The Largest Investment Banks – HSBC

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Table of Contents

Executive Summary
Introduction
Problem Statement
Discussion
Recommendations
Conclusion
Works Cited

Executive Summary

In 2010, HSBC, one of the largest investment banks in the world, announced the departure of Mr. Green, its Chairman. The company claimed that it had an extensive succession plan in place, but the subsequent announcement that Mr. Green would be leaving early put the claim into question. There was a power struggle within the company, with the CEO wanting to be promoted to the role with the support of many employees and several candidates competing for the position. The crisis was ultimately resolved satisfactorily, but the business’s stocks dropped throughout it, regardless. This report studies the case and concludes that HSBC failed to prepare for the eventual Chairman succession by training employees who may have the necessary talents. It suggests that the company should have started managing potential successors shortly after the decision to stop automatically appointing the CEO to the position and communicated the decision to all involved actors, obtaining their agreement.

Introduction

HSBC was a company with a stellar reputation for handling succession, which often leads to power struggles in other corporations. Preparations for structural changes would begin years in advance and follow a strict schedule, ensuring that there would be minimal turbulence throughout the process. However, there were some concerns due to the methods employed to handle succession at the highest level. These misgivings turned out to be appropriate in 2010, as a succession crisis emerged due to a decision to change the standard method used for it. It was ultimately resolved satisfactorily, but as one of the largest banks in the world, HSBC should not have let the situation arise in the first place. This case study will analyze the situation, explain its causes and effects, and propose recommendations that might have alleviated it.

Problem Statement

HSBC’s difficulties began with the departure of Mr. Green, the company’s Chairman. He had occupied the position for a long time and was regarded as vastly successful, and the news of him quitting hurt the company’s stock substantially (Teen 167). The bank was aware of his intention to leave the position for years in advance and prepared a succession plan. However, it was disrupted by his announcement that he would be departing earlier than originally stated. The addition of the fact that HSBC intended to break its tradition of promoting the CEO to the Chairman’s position added to the uncertainty. Some people were supportive of the decision, while others wanted to maintain the tendency. The company’s CEO, Mr. Geoghegan, was among the former, and his opposition deepened the company’s crisis.

Mr. Geoghegan was a loyal and effective employee who had spent thirty-seven years at HSBC, eventually rising to the position of CEO in recognition of his achievements. However, Teen claims that he was seen as too aggressive to deal with investors and that British business guidelines began frowning upon the appointment of the CEO as the Chairman during Mr. Green’s tenure (168). As a result, HSBC started considering other candidates and gave them more consideration than Mr. Geoghegan. The CEO was not happy with the decision and may have threatened to resign, with the information leaking to the news and exacerbating the external pressure on HSBC. The company found itself amid a struggle between the investors and the management, needing to placate both quickly before the situation could damage its stocks further.

Discussion

Leadership succession is a critical period for a company because of the limited number of positions available and the high number of people who want to claim them. As a result, the candidates will engage in a power struggle that will often take precedence over their work to benefit the company. Moreover, if the new leader is not appointed by the time of the previous CEO’s or Chairman’s departure, the conflict will escalate without a higher authority that can stop it. As such, succession planning is critical for a company that wishes to avoid the periods of instability associated with the departures of its leaders.

The practice guarantees that the company will operate smoother before the process and during it. In doing so, it reassures the public as well as the business’s shareholders and stabilizes its potentially volatile stocks as a result. However, to do so, the plan has to incorporate several critical components. A clear definition of the role being replaced is the first one, as it can be challenging for a newcomer to take on the new position’s responsibilities if they are implicit. A development process is another, as people have to be prepared through additional education to handle the CEO’s responsibilities. A clear method of succession that defines who can take on the role, who chooses the appointee, and how long the officer serves is the final one.

A company without controlling shareholders can choose its leadership somewhat freely based on a variety of considerations. As long as the candidate is beneficial for the business and at least slightly popular with shareholders and the public, they can be chosen without substantial difficulty. As such, the company can weigh the interests of the board and the shareholders against each other to keep both satisfied. It is unlikely that substantial opposition will emerge from the investors about the appointment. With that said, investors will monitor the company’s performance afterward and determine their opinion about the appointee after seeing how it has changed.

However, the situation is substantially different in companies that have controlling shareholders. In them, you have small and powerful groups or individuals that have a substantial influence on decisions. They are likely to be closely involved in important matters such as the appointment of a new chairman. Moreover, they have a strong interest in seeing employees who align with them appointed. As such, succession planners have to consider the benefits of these shareholders when choosing candidates and selecting the new leader. They also need to persuade these groups to accept their choices or adjust the selections in case of failure to do so.

HSBC’s problems arose as a result of failing to prepare for the succession adequately. The company left the selection of the next candidate to be resolved at the final moment. As a result, when Mr. Green announced his early resignation to move on to the position of Minister of State for Trade and Investment, the HSBC was surprised and alarmed. It had to choose and prepare a candidate quickly despite the internal division regarding the choice. All of the candidates had substantial drawbacks and strong backing, leading to an internal struggle and an uproar.

A development procedure was the critical component that was missing in HSBC’s succession planning. The company relied on having its CEO take on the Chairman’s responsibilities automatically, as both positions are similarly influential and share some of the same competencies. However, Mr. Geoghegan proved unsuitable for the job, a fact that the Board of Directors realized too late. They did not evaluate and prepare candidates beforehand, and, as a result, all of the potential options had substantial flaws when the time to choose came. Candidate development is a continuous process that takes place even when the current leadership is in place and will stay so for the foreseeable future. HSBC failed to follow this approach and experienced one of the issues associated with doing so.

HSBC’s poor succession planning led to a loss of trust in its leadership by the public as well as investors. According to Teen, there were calls for the non-executive directors to be replaced after the event to take responsibility (170). As a result, its stock dropped somewhat and might have experienced a further decline if the decision made in the end had not proven popular. Moreover, Mr. Geoghegan, who was a valuable asset to the company despite his unsuitability for the Chairman’s position, resigned as part of the reveal of the changes. In addition to the stock drops caused by Green’s departure, HSBC may have suffered substantial financial damage and lost valuable personnel.

HSBC is among the largest banks in the world, and it is involved with a wide variety of stakeholders. Its investors suffered as a result of the stock drop, losing some of the value held in their stock as well as seeing their income lower somewhat. The bank’s trade partners and other related companies may have taken on some of the damage, as well. They would be concerned about the reliability of the bank, afterward, and begin considering other options. The calls for the replacement of the leadership team were likely an expression of these worries.

A company’s CEO manages day-to-day operations and sets the business’s direction, overseeing the implementation of policies and financial performance. However, some matters may create conflicts of interest if they were left to executive leadership, such as the determination of their performance, or be unsuitable for the CEO’s skill set, such as stakeholder communication. Larcker and Tayan claim that the position of the Chairman exists to address these issues and participate in long-term strategic planning, risk management, director recruitment, and other high-level activities. Overall, the CEO is concerned with short-term activities, while the Chairman considers the company from a long-term perspective.

Stakeholder communication is among the most important of the Chairman’s responsibilities. As such, they have to be excellent talkers and listeners, with the skills also benefiting them in Board recruitment and management. They also have to be skilled businessmen and experienced strategists to be able to set the company’s course. Mr. Green was suited to these criteria, being able to lead HSBC through two crises and modernize its general operations.

There are substantial benefits to assigning the company’s CEO to occupy the position of Chairman. In many countries, including the United States, the two jobs are often combined, with one person fulfilling the duties of both at the same time. The former CEO is intimately familiar with the company’s operations, which enables them to make informed decisions. They have also proven themselves highly capable as a leader and a learner that has acquired numerous capabilities to advance to their last position. Overall, the CEO appears as a reliable choice that should be able to handle any responsibilities given to them given appropriate preparation.

However, having the capacity to adapt does not necessarily mean doing so, as the case of Mr. Geoghegan indicates. The former CEO may be unpopular with investors, try to intervene in the activities or the new one, or take an inadequately strategic approach. As a result, conflicts of power would emerge and complicate the company’s operations. The appointment of Mr. Flint partially alleviated these issues, as he was not an executive officer and satisfied investors. However, he was also less experienced than other candidates and may have had an independence issue. Ultimately, the appointment did not resolve the problems completely, but it contributed to addressing the primary concerns.

Both internal operations and external stakeholders have the potential to undermine a company’s performance if their needs are not addressed. Internal decisions may not have a substantial immediate effect but can harm the company significantly in the long term. On the other hand, external interested parties, particularly the shareholders, can make the company’s stock drop dramatically and quickly, potentially causing its collapse. However, over time, if they see the initial decision as justified, they may return and help the business stabilize. Nevertheless, it is critical to consider both when making decisions and maintain a balance that benefits the company.

The introduction of good practice complicates the issue further, as its support or opposition for one of the sides in the argument can change depending on the situation. However, generally, good practice will be on the side of the stakeholders, as many of them, especially institutional ones, will follow it and demand the same of their partners. Typically, unless there are strong reasons for doing the opposite, the business should adhere to good practice. However, it should recognize the dangers associated with doing so and try to address the concerns of the other side while following the original decision.

As Sir Robertson, the author would understand that denials of Mr. Geoghegan’s threat would not achieve a substantial effect on the public and investor perception. Questions about the lack of unity on the decision would arise, as they had done shortly afterward in the incident. However, the action that may have unified the company, Mr. Geoghegan’s appointment, would have aggravated the investors further. As such, since there was no time to overcome the internal divide, the author would push for the nomination of a candidate as soon as possible. With both Mr. Thornton and Mr. Geoghegan being resolutely unpopular with management and stakeholders, respectively, Mr. Flint appeared to be the best option.

The appointment would seem hasty to external observers, who were already dissatisfied with the seeming lack of organization during the succession process. They would only be dissuaded if they saw a strong performance by the company, which would take time to show itself. However, the idea of Mr. Robertson taking on the Chairman’s responsibilities during the transitional period was well-received, if considered unlikely. As such, doing so would be the optimal move to placate the company’s stakeholders, which the succession committee leader realized. Overall, salvaging the situation entirely would be nearly impossible, but Mr. Robertson’s actions were optimal, and the author would mostly repeat them.

Recommendations

Overall, HSBC should have been preparing to pass on the responsibilities of the CEO and Chairman since before Mr. Green announced his impending resignation. The good practice recommendation to avoid promotions from CEO to Chairman first appeared in 2003, and the incident happened in 2010. Since the company was going to promote someone other than Mr. Geoghegan, who was also unsuitable for different reasons, it should have started searching for candidates and preparing them. If such a practice were in place, the announcement of Mr. Green’s premature departure would not have been particularly problematic because his replacement would already be mostly ready to assume the position. Moreover, the alternatives would be better suited to the task, and their promotion should have been received well. It might have also simplified the selection process by improving upon each candidate’s potential and showing their strengths and weaknesses clearly.

The company should have also been clearer in its selection process and communicated with the various interested party. Mr. Geoghegan’s dissatisfaction with not being promoted to the Chairman’s position implies that he was not aware that the committee was not considering his candidacy. The various employees who supported his promotion may not have understood the reasons behind the decision to exclude him and created division in the company. The resulting chaos also likely led to Mr. Geoghegan’s retirement, which was a substantial asset loss to the company. If the various interested parties had been consulted and persuaded to accept the committee’s choices ahead of time, the situation might not have escalated to the degree to which it did. As such, it is critical to discuss matters of succession ahead of time, especially if a leader announces their departure as early as Mr. Green did.

Lastly, HSBC should have paid more attention to the interests of the internal stakeholders in addition to external ones. The company was likely concerned with the shareholders as well as its overall reputation, which led it to disregard employee concerns until it was too late. As a result, the sentiments regarding Mr. Geoghegan went mostly unnoticed until it erupted during a meeting and leaked to the press. By understanding its stakeholders better, HSBC would be able to satisfy their needs and ensure their agreement on critical matters. It would also make decisions that addressed the requirements of most or all of its interested parties and maximized the benefits as a result. Overall, by following the three recommendations above, HSBC should have been able to prevent the debacle, to which there existed no entirely satisfactory answer.

Conclusion

HSBC’s succession crisis was a result of its decision to abandon the tradition of promoting the CEO to the position of the Chairman. It did not implement the appropriate succession procedures or communicate the decision to the executive staff. As a result, there were no candidates that could be accepted by both internal and external stakeholders wholeheartedly, and the CEO may have threatened to resign and done so. The premature departure of the past Chairman complicated the situation and escalated the tension, exposing the issues to the investors. With that said, the company’s management of the case was excellent, as indicated by the positive response of the stock market following the decision. Nevertheless, the incident could have been prevented entirely if the appropriate candidate preparation guidelines, communication tools, and stakeholder management procedures were used.

Works Cited

Larcker, David, and Brian Tayan. Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences. 2nd ed., Pearson Education, 2016.

Teen, Mak Yuen. HSBC: Who’s the Boss? 2013, insert link from which you downloaded the file here.

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