HSBC made a perceptible shift in strategy yesterday in the face of the assault by rebel shareholder Knight Vinke, setting itself a new target of making 60 per cent of profits from emerging markets.
Previously the global bank said it was aiming to shape itself so that 50 per cent of profits came from emerging markets and 50 per cent from developed markets.
Outlining the strategic tweak to institutional shareholders yesterday, Stephen Green, the chairman, said the bank was now “trending towards” the 60-40 figure, though he set no date for arrival there.
Knight Vinke has argued that HSBC squandered its emerging markets heritage when it started making big acquisitions in the lower-growth economies of Europe and the US, and is calling for an independent strategic review.
The sub-prime mortgage lending disaster in the US is propelling HSBC towards a greater emerging markets bias as US profits dwindle: the profits split has already changed from 42-58 in the first half of 2006, to 51-49 in the first half of 2007.
HSBC insisted it had not misled shareholders over the terms of its 2005 bonus scheme, which is due to pay million-pound bonuses to top executives next March in spite of pedestrian profits growth.
However, instititional investors contacted by The Times admitted they had not spotted the peculiarity at the heart of the bonus scheme when it was presented to them in 2005. They failed to grasp the effect of the complex formula which made the performance hurdles much less taxing than a casual glance suggests.
“We didn’t look carefully enough at the worked example,” one major institutional investor said. “The full picture was there if you looked hard enough but it was buried. It certainly could have been communicated better.”
Knight Vinke says shareholders were misled and has a legal opinion from Lord Grabiner, QC, that the scheme is therefore void and cannot pay out without a fresh mandate from shareholders.
HSBC presented the scheme to 50 of its largest shareholders and to the Association of British Insurers in early 2005 ahead of the annual meeting at which it was formally approved. The scheme was presented as paying out bonuses partly based on “absolute growth in earnings per share” over the three years to 2007.
But fine reading revealed triple and double counting of growth in some years. Growth was defined as growth in year one over the base year, plus growth in year one and two over the base year, plus growth in year one, two and three over the base year.
Knight Vinke renewed its complaint yesterday, saying: “It is absolutely clear to us that many of HSBC’s largest shareholders were not made aware of the full details of the scheme, which permits large performance-related payments to be made for no perfomance at all.”
It called on HSBC to publish the documents and worked examples used in 2005 to explain the scheme and said the bank should resubmit the plan to shareholders for a vote at next year’s annual meeting.
On present expectations, the scheme is predicted to pay out £1.2 million to Stephen Green, the chairman, £1 million to Mike Geoghegan, the chief executive, and £750,000 to Douglas Flint, the finance director.
Knight Vinke, an activist fund manager with the backing of two major Californian pension funds Calpers and Calstrs, is pressing for boardroom and strategic reforms at HSBC. It is suggesting that HSBC either ditches its investment banking division or bulks up by merging with a larger, better positioned investment bank. It also says the bank could create shareholder value by demerging its Asian businesses and listing and headquartering that division in Shanghai.
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