A variation on the prisoner’s dilemma may be playing out at the top of HSBC.
They have generally proved to be an excellent combination. The calm, urbane Flint pleases shareholders and regulators; the driven, sharp-as-nails Gulliver imposes his will on the business and his senior subordinates. In the often-conflicted chairman and CEO relationship, they seem to get on well personally to boot.
Gulliver seemed to be in a secure, if uncomfortable, position when fresh details recently emerged of dubious historical tax avoidance services by HSBC’s Swiss private bank.
There was speculation that Gulliver might be tempted to pull a “Reverse Diamond” by offering up the scalp of his chairman Flint to placate the bank’s critics. This would be a variation on the approach of former Barclays chairman Marcus Agius, who was impressively quick to agree with UK regulators that the brash American CEO Diamond had turned out to be the wrong sort entirely and should be pressed to resign.
That took on a different twist when The Guardian newspaper disclosed new details of Gulliver’s past use of a Swiss bank account and Panamanian corporation to keep his bonus payments private, and highlighted his continuing non-domiciled tax status in the UK, despite his birth in the country, where he is based today.
The next day HSBC delivered fourth quarter and full year 2014 results that were much weaker than expected, largely due to poor performance in the global banking and markets division that Gulliver once ran.
Flint publicly defended Gulliver’s use of an offshore account for his bonus payments, which may have resolved the first round of their game of prisoner’s dilemma in a stalemate.
If either of Gulliver or Flint starts to appear more seriously weakened – perhaps due to ill-judged responses to questioning from politicians – then their incentives to stand together could shift again.
They need to find a way to address the scandals around tax avoidance and other business conduct issues, while also convincing leading clients to increase their business with HSBC, just as questions grow over whether the bank, along with some peers such as JPMorgan, has become too big to manage.
HSBC is the leading global investment bank in Asia, where Gulliver spent the formative years of his career. It ranks number one in capital market issuance, rates and credit revenue, and is even number two in equities revenue in Asia ex-Japan. But its rankings in other regions are much less impressive. A push to win debt capital markets share in Europe has delivered results and represents a long-term bet on disintermediation in the region. But HSBC ranks at number five in both foreign exchange and rates revenues, number eight in equities and number 10 in credit in Western Europe, according to consultancy estimates it used in a November presentation. That is sub-par for Europe’s biggest bank by market value and could be getting worse, given recent weakness in credit and FX.
One risk of the current tax scandal surrounding HSBC’s private bank is that it becomes such an all-consuming issue that it casts a similar shadow over attempts to secure growth in other sectors.
Investment bankers are masters at compartmentalizing problems elsewhere in their organizations, as can be seen from the way they so often push hard for bonus payments linked to their own desk’s performance, even when the parent banking group is facing serious headwinds.
Gulliver and Flint may be mulling the lessons of Diamond’s exit from Barclays – and the accompanying departure of Agius – as they game a way to get past the latest scandal with their authority intact.
trust, don’t verify
In 2012 its longstanding CEO and chairman team – Peter Sands and John Peace – botched the handling of a money-laundering fine from US authorities so thoroughly that it turned into a distraction for two years and may have contributed to a downturn in the performance of the bank’s core business.
There has been a sharp increase in loan write-offs at Standard Chartered over the last year, and accusations that lending standards have slipped. It is difficult to escape the conclusion that this was partly because executives at the top of the bank were distracted by their regulatory challenges.