That HSBC, which has clawed its way up from nothing to the top of bond league tables, has failed to match that performance in equity capital markets or mergers and acquisitions is common knowledge in financial circles. Exactly why this is, however, has remained a mystery to many, and a cause of debate.
This conundrum resurfaced notably last November, when Matthew Westerman, the ex-Goldman Sachs big hitter drafted in as co-head of global banking in February 2016, left amid acrimony after only 18 months.
Now a missing piece of the jigsaw has been proposed by an anonymous person or persons who have written a seven page letter to HSBC’s board, blaming dire management failure over the past 15 years.
Just under a month after the date of the letter (August 24) it appeared in Financial News, and it has subsequently been widely circulated among capital markets professionals.
In the firing line
The prime target of the writers’ ire is Robin Phillips, co-head of global banking since September 2011, whom they accuse of ineptitude and of wilfully undermining talented bankers who might have threatened his position. He owes his status, they claim, to his closeness to Stuart Gulliver, group CEO from 2010 until 2018 and before that CEO of global banking and markets since 2006.
The writers claim to be “a group of extremely concerned investment banking professionals, directors and managing directors in HSBC’s global banking and markets division”.
Their letter is detailed, referring to various cases over the past 15 years in which they believe the GBM division took wrong actions, by lacking a coherent strategy; promoting ineffective people; overlooking, failing to retain or even deliberately pushing out the able; losing client relationships; and reorganising itself without benefit.
They claim, for instance, that HSBC had a very successful resources and energy advisory franchise from 2001 to 2007, led by Mark Bentley and for some of the time, Antoine Cahuzac, but that since Bentley was “pushed out”, to be replaced by Matthew Wallace, this business has dwindled, to the point where HSBC no longer wins mandates from many important clients and is losing its once leading status on the planned IPO of Saudi Aramco.
For the years 2001-2007, HSBC was ranked 14th in M&A advice on deals where the target was a metals, mining, hydrocarbons or utility company, according to Dealogic. For the period since then it has been 27th for that sector, and for the period since 2014, 35th.
The complaint is based, the writers say, not only on “our direct personal experiences” but on conversations with over 30 former employees of director or managing director level.
This is clearly a very difficult matter for John Flint, HSBC’s new CEO, to have landing on his desk. But he should take a deep breath and grasp it with both hands. Mark Tucker, who became chairman in October, must also take responsibility for sorting this out.
GlobalCapital takes no position on how true the allegations are. It is perfectly possible that the complaint is partly or all lies — it might even be the work of a single jaundiced individual.
But if even half of what is claimed is true, there are serious management problems in HSBC’s global banking and markets division.
Such failings, if they exist, could be part of the reason why, despite being a huge, global bank with high and sustained ambitions as an investment bank, and 15 years after Gulliver and John Studzinski became co-heads of global corporate, investment banking and markets, HSBC ranks 18th in global ECM this year, just below Huatai Securities, and 43rd in global M&A, just below Dyal Co. Barclays, incidentally, is sixth in M&A and BNP Paribas 16th — and have you heard of Raine Group at number 27?
This may be a little unfair: HSBC may just be having an off year — its M&A rank in 2014-17 was always between 16th and 20th.
Anyone taking over as CEO of HSBC — a bank which, even after recent cuts, had 229,000 employees at the end of 2017 — will have a lot on his or her plate. Fixing investment banking may, one might guess, have been in the top 10 issues on Flint’s first day agenda, especially after Westerman’s messy departure. But it was probably not in the top five.
Now, the rebels’ memo has brought this issue close to the top of the pile, however inconvenient or annoying this may be.
Imperative to act
Global banking may only bring in a quarter of the net operating income in GBM, which itself produces 28% of the bank’s profits. But being a big bank is no excuse for letting any part of the business languish.
The strategic decision over how hard to push in investment banking is one of the most obvious and important choices facing any CEO of a large bank, and one which Flint is bound to face virtually every time he meets shareholders. Every bank investor knows investment banking can be a source of volatility and high costs. When Flint addresses BlackRock, Ping An and JP Morgan — HSBC’s three biggest shareholders, according to a report in the Financial Times in December — he had better be able to explain what his gameplan is in this area.
Now that what could be a group of the bank’s senior investment bankers has publicly attacked the competence of their own firm, in full view of all their clients, competitors and shareholders, Flint has no choice but to get to the bottom of the problem.
Right to speak out
First of all, there must be no hint of a witch hunt or attempt to uncover the conspirators. Jes Staley, CEO of Barclays, nearly ended up getting sacked and was subjected to a highly embarrassing, confidence-sapping and time-consuming investigation by US and UK regulators when he tried to identify a whistleblower who had raised concerns about a senior investment banking employee.
Some may quibble over whether alleging incompetence — not actually a crime — is whistleblowing. They should be ignored.
The letter writers themselves invoke the talismanic term “whistleblowing”. In the present climate, a bank CEO, just from the point of view of self-preservation, would need extremely strong legal advice that these complaints did not qualify as such to go ahead and try to uncover the perpetrators.
Much more importantly, that would be entirely wrong. Unless the letter writers are actually lying, they are acting out of concern for the health of their bank, which they care about and want to succeed.
Working in a firm or team which you feel is badly managed is highly demoralising to staff, making them feel like their efforts are pointless, because they are dragged backwards by poor decisions above them. Few things could be more important to the health of a company than uncovering and ending any such mismanagement.
Furthermore, the writers have taken considerable personal risk, since if their names do come out, it could hurt their employment prospects, not just at HSBC, but conceivably at other firms, which may not be desperate to hire those willing to criticise management.
The argument that the letter will make it harder for Flint to make changes in investment banking than otherwise, because of internal politics, does not hold water. Dealing with a difficult issue head-on, but fairly, would be seen as a sign of strength by staff, not weakness.
It would also send a highly salutary message to employees at other companies who may be harbouring similar grievances.
This does not mean every random staff grumble needs to be handled by the CEO. But the seriousness of these complaints, the claimed breadth of support for these views, and the seniority of the people involved make this an exceptional case.
Fair and thorough
HSBC's reaction so far has been to say that it is proud of its investment banking business, which it maintains is growing revenue and wallet share. It attributes much of the credit for this to Phillips and his senior management team. Sources say the feeling at the firm is the claims are subjective, personal, relate in part to the past, and are based on a misconception that HSBC wants to be a top M&A house like Goldman Sachs. Instead, its ambition is to have a wide product set as a universal bank, including ECM and M&A, which it wants to build and where it is pleased with its progress.
However, the complainers' beef is not that HSBC has starved investment banking of investment. Rather, they allege it has repeatedly thrown money at the business, but unwisely and without ensuring spending brings results. It has not followed a consistent course, they lament, but has been unable to sustain a well organised campaign or retain the right people — problems they believe are still current.
The best course of action, therefore, for Flint and Tucker — if they have not already done this — is to work out a plan of action, which should be discussed at board level.
This should involve, first, making it publicly clear that there will be no reprisals or attempt to uncover the authors.
Second, there should be no presumption that the claims against Phillips and Gulliver are true.
Third, the bank’s leaders should interview all senior bankers in GBM, starting with Samir Assaf, its chief executive, and working down at least to all team heads, and perhaps all managing directors, with guarantees that they can speak the truth, in confidence, without prejudice to their career prospects or relationships. They should also seek to speak to other senior bankers who have left in recent years, including Westerman.
These interviews would enable Flint and Tucker to form a view on whether the problems complained of in GBM are real, and if so, what needs to be done to correct them. Responsible corporate governance demands nothing less.