A variation on the prisoner’s dilemma may be playing out at the top of HSBC.chart a course for the bank since they launched a business model overhaul in 2011.
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.But the current scandal over tax avoidance raises the chance that one or both of Gulliver and Flint will be forced out of HSBC. That in turn could affect their incentives to play well with each other.
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.He was cast in the unlikely role of a former investment banker required to deal with chronic reputational problems created in other parts of the bank. Gulliver certainly did not seem to be exposed in the way that Bob Diamond, a fellow investment banker turned group CEO, was when the Libor manipulation scandal engulfed Barclays.
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.Even if this was an unduly cynical take on his likely course of action, Gulliver himself seemed under minimal pressure.
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.Suddenly Gulliver became the likely focus of popular outrage in the UK at tax avoidance policies in particular and wealthy bankers in general.
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.HSBC also revealed that a US regulator is investigating potential metals market abuses, adding another probe to the long list of business misconduct issues faced by the bank.
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.In the classic iteration of the dilemma, the two prisoners both receive light sentences if they refuse to co-operate with their captors, with incentives and risks changing if they turn on one another.
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.And even if they remain in solidarity, the top two at HSBC still face formidable challenges in transforming HSBC into a bank that fully exploits its unique global reach across all major business lines.
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.There have been selected advances in market share within investment banking since Gulliver took over as CEO and Flint as chairman, but they have been incremental.
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.The acquisition of mortgage lender Household in the US was such an unmitigated disaster that it overshadowed a broader attempt to build scale in North America, with the result that HSBC is outside the top 10 by many key investment banking metrics in the region.
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.HSBC cannot expect big clients to look past scandals that are serious enough to land the bank on the front pages of newspapers and as a lead item in television newscasts.
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.Clients tend to take a simpler approach – viewing their service firms in a holistic manner, to use a term beloved of bankers who are extolling the virtues of their employers.
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.Peace was forced to go to Washington in 2013 and apologize for remarks downplaying the importance of the sanctions, then in 2014 the bank was fined for a second time by US regulators for failing to remedy the problems identified in the original 2012 complaint.
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.Scrutiny of HSBC has become political. In politics, a story only tends to die out when either another entity becomes the focus of attention, or a head rolls. Absent another whistleblower or banking disgrace, the next few weeks will test the solidity of Flint and Gulliver’s relationship.