Whilst it is
fast becoming yesterday’s news, as further financial scandals hit the headlines
on an almost daily basis, the recent debacle concerning the laundering of
Mexican drug and other suspect funds in the Middle East/Arabian Gulf by HSBC
Group is a prime case study exposing the realities of organisational leadership
and the conflicts between the interests of the different stakeholder groups
which have to be constantly navigated in strategic and operational decision
making within the global organisation. I should state from the outset that I
know and have in the past worked with many of the names and faces which have
come to the fore in this case; also other HSBC senior executives who are likely
to have been involved but managed to remain under the radar, so far. In my view
these individuals are amongst the most highly experienced, professional and
principled that I have worked with in a career spanning four decades, in many
organisations and societal cultures. I must therefore admit to equal measures
of disappointment and bemusement. It is a mark of the prevailing (and perhaps
historical) short termism, “smash and grab” of the Anglo-American business
culture that the values, principles and dominant logic of an organisation such
as HSBC ( developed through business, economic, political crises, civil and
global warfare spanning 150 years) appear have been substantially undermined. For
all that, HSBC must and will be fined a sum to make its stakeholders’ eyes
water, as a punishment, an act of contrition and as the chosen representative
of an industrial sector where a large number of other members have, do and will
probably continue to perpetrate similar practices, despite the potential costs
of discovery.
As one of those
cited in this case commented in 2011 in respect of the financial crisis in
Ireland, the Mexican laundering issue is less to do with corruption, greed and
short termism and more to do with leadership inexperience, incompetence and
inadequate insight, judgment, overall and detailed control within key functions
and positions on the part of the organisational leadership. Like Ireland,
Mexico has for long suffered from embedded societal, institutional and
individual greed, corruption and cronyism. HSBC had for long avoided
significant investment in Russia and Eastern Europe due to its view that the
levels of institutionalised corruption and criminality seriously impacted upon
social and economic development and therefore acceptable long term optimal
organisational performance. It is inconceivable HSBC Group leadership thought
it in the organisation’s best interests, over the long term, in terms of profit
and credibility amongst key stakeholders, to consciously and deliberately transport
and launder drug proceeds. The chief executives of HSBC in Mexico have for long
been part of the HSBC Group dominant leadership caucus and until a recent
retirement sat as two Group Managing Directors within the HSBC strategic decision
making forum. As in the case of a number of western European banks who invested
in Eastern Europe, they found that the deeply embedded corruption and cronyism
culture and the allegiances, perspectives and practices developed during the
communist era could not be easily changed, with a resultant substantial adverse
impact upon performance, profit and credibility, at some early or later
juncture. So it is in Mexico, where the tentacles of the drug cartels go deep
and wide, where the staff, management and many of the leadership had become
accustomed and familiar with certain deeply embedded primary allegiances and
practices, which many out of duty and/or fear continued to hide from statutory
and organisational authorities. This does not detract from the responsibility
of highly paid HSBC leadership and the expectations of the broad range of stakeholders.
It just makes it more understandable from the perspective of the realities of
strategic and operational leadership control and decision making. HSBC has for
long consistently succeeded on the basis of its incomparable experience,
professionalism, integrity, insight and judgment. This episode, allied to the
Household Mortgage Corporation debacle, which may be said to have initiated the
sub-prime crisis in USA, severely dents its Teflon image and credibility. My suspicion is that senior leadership within HSBC,
in both Mexico and USA, were aware of these practices, as was the Comptroller
of Currency, but the last thing that they wanted was to create another scandal
during the period of the Lehman, AIG, WaMu and plethora of other financial
crises. In many respects this was an important but less urgent matter to be
resolved once the Household crisis had been resolved on the part of HSBC Group
and the USA financial structure had been stabilised.
In my view the
case of the Middle East/Arabian Gulf laundering is very different in respect of
the realities of organisational leadership. Effective leadership concerns
satisfying and managing stakeholder expectations. HSBC has based its continuing
success over the last approximately 150 years on this complex and difficult
process. On the basis of the limited detail available HSBC is accused of laundering
Al Qaeda and Iranian funds in contravention of USA financial compliance
regulations. It is specifically accused of business dealings with Al Rajhi Bank
whose founder is accused of having funnelled funds to Al Qaeda. HSBC has had a substantial representation in
the Middle East and Arabian Gulf for over 100 years in respect of commercial,
corporate and institutional banking, from Persia as it then was, to Saudi
Arabia, Egypt, Jordan, Lebanon and the UAE. It has therefore developed many
embedded business relationships with governments, institutions, corporations,
individuals, local regulators and supervisors and competitors. The reality of
operational leadership is that you utilise your experience, intelligence,
professionalism, insight and judgment to apply the plethora of regulatory
requirements from a multitude of states in a manner which is consistent with
the framework of values, principles and priorities upon which the organisation
is led. The USA has in the past understood the economic, business and
particularly political implications of to the letter application of its
regulations and sanctions. There has therefore been a measure of unofficial
nodding and winking, such that certain approaches and practices were allowed
which today, as the stranglehold on Al Qaeda and Iran tightens and achieves
increasing global agreement, cooperation and integration, have become anathema.
The difficulty
about leadership is the pragmatism bit. Al Rajhi Bank is one of the largest
financial institutions in Saudi Arabia, which itself is the biggest economy in
the Arabian Gulf. To avoid transacting in some form with Al Rajhi is
unrealistic. Moreover, the majority of banks in Saudi Arabia and the Arabian
Gulf would be guilty of a similar accusation under the USA supervisory terms.
Similarly, Iranian businesses are major traders in the Arabian Gulf, where HSBC
has long standing business and institutional clients. The reality of organisational
leadership in the Arabian Gulf is that you are daily faced with customers,
clients and other key stakeholder groups, many with considerable influence
within your business context who contend that USA compliance regulations should
not be the determining factor in business decisions which adversely affect not
only individual businesses but also the economic well being of retail customers
and industrial sectors. Stakeholders in the Middle East and Arabian Gulf
frequently have a different view from those in the West on the logic of
sanctions against Iran when the nuclear capabilities of Pakistan, India, Israel
and others are addressed with less vehemence and belligerence. Whilst significant
and powerful, USA regulators are but one stakeholder to take into account when
taking operational and strategic decisions within the realities of doing business
in the Arabian Gulf. HSBC no doubt took into consideration the downsides on
non-compliance along with the interests of a wide range of stakeholder
requirements and expectations. In many respects one of the worst case scenarios
for HSBC has materialised. Time to pay up and move on with doing business.
I abhor Mexican drug dealers, the Iranian theocracy
and Al Qaeda’s wanton acts of terror and violence. My objective is to use this
laundering example to throw light on the complex decision making process of
operational business leadership and why even organisations which many would
regard as possessing high standards of integrity may oft times be found
wanting. Leadership is about optimising rather than maximising the application
of key values, principles and priorities which determine the dominant logic of
the organisation. It is about knowing that you have not totally complied with
these values and principles but knowing why on each occasion you have not done,
so but that, in so doing you have optimised the requirements of the broad
rather than narrow range of stakeholders whose interests are your prime responsibility.
This is where HSBC Group differs from the likes of Enron, who started without
any recognisable embedded leadership values or principles.
In this respect I will close with a question. Whilst
the media has been focussing on the practices of the financial services sector,
most recently on Barclays plc and HSBC Group, little attention has been given
to the $1.5 billion fine paid by the pharmaceutical company GSK (GlaxoSmithKline)
to the US authorities, after admitting to the largest healthcare fraud in
US history. GSK was accused of bribing doctors in America, between 1998-2003,
to prescribe medicines for unapproved uses, with potentially dangerous side
effects. As someone who has had my fair share of Lucozade and Ribena I trust
GSK, who have carefully built up a very credible long term reputation in the
marketplace. Yet the leadership decided that it was in the interests of its stakeholders
to promote a drug for treating depression in children, even though it was
not approved for under 18s. It also promoted a drug for weight loss, sexual
dysfunction, substance addictions and attention deficit hyperactivity disorder,
although it was approved only for treatment of major depression. Going beyond
the ethical issues, what were the pressures, perspectives, priorities in the
minds of experienced, insightful and presumably highly principled individuals of
integrity leading, a highly successful and reputable pharma company? This is
why we need to look beyond the media hype and tut tutting to better understand
the complex process and realities of operational leadership decision making. By
not doing so we merely await further scandal and the gradual erosion of values
in reputable business organisations.
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