Change at top of HSBC shows mess – and success? – in succession

The story wasn't supposed to turn out this way, but the initial reactions make you wonder whether it was at least a Plan B from the start. One of the world's most successful companies – a bank that avoided most of the problems of financial crisis and seemed to be set for even greater things – has made a very messy change at the top. For HSBC Holdings, which likes to call itself the world's local bank, it was a bit of local disruption in the boardroom. The headlines have been so large that we need repeat only the basic information: the chairman, Stephen Green, decided to step down. The CEO, Michael Geoghegan, wanted to step up to the chairman's role. The board wanted to move a non-executive director into the chair. Geoghegan objected somehow his objection found its way onto the front page of the Financial Times.

Perhaps Geoghegan really wanted to retire, and if so he got his wish. The board looked set to approve a completely different constellation than it set out to achieve, with Douglas Flint, the finance director, moving up to chairman, Stuart Gulliver, head of investment banking, taking over as CEO from January 1, Geoghegan leaving the company three months later, and to reinforce independence, Simon Robertson, the senior non-executive director, will become deputy chairman. The would-be chairman, the former Goldman Sachs investment banker John Thornton, is left sitting on the sidelines. In some ways, this troubled situation is a triumph in corporate governance.

Think of it this way: Practice at the bank has been, for several successions in a row, that the CEO would step up to the chairmanship when the incumbent was ready to leave. HSBC has been what some scholars call a serial non-complier with the UK Corporate Governance Code. Such transitions go against the letter of the code on two counts:

• Independent chairmen: The code urges that chairmen be independent of management at time of appointment. It's a way to ensure, in the wording of the original 1992 Cadbury Code, that no one person has unfettered powers in the boardroom, providing a remedy for the "agency problem" in corporate governance. A strong chairman will provide a check on the power of the CEO. An independent chairman will give the CEO room to run the company. Best of both worlds.
  
• Former CEO not on the board: The code also recommends that CEOs retire from the board altogether when they leave. Even having the former boss serving as a non-executive director, the code suggests, would inhibit the new CEO and the rest of the board from deciding to change direction.

HSBC has in the past ignored both of these tenets. Stephen Green was CEO before becoming chairman, as was his predecessor, and his. The bank's performance – in terms of growth, earnings and risk – seems to suggest that an orthodox approach isn't necessarily the best. Losing the services of a retiring CEO means losing a lot of knowledge. CEOs know the company, the industry, and – in the case of highly regulated companies – the outsiders who exert a lot of control. Moreover, a CEO who retires but wants to keep working would be an especially valuable non-executive director for a competitor, so keeping the CEO on the board keeps the CEO on board. The trade-offs are clear.

The complexity of banking is one reason why the Walker Review in November 2009 recommended a nuanced approach to corporate governance for financial institutions, one the recognised the need for expertise, not just independence on bank boards.

The case of HSBC puts those notions to the test, and more. As Geoghegan departs, the bank will lose valuable knowledge and experience. But Geoghegan's desire for the chairmanship suggests he was already looking to step back from line management of the organisation, so the loss of service might not be so great. The ability to promote from within suggest the bank is richly enough endowed with talent that there might be benefits in the disruption that will no doubt follow – especially if the exclamations about a new "dream team" we read in the press prove to have substance.

Does it matter that both new people at the top will be insiders? Perhaps it's better that way, for this company, in this industry, at this time in its history. The case also shows that the company is bigger than the individuals that lead it. Having depth as well as breadth of talent, the board didn't have to acquiesce, even to a highly successful CEO.

And what does it say about the UK Corporate Governance Code? Perhaps the message is that flexibility is needed – and that codes can only take you so far.

Source document: The HSBC statement on the changes makes no reference to Thornton at all, though the FT reported he would be leaving soon.