HSBC’s Knight in Rusty Armour

During the weekend, there were lots of reports on the attack by Eric Knight on HSBC's governance and strategy. 

Eric Knight, who is CEO of Knight Vinke Asset Management, is airing his concerns in public, he claims, as a result of the FSA’s Market Watch (six page pdf) of May 2007 which focused upon shareholder activism and states:

“There
is also obvious potential for abuse were a participant deliberately to
set out to generate a false rumour or expectation of some future
corporate action knowing that it, or others associated with it, may be
able to take advantage of a short term movement in the price of the
target's securities. Generally we expect market participants to take
reasonable care to ensure that any announcement or informal comment
does not give rise to false or in the circumstances deceptive signals
about their intentions.”

As a result, Mr. Knight announced on September 6 that:

“Knight
Vinke Asset Management wishes to inform the market that it intends to
engage in a constructive dialogue with the Board and other
institutional shareholders of HSBC Holdings plc over the future
direction and governance of the Group.  In this context, Knight Vinke
wrote to the Executive Chairman on 25th May, met with the Group Finance
Director on 12th June in New York, and wrote to the full Board on 4th
September requesting that it undertake a fundamental review of the
Group’s strategy in consultation with shareholders.”

What’s Mr. Knight’s problem?

It’s a mixture of both the corporate governance and strategy of the firm.

On the governance side, the Daily Telegraph gets to the heart of the debate by stating that "the slumbering board wasn't guilty of napping but full-blown narcolepsy".
This article talks about the sense of too many cronies being inside
HSBC's boardroom, with a third of their non-execs having been there so
long that they can no longer be viewed as being independent.  Another
part of the governance issue is that HSBC does not have any American
directors on the board, although you would have thought that the head
of US operations would have known something was up wouldn’t you?

On
the strategy side, he seems to think that HSBC should give up on
America, sell their French operations and focus on Asia.  In other
words, the acquisitions of Household International and CCF were both
wrong and should be dismantled.

Not sure that HSBC's management
would agree with that view though, especially as Household was an
acquisition managed by Stephen Green when he was Chief Executive.

Nevertheless, Knight Vinke claims may have some substance. 

For
example, HSBC tend to move CEO's up to Executive Chairman when they
manage successions and Mr. Knight thinks that is wrong.  In the Sunday Times,
for example, he is quoted as calling for Stephen Green to move to a
non-Executive role and to elect a new Executive Chairman from outside
the Group, something that would be unprecedented.  Indio of London
commented on this article, and amused me by saying:

"Green needs to go ... Perhaps they could use that nice Mr Goodwin when he gets fired as a result of buying ABN."

There
are also other mud-slingers, such as Threadneedle's retiring Head of
Equities, Michael Taylor, who was quoted as saying late last year that
HSBC Executive Chairman Stephen Green is "asleep on the job is how I would describe it. He's just not up for it.''

These comments were made last December when HSBC's exposure to the US mortgage markets through their acquired subsidiary, Household International, became clear. 

Household
International was purchased in 2003 for $15.5 billion - under the Chair
of Sir John Bond, one should note - and provisions for losses for
subprime exposure of over $8 billion were made in December 2006, rising
to over $10.5 billion by February 2007.

So, in some ways, this
makes Green and CEO Michael Geoghegan easy fodder for critique ... just
as most others have been since the subprime debacle has hit. 

And
maybe that’s why Knight Vinke has invested £200 million in HSBC to gain
a one percent stake, as this is their normal strategy: gain a small
share in a large company and then send out long research notes to all
of the other activists, board members and analysts.  And this has
worked in some quarters, e.g. they managed to get Royal Dutch Shell
to restructure three years ago.  Interesting that, as on this occasion,
this was in cahoots with CalPERS, the California activist pension fund.

These factors, alongside the recent humbling of HSBC by an activist group of student customers; the homophobia that is alleged to exist; and the amazing spin doctors at Knight Vinke who claim that Stephen Green actually rang Eric Knight and agreed with his criticisms, may make you think that Stephen Green is on the ropes.

But you would be wrong.

First,
HSBC is pretty focused on a clear strategy of Asia expansion.  Just
last week, this was evidenced by two announcements.  The first was the
announcement that the bank is focusing heavily on building a strong retail presence in Japan.  The second that HSBC has taken a 51% controlling stake in Korea Exchange Bank for $6.3 billion.

Second, HSBC is one of the more innovative banks.  This was shown by two stories on Finextra, again just in the last week, that HSBC investigates 'out of band' authentication for Web users and HSBC cash machines to alert customers who go into the red.

That’s why I’ve written about HSBC as being pretty strong on two previous occasions (see HSBC’s view from the top and HSBC’s numbers). 

That’s why Ken Murray, Chairman of Blue Planet fund managers was quoted in the Observer
over the weekend as saying “'HSBC has been fantastically successful: I
could find 100 banks ahead of it which I could grumble about.' So says
Ken Murray, chairman of Blue Planet fund managers

And that’s why Stephen Green was quoted in the Financial Times
as saying: “We have a clear strategy.  It is focused on investing and
developing our powerful emerging markets franchises. We will continue
to do that.  That was part of a strategy that had been carefully
thought through from the beginning of the year.”

Finally, a few folks reckon that Mr. Knight must have been asleep on the job too, as the accusations of board cronyism broke in January 2007. 

Where was he then?