable reputation damage to HSBC. This blog is one of a planned series that will discuss facets of People Risk in general and Decision-Making in particular. It is obvious that managers and assurance functions, such as Risk Management, Audit, Compliance and Human Resources, must understand the concept of People Risk, particularly the influence of individual and group biases on decision-making, because badly-made decisions may result in significant damage to the firm.

References
[1] See “HSBC scandal caused horrible damage to bank’s reputation, says chairman” http://www.theguardian.com/business/2015/feb/25/hsbc-scandal-horrible-damage-reputation-chairman
[2] See HSBC’s letter of apology at http://www.bbc.com/news/uk-31476552
[3] See HSBC’s 2014 Annual report at http://www.hsbc.com
[4] See http://www.theguardian.com/business/2010/sep/23/hsbc-mike-geohegan-replaced-stuart-gulliver
[5] See UK Parliamentary Commission on Banking Standards (2013) Changing banking for good, Volumes I & II, published 4 June by authority of the House of Commons, London