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A conflict of interests?Reconciling the interests of shareholders and stakeholders

Speech by Stephen GreenGroup Chairman, HSBC Holdings plcRiskMetrics Conference, Lausanne17 September 2008

Good afternoon ladies and gentlemen, and thank youto RiskMetrics for the invitation to speak to you today.The advert you have just seen is one of HSBC’s mostrecent TV ads, part of a long-running campaign that wecall “your point of view”. What the campaign is trying tosay is that we understand that there are many,contradictory points of view in the world on a massiverange of issues. We think it is possible, indeed important,to recognise and value those different points of view,even where they may be at odds with our individualsympathies.These ads were not, of course, intended as a metaphorfor our approach to our corporate responsibilities but Ithink they echo some of the dilemmas that businesses faceas they seek to define and meet their responsibilities

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their shareholders and other stakeholders.The debate about the extent of companyresponsibilities is as old as companies are themselves. Atone end of the spectrum, you have a verynarrow, short-term and limited definitionof those responsibilities – to maximiseprofits for the business’ owners, itsshareholders. At the other end of thespectrum is a much more diffuse conceptof what those responsibilities are, and towhom they are owed.In shorthand, these are often referred toas the shareholder versus the stakeholderideal, with the former model the more overtly capitalist of the two, and rooted in the US. While the stakeholder idealhas a long history in continental Europe, with its spiritualhome in Germany, where the famous principle of co-determination still governs much corporate decisionmaking.Of course, like all stereotypes, these are only partlytrue. The history of corporations going back the last 150years provides numerous examples of companiesassuming responsibilities unprompted –the LeverBrothers and the Cadbury family in the UK setting up themodel villages of Port Sunlight and Bournville to providedecent living conditions for their workers; the landmark $5 wage that Henry Ford offered his workers; the healthand education infrastructure built in America by some of the so-called robber-barons.However, it is certainly true that if it were everenough for a company to declare that its aim was solely tomaximise profits for shareholders, that is clearly not thecase today.The interests of a wide range of other stakeholders –customers, employees, suppliers, NGOs and the widerpublic, to name a few – all stake a claim on corporatedecision-making. And those decisions are made, anddebated, in the full glare of 24-hour media and publicopinion.The number of companies that has to face this realityis growing. Until recently, the private equity market wasable to keep its business just that, private. But that waswhen it was backing mainly small and mid-marketbusinesses.Today, with 8% of UK private sector employees nowemployed by private-equity backed businesses, theindustry faces some of the same scrutiny as listedcompanies. Indeed, the UK industry association’schairman recently acknowledged that private equity“needs to engage with its audiences and explain its role insociety”. Effectively, the distinction is getting a littleblurred and private equity is learning what majorcompanies have been discovering – that businesses todayneed to articulate a ‘social contract’ with the societies inwhich they operate.Defining that social contract, i.e,defining the extent of a company’sresponsibilities, and reconciling theinterests of the various stakeholders in abusiness is an undertaking that hasbecome a much larger and more visiblepart of the management task of any largecompany in the last few years.In the past this contract has beenlargely unwritten. Now it has become astatutory duty for Directors of UK-domiciled companies.The UK Companies Act 2006, which codified Directors’duties, included a responsibility to “promote the successof the company” taking into consideration the interests of employees, suppliers, customers and the company’sreputation.The UK’s minister for industry, Margaret Hodge,described these new statutory duties as “articulating theconnection between what is good for a company and whatis good for society at large”.And what is that connection? It is that the firstcontribution a business makes to society is throughsupplying goods and services that consumers want;creating employment; paying taxes and creating wealth.The full effect of these can be hard to quantify, but adetailed study by the charity Oxfam and Unilever of thelatter’s economic impact in Indonesia four years agoproduced striking results. It found that Unilever’sbusiness, which employed 5,000 people, actuallysupported the equivalent of 300,000 jobs along its valuechain.The company’s contribution to Indonesia’s economywas estimated at US$630 million and Unilever paidUS$130 million in Indonesian taxes.

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We haven’t done this analysis for HSBC – it’s a majorpiece of work – but the impact of our operations will besimilarly broad. Last year, we paid some US$8 billion toour shareholders. But this sum was dwarfed by the US$14billion we pay in salaries; the US$10 billion we spend onour premises and procurement; and the US$5.7 billion wepay governments in one way or another. And of coursewe provide financial services to over 100 millioncustomers, including some 2.8 million businesses.As the

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newspaper, perennially sceptical onthe subject of corporate responsibility, noted in a surveyat earlier this year:“The welfare [companies] create in the form of jobs,products and innovation dwarfs anything [they] are likelyto do explicitly in the name of CSR.” Or as Rex Tillerson,the plain-speaking Chairman and CEO of ExxonMobil,told shareholders at this year’s annual meeting that Exxonhad “a corporate social responsibility to ensure the worldcontinues to receive the energy it needs”. The mostimportant corporate social responsibility is to do businesswell.When I think about ‘promoting the success of thecompany’, I’m inevitably drawn to theconclusion that long-term success isfundamentally about sustainable businessmodels. Sustainability begins not with asocial or environmental agenda, but in thebusiness model itself. We have to put asustainable business model at the heart of our strategy.But what does a sustainable businessmodel mean? I would define sustainabilityin four senses.First, and crucially, a company must achievesustainable profit growth for its owners. Success has to beabout profitability. Profits allow a company to reward itsshareholders for trusting their capital to it and to invest inthe business for future growth. And profits arefundamentally and over the long term the best and onlyway of measuring the extent to which a company issatisfying its customers, engaging its employees andfulfilling a valued role in society.So, as Directors and managers, we must never forgetthat our primary duty lies in the careful stewardship of thecapital that the owners of the business have entrusted tous. It is our duty to ensure that that capital works hard forits owners – that it is invested in the business so that itwill provide the owners with a decent return over thelong-term; and that it is invested prudently, so that itsvalue is protected. Achieving good returns for ourshareholders sustainably is our first aim.The next question is, of course, what makes forsustainable profits? And surely the answer is thatachieving sustainable profits for shareholders will only bepossible if a company has sustainable customerrelationships. And sustainability here clearly depends on areputation for fair dealing and on trust. To put it crudely,if we go for the quick buck, then eventually customerswill vote with their feet.The third way in which companies need to besustainable is in their approach to their people. It is surelyimpossible for any company – large or small – to besuccessful in the end without high quality, committedstaff. At HSBC, I have 330,000 colleagues around theworld, and their understanding of HSBC’s strategy, theirperception of our brand and reputation, and their opinionsof their day-to-day working environment … employeeengagement, in the new catchphrase … all of these factorsaffect their attitude and will be crucial to performance.This is why, last year, we started to measure thatengagement with a no-holds barred annual people survey.And it’s why we have set ourselves targets for increasingemployee engagement, benchmarking our results againstother organisations.We are just getting the results from our second surveythat 315,000 – or 93 per cent – of my colleaguescompleted. And we are delighted that engagement hasincreased significantly over the last year. But we are notcomplacent – we still have some way to go to be best inclass. What we do know is that without the support of committed employees, no management team, howevertalented, will be able to be successful in the long-term –because it is your employees who, ultimately deliver thecorporate strategy.Underpinning and interwoven witheach of these three aspects of sustainability is a fourth component – acompany’s commitment to society …its social and environmental impact.This has become a much more centralfocus of attention for companiesrecently. Investors, employees,customers and regulators are allproviding the momentum for this,because they share an interest in the sustainability – in thebroadest sense – of a company’s activities. We arewitnessing a growing intensity of governance and SRIdialogue with all our stakeholders.The rise of sustainable and responsible investment – inthe US, more than 10 per cent of investments that areprofessionally managed involves SRI – reflects investorappetite for sustainably-managed companies, ones whosegoal is long-term profits combined with ethical values.You certainly see it amongst colleagues. We knowfrom our own people survey that our sustainability amajor factor for my colleagues. Employees want to work for an organisation that is respected and of which they canbe proud.And any graduate recruiter will tell you that asustainable business model – including our directenvironmental impact – is a major factor today in acompany’s ability to recruit top quality graduates.You see it among consumers now, too. Consumers putsustainability issues – specifically climate change,poverty, food and water shortages – high on the agenda of their concerns in a PricewaterhouseCoopers surveypublished earlier this year. No wonder then, that coverageof sustainability issues in the media has increased 10-foldin the last decade.You see it too among regulators and other supervisoryauthorities. As I travel around the world and meet withthe authorities in different markets, one of the issues theyraise most frequently is the importance they place onbanks making a contribution to economic development,

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particularly through support for the SME sector that is soimportant in creating jobs and prosperity.So you need to be sensitive to this. You need to beseen to be ‘making a contribution’ to society as a whole.It is not good enough to simply demand access undercommitments a country makes to WTO.So what is it reasonable to expect of ourselves? Arecent academic paper published by the Harvard BusinessReview noted that: “Corporations are not responsible forall the world’s problems, nor do they have the resourcesto solve them all. Each company can identify theparticular set of societal problems that it is best equippedto help resolve and from which it can gain the greatestcompetitive benefit.” The key, the authors believe, isabout creating “shared value – that is, a meaningfulbenefit for society that is also valuable to the business.”The interesting thing is that – lo and behold! – findingthat shared value takes you back to the fundamentals of your business and your competitive advantage. Theshared value that companies can create lies in using theircompetitive strengths to help address societal challenges.These strengths will vary from company to company.For banks, it means looks at how we use our expertise infinancial markets to create new business opportunities. AtHSBC, for example, that means we are financingrenewable energy; creating SRI funds;backing microfinance initiatives.One specific example in our case is thecreation of rural banks in China, which weare the first (and currently only) foreigninstitution to do. The creation of thesebanks is helping meet Chinese policyobjectives; they will be profitable in thelong term – although the numbers may notbe big; and they will support thedevelopment of a sustainable rural economy. And this isnot coming out of the philanthropic budget. Nor is itincompatible with sustainable overall profitability – infact, quite the opposite, we believe it is essential to it.In short, sustainability is about bringing relevantissues together into your own business model; creatingshared value for the company, and for society as a whole.For these are the factors which, together, create acompany’s reputation and brand. And the brand embodiesthe long-term

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of a company,highlighting the commonality of interest betweendifferent stakeholders. These stakeholders – shareholders,employees, customers and society are all important – buttheir are interests are not always identical. This meansthat there will inevitably be a number of difficult trade-offs and for the last few minutes, I’d like to talk to youabout some real world issues that we and many othersface.My first example is about stewardship of capital – oneof the most fundamental duties we owe our shareholders.In the current economic turmoil, it’s hard to rememberthat one of the recurring criticisms HSBC faced 18months ago was that we were over-capitalised. For asustained period of time, we were under considerablepressure from analysts to reduce our capital ratios, returncapital to shareholders and/or increase our gearing. Itseems a long time ago now!But financial strength – and this means not onlycapital strength, but liquidity strength and the disciplineof requiring subsidiaries to raise deposits locally –financial strength has always been an article of faith atHSBC. For the industry as a whole, robust capital andbalance sheet strength are now very much back in focus.Or to take another illustration of the same basic point.I was asked at one investor meeting why we didn’t selloff our Chinese investments, release the capital and handit back to investors. Essentially, to close the door on theworld’s largest nation as it re-emerges on the global stage.It’s hard to imagine a more blatantly short-termist attitudethan that. An attitude that perhaps reflects the fact that theaverage share on the London market now is now onlyheld for less than a year. But the job of the Board andmanagement must be to maximise the long-term value of the company.Clearly, it is the responsibility of the Board toconstantly assess the business model for continuingviability. There are plenty of examples companies thathave failed to do so – and failed. As Keynes said: “In thelong run, we are all dead.” But there is an obligation toavoid being whipsawed by the market into short-termism.While the market often puts its finger on a weakness;equally often it’s following a herd instinct. The Board hasa duty of care to know which is which.When the ownership of companies iswidely dispersed as it is today managersneed to “behave as if there is a singleabsentee owner, whose long-term interest[we] should try to further in all properways”. You don’t manage for the quick buck. So said Warren Buffett – so it mustbe right!My second example relates to ouremployees in the UK. This is a live issue we are trying toresolve – the funding of our pension schemes, especiallythe final salary part of the scheme. The final salaryscheme was closed to new members over a decade agoand newer employees are on a defined contributionscheme.What are the issues? First, that the final salary schemeis an open-ended liability, whose economics need to bemanaged toughly. Second, that newer colleagues aredisadvantaged financially by comparison with those onthe final salary scheme and this risks creating internaltensions. Thirdly, that colleagues on the final salaryscheme are necessarily long-serving employees who havedevoted a large part of their career to the bank anddeserve to be treated fairly.Addressing these conflicting issues is not easy. We aretrying to balance the interests of two sets of employeesand of shareholders – and, of course, many staff areshareholders as well as employees. We’re in the midst of this. A set of proposals has been sent to affectedcolleagues for their comments. Realistically, I think it willbe impossible to entirely satisfy everyone but we have aduty and interest to try and find a fair resolution.Third: customers and environmental policy.Over the last few years, we have had to put in place anumber of policies that guide how we do our business inenvironmentally sensitive sectors such as mining, water,

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