INTRODUCTION

The Hong Kong and Shanghai Banking Corporation or HSBC is founded by

Thomas Sutherland in Hong Kong on March 3, 1865 and one of the largest banking and
financial services organizations in the world nowadays, with operations in 64 countries
and territories. HSBC is also known for its long history of smooth board and senior
management succession underpinned by clear succession plans.

In September 2010, the end of an era of smooth succession was ended that
shocked the business world by premature departure of its incumbent Chairman,
Stephen Green. This chaos weakened the outstanding reputation for smooth
management succession of HSBC and impaired the credibility of the board.

In addition to chaos, the statement of HSBC’s CEO, Michael Geoghan, stating

that he will resign if the top position will not be in his favour. The statement leads to
internal confusion of HSBC. How does the HSBC resolve this chaos? Will the HSBC bring
back its lost reputation?

BACKGROUND

HSBC is long known as a model for its smooth board and senior management
succession. Its past successions for the Board Chairman position have been low key,
without major disruptions to the business or public outcry. The succession process
involves extensive benchmarking against external candidates to ensure its internal
candidates are up to standard and not simply chosen by virtue of their insider status.
Successions have also been traditionally consensus-driven, with the succession receiving
unanimous support from the Board of Directors.

In May 2006, In spite of executing another smooth CEO-to-Chairman hand-over,

HSBC was criticized for its tradition of promoting its CEO-to-Chairman, as this was
perceived to impair the Chairman from independently and objectively monitoring the
company. Michael Geoghegan replaced Stephen Green as CEO of HSBC, while Green
was promoted to Chairman. The CEO and Chairman roles at HSBC had been traditionally
been such that the Chairman functioned more as CEO, while the CEO served as the
deputy.

In late May 2010, news about Green’s pre-mature departure as Chairman of

HSBC within a year leaked out in various media reports. The leakage about the
departure and the plunge of HSBC’s share price came to the investors’ knowledge, and
viewed this as the loss of a major asset for the bank. Additionally, there was a
widespread of speculation from the media about candidates to succeed Green, but with
no official word from the HSBC.

Within the HSBC, it was reported that many wished for the bank to maintain its
tradition of promoting CEO-to-Chairman. CEO Michael Geoghegan was a hard-working,
decisive, and quick-thinking CEO who had earned the respect of many of his staff.
However, HSBC appeared inclined to abandon its tradition of promoting the CEO-to-
Chairman and appoint a non-executive Chairman as a more independent check on the
CEO-led business. This would leave Geoghegan out of the race.

Other frontrunners for the role included John Thorton, a non-executive director
who was more well-received by investors because of his independence from bank
management. Another candidate was Douglas Flint, HSBC’S Finance Director, who was
viewed as a “compromise candidate” to placate both investors and management. Also, a
senior independent director at HSBC, Simon Robertson, has been mooted in the media
reports the idea of having him taking the role of temporary Chairman. With seemingly
no clear successor at the time of Green’s departure, and a myriad of potential
candidates that appeared to leave the public and internal stakeholders divided, the
succession looked poised to be most chaotic that HSBC had seen for a long time.

On September 21, 2010, another news has been leaked involving Geoghegan’s
threat to resign after being informed at a meeting that the board did not intend to give
him the position of Chairman. Even though the HSBC strongly denied the incident, the
information leakage had already given the public an insight into the boardroom power
struggle. The public saw at that point in time were a picture of a fractured board and an
extremely disorganized, poorly conveyed, and rifts over succession plan, within HSBC,
which is ill-benefitting of a large global bank.

ALTERNATIVES

In alternate to Robertson decision, John Thornton must succeed Stephen Green,

because he has an experience compared to Douglas Flint and his independence from
bank management is not on questioned compared to Flint. Therefore, John Thornton is
the most suited and more qualified to be a chairman’s qualification given by circular
969. However, Thornton received unremarkable remark internally because of his harsh
management style that he possessed on his time at Golden Sachs.

PROPOSED SOLUTION

As stated in the corporate governance guidelines, the Chairperson of the board

of directors shall be a non-executive director or an independent director and must not
have served as CEO within the past three (3) years to promote checks and balances.
Provided also, the positions of Chairman and CEO shall not be held by one person, as
this creates an inherent conflict of interest as most cases. Provided further, the role of
Chairman of the board of directors provide leadership in the board of directors and
ensures the effective functioning of the board of directors, including a maintaining a
relationship of trust with members of the board of directors.

Also, separating the role of CEO and the Chairman strengthen the overall
integrity of the company. So in the case of HSBC’s Chairman position, Geoghegan is not
fitted to the role even if he had threatened to resign if does not give him the position of
the Chairman.

Thus, HSBC’s Chairman traditionally held the duties of the CEO at an equivalent
institution, while the CEO served as the deputy. This can reduce transparency and
accountability due to fewer checks and balances created by having two separate
positions with separate job functions. So the HSBC unveiling the new leadership team,
with appointing Douglas Flint for the Chairman, it creates a substantial accomplishment
for the company to receive a favourable remarks from the public especially the
stakeholders.

RECOMMENDATIONS

The Board of Directors should establish a system of identifying and developing

potential successors for critical positions like CEO and Chairman so as to have an
effective succession planning program.

Thus, the Chairman and CEO are both responsible for the leadership of the entity
and promote the highest standards of integrity and probity, however, there are still
distinction between their roles and/or clear division of accountability and responsibility
so as to maintain the balance of power and authority. At this point, it is a requirement
that the Chairman should be an independent director, and that the Chairman should not
also the CEO of the company and/or served as CEO within three years.

1. What is the purpose of a succession plan and what are the components of a
comprehensive succession plan?

Succession planning is one of the most important business process in an

organization where the management establishes plans for finding or choosing the next
future potential leader who will fit in stepping into leadership positions. This is also to
identify and to develop their skills, knowledge and talents that will fill the critical roles
and have the capacity to strategically execute the goals and objectives of their company.
Succession planning is not just about replacing an existing employee or position on the
board. The management must understand the purpose of a succession plan which is:

a. for preparing the organization for the succession of position and developing their
strengths for the future requirements.
b. to ensure the smooth transition or succession of positions, especially for the higher-
level positions, which must be done without any problem that can affect the company
or the organization, internally or externally.

c. to ensure that the organization will choose the right person with the right skills,
capabilities and experiences, in the right place at the right time.

The components of a succession plan is to (1) identify the successor fit for the
key position. This can be done by extensive benchmarking of external and internal
candidates just like what HSBC did, (2)identify the requirements and qualifications
needed that must be complied by the candidates to be qualified for the position they
are running for, (3)aligning it to the business goals and objectives for the growth and
development of the organization.

Succession plan may also serve as backup plans whenever there have some
issues or problems arises when the succession or transition of position happens. It is the
key of the organization's long term success and must ensure the preservation of the
organization's financial health and reputation.

Like in HSBC, they've been known as a model of smooth succession for a long
time because of their effective succession plans. But for some reasons, they fail because
of some misunderstanding about the matter of transitioning the position which leads to
the end of their successful succession reputation. An effective succession plan will not
only benefits one of them but the whole organization itself.

2. How is succession planning for the board and senior management different for
companies with controlling shareholders?

The criticality of board succession planning can be done with potential conflict
with major shareholders and the management. The succession planning of the board
and senior management is different for companies with controlling shareholders. For
the succession planning of the board and senior management, they strictly complies
with the principal rules in choosing the best person fit for the key position, while in
succession planning with controlling shareholders is somewhat critical because
sometimes they are bias to whom they are only preferred in choosing the person fit for
the position. It is a disadvantage to the organization to not considering the decisions of
the controlling shareholders because it can affect its financial health and stability. Like in
HSBC, their reputation as a model of succession planning already ended because of the
issues arises from the sudden departure of the Chairman. There is a conflict or
misunderstanding in choosing the next potential Chairman of the board because of the
internal and external factors. In this case, there must be a disclosure. Disclosure is about
the principles, policies and the process and not about the specific details of individual
nominations and appointments. An effective succession plans must have a disclosure
between the internal parties involved in making decisions and secure every information
inside for it does not affect the organization's stability and reputation.

3. Identify the problems that arose as a result of HSBC’s Chairman succession. What was
lacking in HSBC’s succession plan?

HSBC has a history of promoting its CEO to Chairman, but when Stephen Green
made that move executing another CEO-to-Chairman hand-over, HSBC was criticized
because it went against best corporate practice. From this succession, it leads to impair
the former CEO from independently and objectively monitoring the company. And after
four years in the position, news about Green departure from ahead of the schedule,
putting again the HSBC in to the position of chaotic succession whether the CEO,
Michael Geoghegan, or other possible candidates to fit in the job. The lack of effective
succession plan program of the board of directors of HSBC, with a system of identifying
and developing potential successors for this critical positions, also defining the
responsibilities of the CEO and Chairman – that shall not be held by one person,
undermine the HSBC’s stature.

4. What is the impact of poor succession planning on HSBC and its stakeholders?
 Poor succession planning impacted the image of HSBC to the public; its
reputation of being smooth management succession and the credibility of the board.
The departure of Green that highly regarded as the modern influencer of HSBC, creates
the share price of the bank be plunged. As well as the threatened resignation of the
CEO, Geoghegan, adding to the dilemma of the HSBC. With no clear of successors as
time of Green’s departure, it continues to undermine the HSBC by the public speculation
and the division of its stakeholders.

5. What are the roles of the Chairman and the CEO? How are they different? What are
the attributes of a good Chairman?

The Circular No. 969, Series of 2017, of Enhanced Corporate Governance

Guidelines for BSP-Supervised Financial Institutions, Subsection X142.4-Chairperson of
the Board of Directors, states the Roles of the Chairperson of the Board of Directors. He
shall: (1) provide leadership in the board of directors; (2) ensure effective functioning of
the board of directors, including maintaining a relationship of trust with members of the
board of directors; (3) ensure that the meeting agenda focuses on strategic matters
including discussion on risk appetites, and key governance concerns; (4) ensure a sound
decision making process; (5) encourage and promote critical discussion; (6) ensure that
dissenting views can be expressed and discussed within the decision-making process; (7)
ensure that members of the board of directors receives accurate, timely, and relevant
information; (8) ensure the conduct of proper orientation for first time directors and
provide training opportunities for all directors; and (9) ensure conduct of performance
evaluation of the board of directors at least once a year. On the other hand, the Roles of
the Chief Executive Officer (CEO), as provided in the subsection X145.3, he shall be: (1)
the overall-in-charge for the management of the business and affairs of the BSFI
governed by the strategic direction and risk appetite approved by the board of directors;
and (2) primarily accountable to the board of directors in championing the desired
conduct and behaviour, implementing strategies, and in promoting the long-term
interest of the BSFI. The attributes of a good Chairman includes maintaining a
relationship of trust with its board of directors and investors and has a good
management style that can lead the bank and the board of directors on his/her own.

6. What are the pros and cons of having the CEO becoming the Chairman? In your view,
has HSBC addressed the concerns of the CEO becoming Chairman by appointing the
Finance Director as Chairman?

The pros of having the CEO becoming the Chairman is of having the superior
knowledge to the organization’s operations, and having fully aware of the strengths and
weaknesses of the corporation. In this way, he will be able to address well the problems
that the Corporation will face when he became the Chairman. On the other hand, the
cons are stated in the Circular 969, Subsection X142.4, that the Chairperson of the board
of directors shall be: a non- executive director or an independent director, and must not
have served as CEO of the BSFI within the past three (3) years; and the positions of
Chairperson and the CEO shall not be held by one person. It is also included in the case
that promoting this CEO-to-Chairman hand-over was perceived to impair the Chairman
from independently and objectively monitoring the company. For me, yes, HSBC has
addressed the concerns of the CEO becoming Chairman by appointing the Finance
Director as Chairman. The HSBC’s Finance Director, who is Douglas Flint, may have
perceivably less showmanship and experience at HSBC, but he has comply to the
qualifications of a director provided in Circular 969, which is some of it is to be fit and
proper, and has not served as CEO within the past three years.

7. How should a company balance its needs against the expectations of external
stakeholders with respect to compliance with good practice?

The first thing that the management should do is taking a holistic approach. The
management must determine or identify who is the external stakeholders and which the
key issues are their concerns. At the same time, the management also must always think
the long-term profitability of the organization is always the key for it to survive and
become successful.
 To make it happen, the management must set a clear standards and operation
intentions that the external stakeholders must know and clear to them. The said
standard and operation intentions must be aligned to each other and compliance is a
must. Setting a standard and its intentions for operation eliminates the everyday conflict
of the needs and expectation of external stakeholders along with what is actually
achievable. Being consistent and honest to these standards and intentions will always
lead to loyalty that will help to mitigate the impact of any misstep. Having clear vision to
it and staying on this path will help the organization to stay true to its external
stakeholder. Like how the management of HSBC resolve its issue. Eventhough there is a
misstep on their part, the management still gets a positive feedback to their external
stakeholders by appointing competent leadership team and does not damage their
operational intentions.

8. Imagine you are Sir Robertson right after the news broke about the CEO threatening
to leave. How would you resolve the situation within and outside HSBC to protect the
firm from adverse market reaction?

If I am Sir Robertson, I will be honest to the market and explain to them the
dilemma. I’m going to release a firm’s standard that is based on the qualifications of
directors and chairperson provided by the circular 969. I will let the community be
informed why the position of chairman is not given to the CEO by explaining that this
standard must be complied and the CEO is not qualified for chairman’s job because it
may lead to less transparency and less objective oriented. I also make a draft of
potential leadership team that are competent, qualified, and suited for the given job
and release it to the public. I also release a list of potential candidates to take the CEO
job, in preparation of the current CEO’s departure. With these said, it will resolve the
situation within and outside HSBC and protect the firm.